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2010-Editor's note: This article is based on C. Galperín, M. V. Lottici and M. C. Pérez Llana (2010), ‘Los subsidios a los combustibles fósiles en la agenda del G-20’, CEI Journal 18, available at:http://www.cei.gov.ar/revista/18/parte%205b.pdf. The opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect the views of the Centre for International Economy of the Argentine Ministry of Foreign Affairs, International Trade and Worship.

Energy subsidies are a long-debated issue as regards their efficacy, efficiency and relationship with the problem of climate change. These questions have been recently included on the agenda of the G-20, after the Leaders’ Summit held in Pittsburgh in September 2009. Paragraphs 29 and 31 of the Leaders’ Statement set forth a course of action for member countries. In those paragraphs, fossil-fuel subsidies are questioned on the grounds that they can be inefficient and encourage wasteful consumption, and it is therefore proposed to phase them out over the medium-term, while recognizing the importance of providing those in need with essential energy services.
 
However, the question of fossil-fuel subsidies is a very complex issue and from our perspective the way it is being discussed within the G-20 raises some concerns.

First, this commitment might be understood as if all G-20 countries were assuming greenhouse gas (GHG) emission reduction commitments, regardless of the actual outcome of a Post-Kyoto agreement on climate change. A G-20 agreement made on this basis might eventually not be compatible with the objectives and principles contained in the United Nations Framework Convention on Climate Change (UNFCCC) regarding the establishment of differentiated obligations according to each member’s development level.
 
The profile of the emissions from fuel combustion in the G-20 shows that its members accounted for 81% of the world carbon dioxide (CO2) emissions in 2007, but that there are significant differences among its members. China, the United States, the European Union, Russia and India – the five largest CO2 emitters – accounted together for 64% of world emissions. On the other hand, Saudi Arabia, Brazil, South Africa, Turkey and Argentina, the G-20’s five lowest CO2 emitters, accounted for only 5% of world emissions.
 
It should also be borne in mind that the reduction of CO2 emissions resulting from this commitment is limited to subsidies that are “inefficient” and “encourage wasteful consumption”, but recognizing at the same time, “the importance of providing those in need with essential energy services”. Furthermore, there is no agreed definition of these terms: each country decides which subsidies to rationalize and phase-out.
 
Second, the definition of subsidy is not a minor issue because the G-20’s debates are expected to have consequences for member countries’ energy policies. The definitions proposed so far by several countries differ from the definition for subsidies agreed within the World Trade Organization (WTO). Why should a different definition be developed? The definition established in the WTO Agreement on Subsidies and Countervailing Measures (ASCM) was: (i) negotiated in the Uruguay Round, (ii) the result of several years of debate, (iii) intended for goods (and fuels are goods), and (iv) accepted by all 153 WTO members according to WTO rules.
 
Third, not all fossil fuels contribute to CO2 emissions in equal measure: coal for the generation of energy and oil derivatives for road transport account for roughly half of the G-20’s total emissions (33% and 16% respectively). However, a distinction should be made at a country level: although most G-20 members depend on fossil fuels to generate energy − at least 62% of the energy is generated from these fuels in 17 of the G-20 countries − some of them (for example, South Africa, China, Australia and India) rely heavily on coal, the most CO2-intensive fossil fuel, while others (for example, Italy, Argentina, Turkey, Mexico and Russia) resort to cleaner fuels, such as natural gas. Regarding road transport, which relies almost entirely on oil, it should be noted that the United States represents around 42% of the G-20’s CO2 emissions produced by the use of oil-based fuels in 2007. Therefore, the greatest impact on greenhouse gas emission reductions should be achieved by changing both explicit subsidies and measures − for example, financial transfers and tax deductions − and implicit ones − such as very low tax rates − which encourage the use of coal to generate electricity and of oil products for transport.
 
On this note, the different consumption tax rates (both specific taxes and general sales and value-added taxes) on oil derivatives charged by each country should be considered. A lower tax rate constitutes an incentive to increase consumption, as happens with a consumption subsidy. An example of this is the estimated ad-valorem-equivalent total tax rate of 15% imposed in the United States on lead-free premium gasoline (which includes an estimated national weighted average of general sales taxes and an average of federal and state excise taxes), which is much lower than the rate charged in most developed and many G-20 developing countries (Germany’s consumption tax rates accounts for 62% of the final price paid by consumers, while in Argentina tax rates are above 44%), with the exception of some oil-producing countries (such as Mexico, Russia and Saudi Arabia), where the tax rates are normally low.
 
These varied levels of taxation are also reflected in different prices. Gasoline prices measured in purchasing power parity dollars are lower in the United States and several oil-producing developing countries (such as Russia and Mexico) than in other G-20 countries. Once again, this shows that taxes can have as much of a bearing on fuel consumption as subsidies.

Fourth, excluding subsidies to renewable sources of energy means disregarding the significant support currently given to biofuels, which in the cases of the United States and the European Union amounts to several billion dollars and is expected to grow substantially as increasingly demanding mandatory national goals regarding biofuel usage have to be met. Since these subsidies involve a direct incentive to continue consuming fossil-fuels (currently, gasoline is blended with ethanol and diesel-oil with biodiesel) as well as an indirect incentive on fossil-fuel demand (mainly through the fossil-fuel inputs needed in the biofuel production process) it is possible that they might partially counter-act the proposed reduction in fossil-fuel subsidies and its effect on greenhouse-gas emissions.
 
Regardless of the concerns discussed above, the G-20 initiative constitutes an important tool for countries to find the best way to reduce greenhouse gas emissions resulting from the use of fossil fuels. Thus, discussions on policy reforms should involve the consideration of subsidies, taxation and relative price changes addressed to those sectors that are the largest emitters of greenhouse gases. It is therefore important that the process be voluntary and pursued by each country in view of its particular needs and capabilities, aiming at the highest level of coordination.

Carlos Galperín works as a senior economist at the Centre for International Economy (CEI) within the Ministry of Foreign Affairs, International Trade and Worship of Argentina. He has been published in academic journals in the country and abroad on trade policy, economic integration, environmental economics, agricultural biotechnology and agricultural policies, among other topics.

María Victoria Lottici works as an economist at the Centre for International Economy (CEI) within the Ministry of Foreign Affairs, International Trade and Worship of Argentina. Her research fields include environmental economics, payments for environmental services, fossil-fuels, renewable energies, trade negotiations and climate change.
 
María Cecilia Pérez Llana works as a political scientist at the Centre for International Economy (CEI) within the Ministry of Foreign Affairs, International Trade and Worship of Argentina. Her research fields include biofuels, trade negotiations and climate change.