The Next Economy
Clear Economic and Environmental Benefits to Phasing Out Fossil Fuel Subsidies

After a slow start 6 years ago when the G20 and APEC made commitments to phase out inefficient fossil fuel subsidies, about 30 countries have launched or accelerated fossil fuel subsidy reforms, according to a new paper by the New Climate Economy.

The paper, Fossil Fuel Subsidy Reform: From Rhetoric to Reality, identifies the lessons learned from past attempts to reform fossil fuel subsidies, explores why progress has been slow and outlines the principles for successful reform.

The economic and environmental benefits of phasing out fossil fuel subsidies are clear, the report says. However, governments still are expected to spend almost $650 billion funding fossil fuel subsidies in 2015.

Fossil fuel subsidies create significant burdens on government budgets, taking up as much as 5 percent of GDP in as many as 40 countries — often more than is spent on health or education. Removing these subsidies can spur a virtuous circle, the report claims, freeing up scarce government funds to be spent on other critical priorities, including better targeted support for the poor.

The paper identifies the following principles for governments attempting reform:

  • Ensure reforms take a ‘whole-of-government’ approach. In Honduras and the Dominican Republic, joint action was taken across the government, creating broad political ownership.
  • Mobilize resources upfront. Indonesia prepared for reforms in the state budget ahead of time to support households through the transition.
  • Provide clear and transparent public information on the scale and impacts of reform. Iran and Ghana succeeded in reform through widespread public information campaigns, while Bolivia faced demonstrations and strikes in part due to limited information among citizens.
  • Reallocate the resources saved to those groups most affected by reform. In the Middle East and North Africa, 100 percent of the reforms that provided targeted support to households were successful, but only 17 percent of attempted reforms that did not provide support were successful.
  • Phase-out the subsidies according to a credible and pre-planned timeframe. Angola, India, and Peru succeeded by starting first with reforming gasoline subsidies before reforming those to diesel and kerosene.

Momentum has been building with new reform efforts in the last two years in a number of countries, spurred by low oil prices and tightening budgets, the report finds. Egypt raised fuel prices by 78 percent in 2014 and plans to double them over the next 5 years. In 2015 the Angolan government approved a 60 percent cut in support for fossil fuels. Together, these experiences offer a path from rhetoric to implementation, the report says.

In April, 62 institutional investors representing nearly $2 trillion in assets called for the Securities and Exchange Commission (SEC) to push for better disclosure by oil and gas companies of critical climate change-related business risks that will “profoundly affect the economics of the industry.” Investors noted that the current low price environment is providing a stress test for the fossil fuel sector of the risks it is likely to face due to climate change, citing a number of “carbon asset risks” — including expanding carbon-reducing regulations, growth of renewable energy and weakening oil demand — that are not sufficiently disclosed in their financial filings.

All of this comes even as renewables like solar and wind are becoming the cheapest forms of energy to produce in certain areas of the world, despite oil subsidies creating an uneven playing field.


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