Struggle to Eliminate Fossil Fuel Subsidies

Context (TH)

Despite a global consensus on combating climate change, fossil fuel subsidies persist as a major hurdle for governments. By making fossil fuels cheaper, these subsidies encourage their continued use, ultimately undermining global climate objectives.

Global Scope of Fossil Fuel Subsidies

• OECD Estimates: Approximately $1.5 trillion annually (2022).
• IMF Estimates: Around $7 trillion annually when accounting for environmental costs.
• Global Variations: Countries like Iran, Libya, and Venezuela heavily subsidize fossil fuels, keeping prices exceptionally low, while places like Hong Kong and the Netherlands counteract subsidies with high taxes.

Advantages of Phasing Out Fossil Fuel Subsidies

• Environmental Benefits: Reducing subsidies can lead to decreased fossil fuel consumption, thus lowering greenhouse gas emissions and mitigating climate change.
• Market Efficiency: Reflecting the actual costs of energy can foster a shift towards renewable and sustainable energy sources.
• Increased Revenue: Redirecting subsidy funds can support renewable energy development and social welfare programs.

Global Efforts to Address Fossil Fuel Subsidies

• G20 Pledge (2009): Leaders committed to phasing out inefficient subsidies to curb wasteful energy use and reduce carbon emissions.
• Examples of Fossil Fuel Subsidies:
  • Saudi Arabia: The government regulates fuel prices and absorbs cost differences.
  • Indonesia: Energy prices are capped, with the government compensating state-owned enterprises for losses.
  • USA: Oil companies receive tax benefits for drilling expenses.
• New Zealand’s Initiative (2010): Formation of the Friends of Fossil Fuel Subsidy Reform to support G7, G20, and APEC efforts to reduce inefficient subsidies.
• Challenges in Progress: Despite commitments, subsidy levels have reached record highs due to crises like the Russia-Ukraine war.

Reasons for Continued Subsidies

• Economic Interdependence: Fossil fuels influence numerous sectors, and price increases can result in inflation and economic instability.
• Political Motives: Subsidies help maintain political favor by keeping energy prices affordable, particularly in low-income regions.
• Historical Context: Some fossil fuel subsidies date back to the Great Depression and have persisted beyond their original intent.

Challenges in Removing Fossil Fuel Subsidies

• Public Resistance: Higher energy costs often lead to public discontent, especially among low-income communities.
• Regressive Impacts: Without safeguards, removing subsidies may disproportionately burden economically weaker nations.
• Economic Instability: Sudden subsidy removal can disrupt businesses and households.
• Social Unrest: Protests and political backlash are common, especially in nations heavily reliant on fossil fuels.
• Short-Term Hardships: Vulnerable populations are more affected by increased energy costs.
• Inflationary Effects: Higher energy prices can drive up the costs of goods and services, triggering inflation.

Strategies to Phase Out Fossil Fuel Subsidies

• Careful Reform Design: Implement changes with safeguards to protect vulnerable populations, such as targeted financial support.
• Gradual Transition: Introduce reforms incrementally to prevent abrupt economic shocks.
• Public Engagement: Educate people about the long-term benefits of subsidy removal, including reduced climate risks and cleaner energy options.
• Investment Diversification: Reallocate subsidies to renewable energy projects, promoting energy efficiency and sustainability.
• Global Collaboration: Encourage international cooperation to align energy policies and reform strategies in the fight against climate change.