Phase out subsidies for fossil-fuels and agricultural inputs, and incentives for urban sprawl, to drive more efficient use of resources and release public funds for other uses, including programmes to benefit those on low incomes.

This is one of 10 recommendations in the report "Better Growth, Better Climate", part of the New Climate Economy project led by the Global Commission on the Economy and Climate.

The Commission is made up of 24 global leaders drawn from 19 countries and is chaired by former Mexican President Felipe Calderón and co-chaired by Lord Nicholas Stern.

The New Climate Economy is the Commission’s flagship project. It was tasked with managing a year-long, independent study of the linkages between action that reduce climate risk and those that boost economic growth. The study has been conducted by leading research institutes from around the world, advised by a panel of world-leading economists chaired by Lord Nicholas Stern.

The report estimates that subsidies to fossil fuels, agricultural inputs and incentives to urban sprawl total over US$ 1 trillion per year globally. Of this amount, subsidies to polluting fossil fuels are estimated at around US$ 600 billion per year. ^[1]

The inclusion of fossil-fuel subsidy reform as one of the 10 recommendations is significant as it recognizes the key importance of this issue in determining the future of economic development, environmental policy and poverty eradication. The Commission joins a chorus of international actors that have called for action on fossil-fuel subsidy reform, including the 2009 commitments by the G-20 and Asia-Pacific Economic Cooperation (APEC), as well the declaration from the United Nations Conference on Sustainable Development (UNCSD or “Rio+20) and the draft text of the successor to the Millennium Development Goals (MDGs), the Sustainable Development Goals (SDGs). ^[2]

While recognizing the political difficulties around fossil-fuel subsidy reform, particularly with regards to potential unwanted negative impacts for poor and vulnerable groups, the report highlights recent examples of subsidy reform.

IISD’s Global Subsidies Initiative was contacted as an expert advisor by the Commission, and, building on GSI country work in Ghana and Indonesia, the Commission concluded that it was “encouraged” by reform efforts to reduce fossil fuel subsidies by “using part of the revenues released to provide conditional cash transfers and other forms of financial assistance to low-income households”. Without going into specifics, the report also calls for national governments to develop comprehensive plans for fossil fuel subsidy reform. Such plans should include “enhanced transparency and communication and targeted support to poor households and affected workers”.

As a high-level summary of good practice, the Commission’s suggestions are well framed, but it should be noted that international experience shows that fossil-fuel subsidy reform is a highly complex exercise. The exact “how” of reform must be tailored to individual circumstances, although the process for identifying a strategy is likely to be relatively uniform between countries. The GSI has outlined detailed technical guidance on this planning process in ‘A Guidebook to Fossil Fuel Subsidy Reform’, organized around three pillars: improving and de-politicizing pricing mechanisms; building support for reform through consultations and communications; and making sure that the impacts of reform, particularly on vulnerable groups, are well understood and can be managed with complementary policies.

There have been many recommendations that governments should reform fossil-fuel subsidies, but global expenditure keeps rising. What will actually result from this latest report?

The next step for the Commission is to embark upon a second phase of work that will seek to engage with governments, businesses and other stakeholders in a number of countries across the world over the next six months.

For the benefit of this influencing activity to be maximized, it will be important for the Commission to ensure that it draws on the ongoing efforts already underway on fossil-fuel subsidy reform. Internationally, governments are often unaware of one another’s good (and bad) practice in preparing for fossil fuel subsidy reform, so a number of international organizations support information-sharing to ensure the passage of good innovations. In addition, many organizations—particularly civil society—are active in encouraging forums such as the United Nations Framework Convention on Climate Change and the World Trade Organization to step up and take a strong stance on the issue. At the national level, governments themselves along with policy experts are in many countries attempting to develop new technical solutions to ensure that reform truly delivers on its economic, social and environmental benefits. And civil society organizations continue to play a vital role in communicating the needs and concerns of key groups, as well as ensuring that the funds liberated from reform are truly going to better purposes.

It must also be remembered that fossil-fuel subsidy reform cannot happen overnight, or even in six months—at least, not if it is to be sustainable. The journey towards cost-reflective pricing is a gradual one that in most countries requires a long-term commitment from a broad-based coalition of actors.

Notes

1 The International Monetary Fund (IMF) has argued that the true “market price” for a fuel should be equal to its full costs, including costs that are not currently reflected in most markets in the world, such as the impacts of local air pollution and greenhouse gas emissions. Under this definition of “subsidy”, it has estimated that fossil-fuel subsidies in 2011 were equal to US$ 1.9 trillion globally. This is based on an assumed value of carbon of US$ 30 per tonne of CO2-equivalent_.

2 Early drafts of the SDGs implied that fossil-fuel subsidy reform might be included as a target within a goal focused on sustainable energy for all. The latest draft to emerge has decided not to include fossil-fuel subsidy reform as a measurable target in the context of energy. Instead, it has been demoted to a “means of implementation”—essentially, a way of achieving other measurable targets—in the context of sustainable consumption and production. It is not yet clear if this will change again as the SDGs continue to be negotiated. See this piece by the GSI’s Laura Merrill for a full discussion.