Fossil fuel subsidy removal imperative

In what was a very strong message to the governments of different countries during the R20 Austrian World Summit 2019, United Nations Secretary-General Antonio Guterres said, "We must tax pollution, not people. Second, stop subsidies to fossil fuels. Taxpayers' money should not be used to boost hurricanes, to spread drought and heatwaves, to bleach corals or to melt glaciers."

The notion behind his such assertion is that we can't make the fossil fuel industry better off while making the world worse off.

Even a decade ago, different countries had significant motivations to continue with fossil fuel subsidies – be it supporting industrial activities, enhancing access to electricity or others. Also, the net energy exporting countries have different rationales than that of other countries to use subsidy, as a policy instrument, to keep energy price artificially low.

However, the dynamic and ever-evolving energy value chain has gone through a massive transformation globally, particularly from innovation to economies of scale of renewable energies. In tandem with this transformation, the pricing mechanism of renewable energies has seen a notable shift from feed-in-tariff to auction, making most renewable energies cheaper than fossil fuels.

Yet, to date, fossil fuels and the fossil fuel industry enjoy subsidies, both in implicit and explicit forms.

While the Covid-19 led economic disruptions along with a fall in energy demand have plummeted the fossil fuel industry and the global subsidies to fossil fuels in 2020 is projected to decline, the monetary value of such subsidies as recently revealed in a report of the International Energy Agency (IEA), would still stand at $180 billion.

However, with the methods used by the International Monetary Fund (IMF) in calculating the value of global energy subsidies, the IEA projection of subsidies for 2020 would increase manifold. For example, taking into account the external costs of fossil fuel subsidies that are being paid by society, the value of global fossil fuel subsidies in 2017 stood at a whopping $5.3 trillion. This stupendous level of subsidies may help the governments to pursue different social goals but the subsidy mechanism is often not aptly designed and as a result, the budgetary deficiencies increase quite significantly.

Even though subsidies are supposed to benefit the poorest households, it often tends to benefit rich people instead. This triggers the necessity of assessing distributional impacts of the subsidies on different groups of people – urban/rural, poor/rich, or others.

Regrettably, we continue to subsidise fossil fuels when we don't feel the need to do so. Perhaps, it stems from the hypothesis that keeping low energy price would help spur economic growth. Furthermore, a significant part of the total global subsidies belongs to the fossil fuel exporting countries who don't immediately see the damages of fossil fuel combustions as these damages normally appear after many years. When the damages do eventually manifest, they are being inflicted upon the countries least responsible for emitting large quantities of greenhouse gas (GHG) emission into the atmosphere.

Hence, we shall look into and value the benefits of subsidy removal. For instance, an IMF working paper of 2019 concluded that fixing the fossil fuel prices at efficient levels in 2015 would have reduced global GHG emission by 29% while helping avoid 46% deaths from air pollution with an increase of tax revenue, equivalent to 3.8% of global GDP. The paper also revealed that coal receives the most subsidy among fossil fuels, contradicting the notorious role that is being played by coal in warming the planet.

This is inconceivable as to how fossil fuels are supported when finance for climate protection is often not there on the ground of lack of availability of the same. Contrary to that, the removal of the high level of fossil fuel subsidy and channelling this to the energy sector would help spearhead the transformation necessary to be on track to 1.5 degrees Celsius emission trajectory under the Paris Climate deal.

Even then, the subsidies being made on fossil fuels, without even considering the economic and environmental consequences, are still much higher compared to the climate finance pledged by the developed nations to channel to developing and least developed countries per annum via Green Climate Fund (GCF).

In all sincerity, there are enough rationales to phase out subsidies completely. For instance, polluters should not be encouraged and paid to over-exploit resources and pollute. If the licence is given to polluting, supported by incentives, policy measures to enhance resource efficiency can't deliver desired results. Fossil fuel subsidies would rather lock us into the business-as-usual system. The economics of renewable energies further reinforces that fossil fuels shall not be promoted aggressively.

The governments now shall pursue efforts to eliminate fossil fuel subsidies more than ever before. Typically, during the period of low fuel prices, governments of the countries that are net importers find it politically more feasible to minimise fossil fuel subsidies. Covid-19-led dip in oil prices exactly provides the same opportunity to many countries to phase-out subsidies. On top of this, the governments may eliminate environmentally harmful fossil fuel subsidies to relieve fiscal strains underpinned by the opportunity to build back better and cleaner.

In a resource-constrained world, it is incomprehensible to pay such huge subsidies, as mentioned in the foregoing, to promote environmentally harmful energies when we find it difficult to accumulate finance for climate actions. Perhaps, once there were trade-offs in paying subsidies, for example in increasing access to electricity, enhancing industrial production, maintaining good economic growth, creating jobs etc, but we realise changes in trade-offs today.

There is a growing need for decoupling the economy from resource use and renewable energy can fulfil the energy demand even at a lower cost while also providing incremental jobs. Putting aside these, eliminating energy subsidies would benefit the climate.

Be that as it may, the subsidy reform process shall be in gradual phases. The resources to be freed-up gradually maybe utilized in climate protection and transformation of a country's energy system. Also, designing pro-poor programs, based on distributional impacts of subsidy reform on the poor people, would help ease the phase-out process. If subsidy reform is properly flanked with pro-poor programs, it would be a no-regret policy, as economists have been claiming for years.

 Shafiqul Alam is a Humboldt Scholar. He is an engineer and environmental economist.