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Phasing Out Fossil Fuel Subsidies After COP26

Goran Dominioni (DCU)

Since COP26 came to a conclusion, politicians, analysts and commentators are drawing their conclusions on whether the Glasgow conference has delivered on expectations. One of the key achievements was the agreement to accelerate efforts to phase out inefficient fossil fuels subsidies. Experience, however, shows that progress on eliminating fossil fuel subsidies can find many obstacles. Below, I argue that reaching this ambitious climate commitment requires focusing advocacy and policy efforts on the non-climate benefits of these measures to win sufficient public support. While this approach is not a silver bullet, it can help make additional steps in the right direction.

COP26 Key Achievements

The Glasgow negotiations have brought progress in various areas of climate change action. Key achievements include: 

  • New climate promises that bring us closer to 1.5 degrees. According to Faith Birol, Head of the International Energy Agency (IEA), the new pledges would limit global warming to 1.8 degrees, in line with the Paris Agreement minimum target of 2 degrees.
  • More climate finance for adaptation. The Glasgow Climate Pact urges developed country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025“. This is an important step forward in a context where most international public finance for climate change focuses on mitigation. 
  • The completion of the technical negotiations of the Paris Agreement Rulebook. The Rulebook establishes transparency and reporting requirements for Parties to the Paris Agreement and sets out rules for the operation of international carbon markets (Article 6). 
  • Less coal power and the phase-out of fossil fuel subsidies. Parties have agreed to accelerate efforts to reduce coal power and phase out inefficient fossil fuels subsidies. 

The commitment to phase out fossil fuel subsidies comes in a context where more than ten years ago, in Pittsburgh, G20 countries committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” – but little progress has been made since then. According to the IEA, global subsidies for fossil fuel consumption decreased from about 450 billion USD in 2010 to about 180 billion USD in 2020. However, these subsidies are expected to increase in 2021 as fossil fuel prices and energy consumption increase. Using a different methodology which includes the environmental cost of fossil fuel subsidies, the IMF finds that global fossil fuel subsidies were 5.9 trillion USD in 2020 (6.8 per cent of GDP)  and forecasts them to increase to 7.4 per cent of GDP in 2025. Therefore, there are reasons to suspect that the pathway to the phase-out of inefficient fossil fuels subsidies may not be without obstacles.

What makes fossil fuel subsidies so difficult to reform? 

Many media outlets (rightly) identify resistance from the fossil fuel industry as a key factor that reduces ambition in fossil fuel subsidies reforms globally. However, the story of the slow progress to reduce fossil fuel subsidies is more complex than this. 

Phasing out fossil fuel subsidies can generate legitimate concerns in segments of the population that fear energy price increases and in communities that would suffer job losses. Experience in many countries show that attempts to reform subsidies to fossil fuels consumption can find significant resistance in large segments of the public and are, thus, often short-lived. In these contexts, advocacy efforts to persuade the public to give up fossil fuel subsidies to mitigate climate change are unlikely to succeed. For a parent who risks losing her job – and the possibility of sustaining her family – or who cannot afford higher fuel heating prices without affecting basic living standards, the climate mitigation benefits of reducing consumption subsidies are often too far away in time and space to really matter. In these contexts, alternative – more concrete, local, and short-term focused – approaches to fossil fuels subsidy reforms should be pursued to gain traction with the public. 

Towards a More Pragmatic Approach to Fossil Fuel Subsidy Reforms

Reforming subsidies to the consumption of fossil fuels can yield significant local benefits in the relatively short term. These include, for instance, reductions in local pollution and related cardiovascular and respiratory diseases and reduced traffic congestion and accidents. According to the IMF (post-tax estimates), underpriced local air pollution accounts for about 42 per cent of global fossil fuel subsidies, and traffic congestion and accidents account for about 15 per cent. 

Phasing out fossil fuel subsidies would also free up fiscal space and allow for the distribution of cash transfers to segments of the population affected by the reform (ideally, primarily targeted at low-income households). Various jurisdictions are moving in this direction. For instance, the Philippines and Indonesia have implemented cash transfers in conjunction with fossil fuel subsidies reforms. 

More elaborated mechanisms can be imagined to better garner public support for reforms. For instance, Dirk Heine and I have proposed a mechanism whereby forecasted revenues from environmental tax reforms are distributed to citizens on visible but frozen bank accounts before the environmental tax reform takes place, and the accounts are unfrozen only after the reform has passed. This mechanism helps make the benefits of environmental tax reform salient to cash recipients while also increasing public trust that cash transfers will be distributed (an important factor in communities where citizens do not trust their government). The scheme was initially elaborated to implement carbon taxes but can equally apply to fossil fuel subsidies reforms, as both measures create fiscal space while increasing energy prices. Further research on how to make the benefits of fossil fuel subsidies reforms more tangible for the public could help advance the climate agenda. 

To Sum Up

While COP26 has delivered less than many had hoped for, there are some tangible achievements from this round of negotiations. One of the areas where some progress has been made is the reform of fossil fuel subsidies. Experience shows that achieving higher ambition in reducing fossil fuel subsidies often requires increasing public support for these reforms. A pragmatic approach to fossil fuel subsidies reforms can help in catalyzing this support. Advocacy and government efforts should focus more on local and tangible benefits of fossil fuel subsidy reforms – such as improved air quality and electronic cash transfers. While this approach is not a silver bullet, it can help make additional steps in the right direction.

 

Goran Dominioni is an Assistant Professor at the School of Law and Government of Dublin City University

Goran Dominioni will be a speaker at the DCU Law Research Centre’s Seminar on “Carbon Border Adjustment Mechanisms after COP26on 15 December.

The views expressed in this blog reflect the position of the author(s) and not necessarily that of the Brexit Institute Blog.

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