More than half of global greenhouse gas emissions come from burning fossil fuels. Reducing and eventually eliminating fossil fuel use is a critical priority. Most of the world’s remaining fossil fuel reserves need to stay in the ground if we are to avoid dangerous climate change.
Yet governments around the world still pour billions of dollars into supporting fossil fuel production and use every year. Money utilised to prop up the fossil fuel industry dwarfs investment in renewable energy. This is a backwards policy that needs to change.
A growing chorus is calling for the removal of fossil fuel subsidies. As well as environmental organisations, such as Paid to Pollute, and the International Institute for Sustainable Development, those calling for action include major international organisations like the G20, Organisation for Economic Cooperation and Development (OECD) and International Energy Agency (IEA), International Monetary Fund (IMF) and World Bank.
The latest estimate of global fossil fuel subsidies comes from the IMF. In a report earlier this year, the IMF valued global fossil fuel subsidies at a staggering $1.9 trillion, or 2.5% of global GDP. The IMF estimate is a lot higher than previous estimates from the Earth Policy Institute ($620 billion) and IEA ($512 billion). This is because the IMF includes lost revenue from failure to apply efficient taxes to fossil fuels.
In Australia, a comprehensive 2007 study identified fossil fuel subsidies of between nine and ten billion dollars. More recent work by the Australian Conservation Foundation estimated that fossil fuel incentives amounted to $11 billion in 2010-11.
There are several reasons why fossil fuel subsidies are a concern. First, fossil fuel subsidies contribute to climate change and air pollution. They reduce the prices of fossil fuels, encouraging people and organisations to use more. This, in turn, leads to more pollutants, including greenhouse gases that warm the atmosphere. The IMF estimates that eliminating fossil fuel subsidies would reduce global carbon dioxide emissions by 4.5 billion tonnes, or 13%. The IMF also highlights the health benefits of reduced air pollution.
Second, fossil fuel subsidies create an uneven playing field for competing technologies like renewable energy. The Earth Policy Institute found that global fossil fuel subsidies were more than seven times higher than renewable energy subsidies. In Australia, the disparity is even higher. Fossil fuel infrastructure has benefited from government investment and support over decades, putting renewable energy at a distinct disadvantage.
Third, fossil fuel subsidies can have negative economic consequences. They can depress investment in the energy sector, crowd out spending on public goods, diminish competitiveness, provide incentives for smuggling and make it harder to manage volatile international energy prices.
Finally, energy subsidies are regressive because they tend to benefit high energy users, with higher incomes. According to the IMF:
On average, the richest 20 percent of households in low- and middle-income countries capture six times more in total fuel product subsidies (43%) than the poorest 20% of households.
In other words, fossil fuel subsidies act to entrench poverty and reduce social equity.
Despite the number of heavyweight international organisations calling for reform, progress has been slow. Global fossil fuel subsidies have increased since the G20 first committed to their removal in 2009.
In Australia, there has been some limited progress. The rules relating to fringe benefits tax for company cars were changed in 2011, reducing that subsidy from $1.24 billion in 2011-12 to $930 million in 2012-13. Support for renewable energy through the Clean Energy Finance Corporation and other measures has also increased in recent years, relative to fossil fuels.
However, many fossil fuel subsidies and incentives still remain. In 2001, John Howard stopped annual indexation of fuel excise. The foregone budget revenue from this decision now amounts to something like $5 billion per year in lost tax on fuel. The Fuel Tax Credits Scheme, which provides exemptions on fuel excise, cost another $5.1 billion in 2010-11. Removing these subsidies and incentives would increase the price of fossil fuels and free up budget to support renewable energy alternatives. Just imagine what the Clean Energy Finance Corporation could achieve with another $10 billion per year to invest in renewable energy.
Of course, politicians are likely to run a mile from any policy that would increase petrol prices, so the prospects for removing these Australian subsidies in the short-term are slim. That’s a shame, because subsidy removal could be a lucrative source of funds in an era when government budgets are tight. Reducing support for highly profitable coal, oil and gas companies and redirecting those funds towards public goods such as renewable energy and education makes excellent sense.
Although removal of fossil fuel subsidies clearly makes sense, it does require a cautious and well-designed approach to ensure that consumers are not hit with rapid price rises. This is particularly important with respect to petrol prices, as many of the people that are most dependent on their cars to get around have few viable transport alternatives.
Nevertheless, a compelling case remains for removal of fossil fuel subsidies around the world to reduce environmental, economic and social impacts. Reversing the backward policy of subsidising unburnable carbon should be a key plank in international and domestic climate change policy.