FfD4 Countdown: Countries Must Eliminate All Public Financial Flows for Fossil Fuels

As the Fourth International Conference on Financing for Development (FfD4) approaches, countries are preparing to shape the global development finance agenda for the next decade. Currently, the outcome document being negotiated recommits to phasing out “inefficient” fossil fuel subsidies that do not address energy poverty or just transitions as soon as possible. However, the current text disregards other sources of public support for fossil fuels, such as public finance and capital expenditure of state-owned enterprises.

The FfD4 negotiations present a critical opportunity to address all public support for fossil fuels. The outcome of this process should include concrete commitments on phasing out public finance—both international and domestic—and state-owned enterprise investments. In addition, in relation to fossil fuel subsidies, the “inefficient” loophole should be dropped. 

Why Is It Crucial for FfD4 to Address All Public Financial Flows for Fossil Fuels?

Public financial flows for fossil fuels reached at least USD 1.5 trillion in 2023, the second-highest annual total on record after 2022, when Russia’s invasion of Ukraine triggered a global fossil fuel price crisis. The majority of this—USD 1.1 trillion—was support in the form of subsidies. However, a substantial amount came from state-owned enterprise investment (USD 368 billion) and international public finance (USD 29 billion). The figure for domestic public finance to fossil fuels is not known, but it is likely to be substantial as well.

These figures expose the high cost of relying on fossil fuels for energy. When the fuel price spikes—as it inevitably does since the price of globally traded commodities is inherently volatile—people will face hardship unless governments intervene. While in the short term there are better interventions than subsidizing fuels, such as redirecting funds to social protection, the solution is ultimately to move to clean energy, which is generally cheaper and has more predictable pricing.

Phasing out public financial flows for fossil fuels offers a crucial opportunity to free up fiscal space for sustainable development priorities. For instance, countries such as Zambia, Morocco, India, and Indonesia have reallocated savings from fossil fuel subsidy reform to alternative sources of energy and energy efficiency. The Clean Energy Transition Partnership signatories have committed to “prioritise … fully” their international public finance for clean energy while ending such support for fossil fuels. 

What FfD4 Should Say on Public Financial Flows for Fossil Fuels

The first draft of the FfD4 outcome reaffirms “the commitment to rationalize inefficient subsidies, and to phase out inefficient fossil fuel subsidies that do not address energy poverty or just transitions, as soon as possible.”

This is already an improvement on the Addis Ababa Action Agenda, which committed to “rationalize” inefficient fossil fuel subsidies “that encourage wasteful consumption by removing market distortions.” Singling out fossil fuel consumption subsidies was not a helpful approach. Although fossil fuel production subsidies represent a minority of subsidies (USD 36 billion), they lock in new fossil fuel production and thus have an outsized impact on greenhouse gas emissions. The zero draft of the FfD4 outcome repeated this mistake, which has since been rectified in the first draft. 

However, there is still room for improvement. First, FfD4 should drop the loophole that involves the phasing out of only “inefficient” fossil fuel subsidies. Instead, each country should be required to create a national action plan for phasing out its fossil fuel subsidies. This plan would require it to justify any remaining subsidies and identify alternative policy levers to achieve the same objectives. 

Second, FfD4 should include comparable language on public finance and state-owned enterprise investments for fossil fuels. It should commit to ending new direct public support for the domestic and international fossil fuel energy sector, and to align investments through state-owned enterprises with the principles of sustainable development, including ending all new capital investments in the fossil fuel energy sector. There could be an exception for limited and clearly defined circumstances that are consistent with the 1.5°C warming limit and the goals of the Paris Agreement.

These changes are crucial to effectively addressing the issue of financial flows for fossil fuels and supporting sustainable development. If FfD4 remains silent on non-subsidy-related public financial flows for fossil fuels, it risks legitimizing these flows and undermining domestic resource mobilization goals.

In conclusion, FfD4 is a chance to redirect public financial flows from fossil fuels to clean energy and other pressing sustainable development priorities. But for this to happen, the outcome document must go beyond recommitting to the phasing out of fossil fuel subsidies.