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G20 stalls on fossil fuel subsidies

As the world’s largest economies met in Japan, there was little appetite for action on fossil fuel subsidies
<p>Countries are not switching away from coal fast enough to be effective [image by: Andrew / Flickr]</p>

Countries are not switching away from coal fast enough to be effective [image by: Andrew / Flickr]

As G20 countries met for the group’s annual summit in Osaka, the dirty secret was that the world’s leading economies were failing to phase out wasteful fossil fuel subsidies. On top of that, the host country, Japan, bowed to US pressure to remove references to emissions in the draft communiqué, which led to a face-off between other members of the G20.

All of this, though, has obscured the fact that ten years ago the G20 pledged to “phase out and rationalise” fossil fuel subsidies yet the cost increased from USD 75 billion in 2007 to USD 147 billion in 2016, the last year that data is available for the entire group.

“Since 2009, the G20 is limited to copying and pasting the same statement every year in its annual document, stating that fossil fuel subsidies are inefficient and hinder the energy transition. But that’s not enough,” said Enrique Maurtua Konstantinidis, senior advisor on climate policy for the Environment and Natural Resources Foundation (FARN).

G20 commitments

The G20 economies represent more than 80% of global GDP and three quarters of global trade. The G20 is also responsible for 79% of global emissions so it has a major role in fulfilling the goals of the Paris Agreement.

However, current G20 commitments are insufficient to prevent a global average temperature increase of more than 2C compared to pre-industrial levels.

G20 countries still generate most of their energy from fossil fuels. From 2013 to 2015, at the group level, they spent USD 91.4 billion per year on coal, oil and gas projects. A new report by the Overseas Development Institute finds that they provide USD 63.9 billion per year to the production and consumption of coal.

“Ten years have passed since the group’s commitment and it hasn’t been possible to advance a definition of subsidies or a specific date to remove them,” said Ipek Gencsu, a specialist in subsidies at the Overseas Development Institute (ODI).

The group’s 2009 commitment was quickly replicated by other organisations. The G7, which includes members of the G20, promised to remove subsidies by 2025. Goal 12 of the Sustainable Development Goals (SDGs) commits to “rationalising inefficient subsidies”.

The role of fossil fuel subsidies

G20 countries grant subsidies through various mechanisms such as tax exemptions, financial incentives, reimbursements and bonuses. They are directed at the production of hydrocarbons and their consumption, decreasing the prices of fuel for consumers.

“They also vary with the price of oil. When it is low, subsidies also go down since consumers are not so concerned about prices. But the opposite happens with more expensive oil,” said Ivetta Gerasimchuk, director of sustainable energy supplies at the International Institute for Sustainable Development (IISD).

Experts agree that state support for fossil fuels is difficult to justify because of pollution and greenhouse gas emissions. And with renewables increasingly cost competitive, fossil fuel subsidies are becoming more difficult to justify economically. Since 2010, the cost of generating solar energy has fallen 73%, according to the International Renewable Energy Agency.

Despite this, subsidies and investment in fossil fuels remains high globally.

Research by the International Monetary Fund estimated that in 2015 fossil fuel subsidies represented 6.3% of global GDP, with China, the United States and the European Union spending the most. Without subsidies, greenhouse gas emissions would have been 28% lower.

The International Energy Agency found that investment in natural gas and oil projects increased in 2018, while investment in renewable energy declined. Gas represented half of the increase in global energy consumption.

The G20 has repeatedly supported the use of natural gas as a transition fuel until further development of renewable energies is achieved. However, this approach has been questioned by environmental organisations. While it generates fewer emissions, gas is not clean energy, they argue.

At the recent meeting of G20 energy and environment ministers prior to the leaders’ summit, countries called for more extensive use of natural gas.

Limited progress

The G20 has acted on subsidies by establishing a voluntary peer review mechanism. Paired countries submit self-reports on fossil-fuel subsidies and then each country reviews the other, making recommendations.

The G20 countries that have participated include China, the United States, Canada, Argentina, Indonesia, Italy, Germany and Mexico. However, the process has not resulted in major changes to domestic subsidy policies in any country.

“The United States and China were the most committed to this process but only China implemented some of the recommendations. The rest of the countries were criticised for not including all types of subsidies. As volunteers, they aren’t bound to anything,” said Gerasimchuk.

It is typical for the G20 host country to participate in this mechanism but this year Japan will prove the exception as it has not worked on fossil fuel subsidies during its presidency.

Japan spent USD 3.8 billion on subsidies in 2016, according to the latest data available in the Brown to Green report, an increase of USD 1.7 billion on 2007. The subsidies were granted through direct transfers and tax reductions.

Japan not only committed to reduce subsidies through the G20 but also through the G7, but within the G7, its progress on ending support for fossil fuels was ranked second to last behind the US. The report found that Japan continues to support subsidies and is spending billions building coal plants in countries vulnerable to climate change.

In closing, though, the G20 gave two indications that the fight against climate change may be becoming more difficult. The first, a minor error in its closing statement, misspelled the name of the Intergovernmental Panel on Climate Change, replacing “International” for “Intergovernmental”, which seemed to indicate a somewhat cavalier approach to the IPCC. the more serious issue was that the G20 agreed for its next meeting to be hosted by Saudi Arabia, which has been deeply dismissive of the challenges of carbon emissions.

See: USD 277.3 billion: India’s 2014 fossil fuel subsidy bill

Fermín Koop is Latin America editor for Diálogo Chino, where this story was first published, and has been updated with inputs from the South Asia office