Fossil Fuel Subsidy Reform: 3 Insights from a Candid Discussion

We understand the economics. We know some successful strategies. But mastering the politics – that’s the hardest part.

Pertamina Gas Station in Seminyak, Bali
Pertamina Gas Station in Seminyak, Bali

Governments in rich and poor countries alike have subsidized the production and consumption of fossil fuels for many years.

Although such subsidies may have some benefits, such as making fuels affordable to the poor, they come at a cost. Subsidies strain public budgets, leaving less money for social welfare, infrastructure and other policy priorities. Consumer subsidies benefit richer people more than the poor. And by supporting fossil fuel production and use, subsidies contribute to climate change and local air pollution.

So there’s a growing consensus, embraced by the G20 almost seven years ago, that (“inefficient”) fossil fuel subsidies should be phased out. Yet overwhelmingly, they remain in place. A few countries have successfully cut or ended their subsidies, but many more have tried and failed, or done nothing at all. The politics, it turns out, are daunting.

Last month, aiming to shed light on why fossil fuel subsidies are so entrenched, and what it takes to successfully reform them, we hosted a workshop in Stockholm that looked at both the global picture, and at case studies from around the world. Here are our three main takeaways:

1. We know that we want to reform fossil fuel subsidies, but we don’t yet agree on what fossil fuel subsidies actually are.

You may have noticed wildly different estimates of total fossil fuel subsidies. The latest estimate from the International Monetary Fund (IMF), for example, puts them at US$4.9 trillion in 2013 (6.5% of global GDP), while the International Energy Agency (IEA) says in 2014, they amounted to US$493 billion.

What explains this tenfold difference? Quite simply, they are counting different things, using different definitions. And the definition of subsidies affects not only the numbers, but which countries are found to have subsidies, and what policy interventions would be needed to address them.

Of course agreeing on a shared definition of fossil fuel subsidies is itself a political challenge. It’s one thing to agree that “subsidies”, as a concept, are undesirable – it’s another to double the price of petrol back home, or end support to an industry that employs thousands of people. Countries are likely to define subsidies in such a way that their subsidies are excluded.

Still, we need to talk about these differences, the value judgements that underpin them, and the policy implications of each approach. That is what we did in our workshop, and though we may still disagree amongst ourselves, at least we’re clearer on how we differ.

2. We’re starting to know why and how fossil fuel subsidy reform works, but we still don’t know why sometimes it doesn’t work.

There is a growing body of knowledge on fossil fuel subsidy reform. We know, for example, that “safety nets” can be useful to buffer the impact of higher energy costs on the poor. We know governments need to make a compelling case for reform, and reinvest the funds in ways that benefit all of society: through improved infrastructure, new social programmes, support for women’s health and education, expanded energy access.

Yet at our workshop, we also heard about multiple cases of countries that have not embarked on fossil fuel subsidy reform (such as South Africa) or which undertook reforms that were successful at first, but more recently have run into problems.

Egypt’s reforms faced little opposition when introduced in 2014, but increasing opposition and drastically changed political conditions raise risk about the durability of the reforms. Indonesia had a successful first round of reforms, but is struggling with the fiscal consequences of recent efforts. Nigeria, which cut fuel subsidies in May to address both fiscal and energy crises, has yet to seize the opportunities created by this reform.

A key insight from these case studies is that fossil fuel subsidy reforms seldom occur in an ideal setting. Many of the countries attempting them lack the necessary institutional capacity; many have widespread poverty and unemployment; some have serious security problems. Even the industrialized countries that have attempted fossil fuel subsidy reform have faced serious challenges.

Well-crafted reforms could potentially help these countries to realign their economies and stabilize social and political conditions – but getting reforms right is no small task. We need to learn from the failures as well as the success stories, to understand the key barriers and how they might be overcome.

3. Fossil fuel subsidies are not (just) a climate change issue.

Reforming fossil fuel subsidies can lead to significant climate benefits. However, at the international level, it has not been the United Nations Framework Convention on Climate Change (UNFCCC) leading the reform effort, but rather economic institutions such as the IMF, the G20, the Organisation for Economic Co-operation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC).

Is it a problem that fossil fuel subsidies are addressed by international economic institutions? Maybe not. The national case studies presented at our workshop suggest that successful reforms have been undertaken mainly due to fiscal or macro-economic concerns, with environmental concerns playing a very limited role at best. Still, environmental concerns can help build the case for an international norm that fossil fuel subsidies should be reformed.

In tackling fossil fuel subsidies, it may therefore be sensible to build across-the-board coalitions with stakeholders in the health, education and other sectors, with the main argument being that fossil fuel subsidies will help make money available for other policy priorities. The climate benefits could still be significant, particularly if some of the revenue is used to promote renewable energy as a way to expand energy access. Expanded renewables, in turn, could help make fossil fuel reform more politically viable.

So where do we go from here? First of all, we need to clarify what we mean by “fossil fuel subsidies” – not necessarily to reach consensus, but to avoid confusion and loopholes that can be used by those opposed to reform. Second, we need to recognize that there’s never a perfect time or place for fossil fuel subsidy reform. Reforms need to be tailored to the country context. Sometimes the best approach is to turn a crisis into an opportunity; other times it pays to lay the groundwork slowly and patiently.

Finally, we need to recognize that while climate change may be the priority for many of those studying and advocating for fossil fuel subsidy reform, it’s not the priority on the ground. The more we know about the broader fiscal, economic and social benefits of well-crafted reforms, the stronger the case for reform will be. Think of the climate benefits as a bonus.

Jakob Skovgaard is senior lecturer in political science at Lund University, in Sweden. Harro van Asselt is professor of climate law and policy at the University of Eastern Finland, and senior research fellow at the Stockholm Environment Institute (SEI).

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