Stuck in dirty development

The G20 is stalling its commitment to phase out fossil fuel subsidies, despite the need for immediate action

Hayley Stevenson
Hayley Stevenson

Last week the world’s largest economies convened in the Russian city of St Petersburg in an effort to promote sustainable economic recovery and financial stability. This year’s G20 summit declaration reaffirmed the commitment to phase out inefficient subsidies for fossil fuels, but, once again, it has failed to deliver any real progress.

Perhaps this is unsurprising; given the fragility of recovery in the advanced economies, coupled with the industrial ambitions of the emerging economy members, environmental concerns rank fairly low on any policy agenda. But what is most surprising is that an environmental issue was placed on the agenda at all.

Of course, in theory we are all environmentalists now: it is difficult to deny that economic and environmental fates are intertwined; this is as true nationally as it is globally. Yet it has proven extraordinarily difficult to square the short-term fate of national economies with the long-term fate of the global environment.  Yet to understand why G20 members continue to pay even lip service to this thorny issue we need to cast our minds back to 2009.

The year 2009 was one of high hope (and ultimately deep disappointment) for those waiting for global action on climate change. With the international community’s gaze fixed on the UN Climate Summit in Copenhagen, diplomatic manoeuvring had been underway to signal ambition and commitment among the major economic powers. Faced with domestic resistance to a ‘cap-and-trade’ market in greenhouse gases, new US president Barack Obama had to pull another trick from his sleeve to deflect growing criticism of his country’s contribution to international efforts. In a move that surprised many, Obama used the opportunity of hosting the September G20 summit to formulate a collective commitment ‘to phase out and rationalize … inefficient fossil fuels subsidies while providing targeted support for the poorest’.

Subsequent G20 declarations have reaffirmed this commitment, but we are yet to see any genuine progress on compliance. Expectations of voluntary reporting on subsidies have fallen flat as most member countries hide behind definitional fuzziness to claim they don’t have any inefficient subsidies to phase out. To take these countries at their word (as some compliance studies do) would be folly. Much is at stake both socially and environmentally.  So let me set out the case for inserting a dose of urgency, transparency and accountability into this agenda item.

The International Energy Agency defines a subsidy as ‘as any government action that … lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers’. While many countries do employ this definition, G20 members negotiated ambiguity into the commitment in a way that allows members to define their own subsidies out of existence. Numerous G20 countries have claimed that no action is necessary on their part because they have no ‘inefficient’ subsidies; this includes Australia and Russia whose annual fossil fuel subsidies have an externally estimated value of US$8.4 billion and US$39.3 billion respectively.

Global levels of subsidies are truly staggering; the IMF estimates that global subsidies in 2011 totaled US$1.9 trillion (2.5% of global GDP), a figure which captures the costs of environmental externalities. The top three subsidisers are all G20 members (USA, China and Russia), yet none has acted on the G20 commitment to phase out and rationalise fossil fuel subsidies.  Analysis by economist Doug Koplow shows that countries frequently omit a range of support from their definitions of inefficient subsidies. This includes subsidies that maintain below-market prices despite covering production costs, and those that maintain above-market prices despite taxing fossil fuels lower than other goods and services; tax breaks for extractive industries that allow them to under-report profits on the basis of depreciated value of equipment and assets; and a range of support measures that have the effect, though not the declared intent, to subsidise.

These subsidies are a significant hindrance to tackling global climate change. By artificially lowering the price of fossil fuels, they promote over-extraction, inefficiency and wasteful consumption, and make it even harder for clean technologies to establish a foothold in the energy market. The impact on global greenhouse gas
emissions of this energy use is significant: the IMF estimates that removing post-tax subsidies in advanced economies and oil-exporting countries could reduce global C02 emissions by 13%.

Subsidies also carry a heavy social cost, and not just for future generations which will feel the effects of climate change. A popular justification for maintaining subsidies is that they protect vulnerable groups from energy poverty. However, this overlooks the regressive nature of indiscriminately applied subsidies that produces a skewed distribution of benefits. In low- and middle-income countries, the richest 20% of households receive 43% of total fuel subsidies, while the poorest 20% receive only 7%. Equitable social development would be more successfully advanced in all countries by eliminating subsidies and redirecting budgetary savings to targeted welfare support and investment in clean energy infrastructure, health and education.

What, then, should we expect from the G20 on fossil fuel subsidies, and what can we realistically expect to see achieved? The G20 is not the only institutional setting where this issue is being discussed; progress has also been sought in the UN’s climate regime (UNFCCC) and the WTO. Yet the theory and practice of deliberation and so-called ‘minilateralism’ tells us that challenging issues are often most fruitfully addressed within small groups rather than inclusive multilateral settings. The G20, then, may be more conducive to progress than either the UNFCCC or WTO.

One small sign of progress we’ve seen in the G20 this year is the tentative development of a voluntary peer-review process to bring some accountability to self-reporting. However, this is unlikely to produce any meaningful results unless agreement is first reached on a specific definition of subsidies that encompasses full opportunity costs and environmental externalities. Such a process may then develop the transparency and trust that is necessary for member states to reduce subsidies without jeopardising their competitive advantage vis-à-vis trading partners.

As President Putin acknowledged in his G20 press briefing, the responsibility of focusing the G20’s attention on specific issues falls to the host nation. Russia, he accepted, had failed to adequately prioritise environmental sustainability at this year’s summit. Sadly, we’re unlikely to see significant progress in this area over the next two years as the presidency now falls to Australia and then Turkey. Given the emissions profiles and reporting records of these two countries, we’re more likely to see further foot-dragging and definitional fudging than the ambitious leadership so desperately needed.