Council on Foreign Relations Addresses Fossil Fuel Subsidy Reform

gas pump CFRThose opposing the transition to clean, distributed renewable energy resources routinely point out that these alternative energy sources couldn’t survive without government subsidies. What they routinely omit is that fossil fuel subsidies far exceed those for renewable energy and have for many decades.

Fossil fuel subsidies run directly counter to the “polluter pays” principle. Phasing them out, moreover, would be a big step forward in the global effort to reduce greenhouse gas (GHG) emissions and reduce the destructive impacts of fossil fuel development and use on critical ecosystems, in terms of natural resource degradation and in terms of its detrimental impacts on human health and well-being.

Releasing the results of new research, the IMF (International Monetary Fund) determined that government fossil fuel subsidies are dramatically higher than had been previously estimated, totaling a “shocking” $5.3 trillion. That’s more than all the world’s governments collectively spend on health care, IMF highlights. Fossil fuel subsidy reform and accounting for the high, long-term and unaccounted-for costs of fossil fuels was also the subject of an all-day workshop organized by the U.S. Council on Foreign Relations (CFR), an influential New York-based think tank.

In early May CFR’s Maurice R. Greenberg Center for Geoeconomic Studies brought together 20 experts from around the world to discuss challenges, opportunities, and strategies of fossil fuel subsidy reform. Hosted by CFR Senior Fellows Michael Levi and Jennifer Harris, CFR summarizes the discussion and highlights key points in a report. Here’s a rundown.

Reforming fossil fuel subsidy regimes

IMF global energy subsidy by region

Worldwide, fossil fuel companies benefited to the tune of some $548 billion in fossil fuel subsidies in 2013, far more than those granted to those in the fast growing renewable energy industry. Fossil fuel subsidies in just 10 nations – five of which are in the Middle East and North Africa – account for roughly 75 percent of the global total, CFR workshop participants pointed out.

The ramifications of fossil fuel subsidies “are stark,” they highlighted, particularly as they “are concentrated in a handful of vulnerable countries….which are already grappling with the fiscal effects of lower prices for crucial exports such as crude oil, amid simmering social upheaval and consistent threat from Islamic extremism.”

Fossil fuel subsidies in these countries, CFR continues in its report, “drain national coffers, spur additional domestic consumption, and threaten future resource availability for export.” As a result they present a security risk to the governments of Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates (UAE), CFR highlights.

By distorting market prices and spurring consumption fossil fuel subsidies are also the main driver of ongoing growth in global GHG emissions and hinder global efforts to mitigate and adapt to climate change, CFR panel members added.

The politics of energy

On a positive note, CFR panel members noted that some governments have taken steps to reduce fossil fuel subsidies. “Notably, countries such as India, Egypt, Kuwait, Oman and Bahrain have recently taken steps to start unwinding some subsidies.” Furthermore, governments, such as much troubled Venezuela’s,”acknowledge the need to overhaul fuel subsidies.” Others, including Saudi Arabia, continue to resist calls phasing them out, however.

IMF global energy subsidy by product

The IMF and CFR’s reports on fossil fuel subsidies and reform come in advance of much anticipated 21st UN Framework Convention on Climate Change (UNFCCC) Conference of Parties (COP-21) to be held in Paris this December. There, climate negotiators from more than 195 nations will try to hammer out a global climate treaty that will cap GHG emissions at a level that will enable humanity to avoid reaching a climate change tipping point.

While lowering the cost of fossil fuels is a populist measure intended to quell public discord and discontent, fossil fuel subsidies are costing societies worldwide a great deal. In addition to perpetuating fossil fuel-based economies that are devastating fundamental ecosystems and driving climate change, they are hindering alternative, clean energy R&D, investment and deployment, which is spurring sustainable development, economic growth and local “green” job creation in countries the world over.

Addressing the economic costs, CFR workshop participants noted that, “Among the forty-odd countries that subsidize fuel consumption, the cost of such policies represents about 5 percent of national gross domestic product (GDP) and, on average, about 25 percent to 30 percent of government revenues.”

In many subsidizing countries, they continued, “governments spend more on subsidizing cheap energy than they do on health or education. The existence of market-distorting energy subsidies also tends to depress foreign direct investment in those countries, thus lowering future growth prospects.”

It’s politics and the powerful influence of fossil fuel companies and lobbyists that provide the biggest obstacle to fossil fuel subsidy reform, according to CFR panel members. As CFR highlights in its report:

  • Subsidies and efforts to reform them are both contagious. Some energy-importing Middle Eastern countries mimic neighbors and embrace cheap energy as a birthright, despite little or no domestic energy production. Other participants noted that initial stabs at reform, once shown viable and beneficial, often prod neighbors to undertake reforms themselves.
  • The United States is among the loudest voices calling for reform. Yet such admonitions are undermined by continued production subsidies for fossil fuels in the United States.
    The G20 has been at the forefront of calls for reform, but may not be the best forum to actually drive progress. Fossil fuel subsidies are a second-tier issue when the G20 is confronted with other more immediate or urgent crises.
  • Subsidy reform has a narrow base. One participant suggested enlisting “the Bonos of the world, the Bill and Melinda Gateses of the world,” to highlight the role that energy subsidies play in curtailing investment, development, health, and education in dozens of countries.”

Workshop experts suggested two ways in which leading multilateral organizations such as the World Bank and IMF could provide technical and fossil fuel reform policy assistance to governments:

  • Helping them establish a comprehensive communications strategy that explains to lower-income segments of society that subsidies largely benefit the already well-off and well connected, in order to get political buy in; and
  • Leveraging technical ability to establish cash transfer mechanisms and independent price-setting schemes free of political interference.

They added that in order to increase the likelihood of success, it is important to “front-load” as much of the benefits resulting from fossil fuel subsidy reform as possible. “These strategies, most participants agreed, would help protect the vulnerable while spurring more durable subsidy reform,” CFR concludes.

*Image credits: 1) CFR, “Fuel Subsidy Reform: Insights From a CFR Workshop”; 2), 3) IMF, “How Large are Global Energy Subsidies?”

Andrew Burger
Andrew Burger
A product of the New York City public school system, Andrew Burger went on to study geology at the University of Colorado, Boulder, work in the wholesale money and capital markets for a major Japanese bank and earn an MBA in finance.

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