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Fossil fuel subsidies

On the verge of climate catastrophe, we are still investing in unsustainable energy resources that distort our markets, speed up global warming and cause us to breathe contaminated air. “Stop subsidizing fossil fuels!” urged UN Secretary General António Guterres during his recent trip to New Zealand. He went on further to assert: “Taxpayer money should not be used to boost hurricanes, spread droughts and (fuel) heat waves.”

Experts underline that policy change in the area of fossil fuel subsidies is an essential condition within a sustainable future. A new UN Environment report, drafted in close collaboration with the International Institute for Sustainable Development’s (IISD) Global Subsidies Initiative and the Organisation for Economic Co-operation and Development (OECD), provides the first internationally agreed-upon methodology that will help UN countries increase transparency on fossil fuel subsidies.

A methodology is crucial to help drive through the reform of fossil fuel subsidies,” stated Thomas Haidon, opening the report launch event on May 14. Organized by the Friends of Fossil Fuel Subsidy Reform, the event at the World Trade Organization in Geneva was widely attended by UN country delegates and the expert community. The report findings were presented by UN Environment representatives Steven Stone, Chief of Resources & Markets Branch, and Joy A. Kim, Senior Economic Affairs Officer, along with Rachel Bae, Senior Counsellor in the OECD Trade and Agriculture Directorate.

UN Environment confetrence
Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals, report launch event.
Phot.: GSI

“The lights are blinking on the dashboard of the car,” warned Steven Stone, alluding to climate change and the related impacts of fossil fuels. “There’s been 16 of the 17 hottest years on record since 2001; carbon concentrations in the environment have not been as high as they are now for 8 million years and 90 per cent of the air we breathe is unfit for human consumption. How can we continue to subsidize something bad for our health?” he alerted. “Fossil fuel subsidies are environmentally harmful, socially inequitable and inefficient,” continued Rachel Bae.

Transition toward clean energy is crucial to achieving the goals of the UN 2030 Agenda on Sustainable Development. The importance of measuring fossil fuel subsidies has been recognized in the Sustainable Development Goal (SDG) process with a dedicated indicator [12.c.1 – “Amount of fossil fuel subsidies per unit of GDP (production and consumption)”]. However, until this report, there was no agreed methodology to report on fossil fuels subsidies, and consequently their reform has been held back by a lack of consistent and comprehensive data.

The new methodology is the first agreed upon globally. It has been developed by three expert organizations with three case studies from Egypt, India and Zambia with reference to 30 technical experts.

The first step to providing a consistent approach was establishing definitions that would enable a common understanding of fossil fuel subsidies. The price-gap approach, which compares domestic energy prices to the international market, though very effective, was considered too narrow as it reflects only subsidies to consumers. The main discussion among the experts concerned how to include producer subsidies; while they may not affect the price of the product immediately, they incentivize extra exploration and production.

The proposed methodology includes all fossil fuel subsidies and splits them into four categories:

  1. Direct transfer of funds – payments made by governments to individual recipients
  2. Induced transfers – energy prices regulated by government
  3. Tax expenditure, other revenue foregone, and under-pricing of goods and services – for example, tax reductions, allowances, rebates or credits
  4. Risk transfers – direct involvement of a government in the fossil fuel industry, by taking on risks on behalf of parts of the industry

The categories listed above were examined against data availability, their complexity and their acceptance. The methodology asks countries to identify, measure and report against three of the aforementioned categories: direct transfers, induced transfers and tax expenditures. For the first category, the methodology argues for a phased approach, moving gradually from global to national datasets. Recognizing the complexity and data availability issues around the third category in many countries, the methodology recommends that countries report against it progressively. The fourth category—transfer of risks to a government—presents serious issues on data availability and complexity. The methodology therefore concludes that reporting against this should be optional.

Fossil fuel subsidies measuring methodology
Source: Measuring Fossil Fuel Subsidies in the context of the sustainable development goals, (UNEP 2019)

In common with all SDG indicators, UN members are asked to report annually, from next year (2020) to 2030. Many organizations are available to help countries complete the vital task of identifying, measuring and reporting their fossil fuel subsidies. Sharing experiences between countries, potentially at a regional level, appears valuable.

“We have seen that shining the light on the scale of fossil fuel subsidies leads to informed and constructive debate, encouraging reform of inefficient fossil fuel subsidies,” comments Laura Merrill, IISD’s Global Subsidies Initiative Manager and Senior Policy Advisor. “This new, globally agreed methodology will allow all countries to examine the subsidies they give to consumers and producers of fossil fuels and to reform those that are acting against sustainable development. A comprehensive international database will make a huge contribution to subsidy phase-out and, hence, to a safer climate,” she concludes.

Laura Merrill (GSI), Rachel Bae (OECD), Michael Webb, (New Zealand), Ron Steenblik (GSI).
Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals, report launch event.
Laura Merrill (GSI), Rachel Bae (OECD), Michael Webb, (New Zealand), Ron Steenblik (GSI).

The Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals report has been prepared by the United Nations Environment Programme (UN Environment) in close collaboration with the International Institute for Sustainable Development’s (IISD) Global Subsidies Initiative (GSI) and experts from the Organisation for Economic Co-operation and Development (OECD). The process also involved the establishment and convening of an international expert group that provided advice on the methodology and on the operationalization of the methodology.