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In March 2023, the Intergovernmental Panel on Climate Change released a Synthesis report of its huge sixth assessment report, pointing out that greenhouse gas emissions must fall dramatically – starting immediately – for us to have any chance of keeping the global temperature within 1.5 degrees above pre-industrial levels by 2100. This will require a complete restructuring of the global economy to move away from fossil fuels towards renewable energy and sustainable agriculture and forestry.
Yet, despite a steady stream of climate-induced catastrophes around the world, the extraordinary fact remains that governments across the world continue to subsidise fossil fuels. In 2009, in Pittsburgh, the G20 national agreed to “eliminate inefficient fossil fuel subsidies”. They have reiterated that commitment almost every year since, yet the value of fossil fuel subsidies over the period has soared to over $1 trillion in 2022 – four times the value of all overseas aid.
Also on the Forum Network: Economic advice on climate change needs to change by Simon Sharpe
Subsidies to fossil fuels – whether in the form of special tax allowances to oil and gas companies, or due to governments selling fuel (or fossil-produced electricity) far below its cost of production – cause huge damage. Cheaper fuel and electricity result in greater consumption of fossil fuels – worsening climate change; burning coal and other fossil fuels creates outdoor air pollution that kills 4.2 million people each year; and spending $1 trillion on subsidising fossil fuels means not spending it on health, education, infrastructure and all manner of other public goods that could have much greater overall developmental benefit.
However, if fossil fuel subsidies are so harmful, why do they persist? My book ‘Ending Fossil Fuel Subsidies: the politics of saving the planet’, digs into the complex politics of fossil fuel subsidies and finds three answers.
The world faces overlapping climate, food and energy crises. Yet the governments of both rich and poor nations continue to spend billions of dollars subsidising fossil fuel subsidies. Professor Melissa Leach, Director, Institute of Development Studies
First, politicians are under pressure to protect their citizens. The huge spike in oil and gas prices resulting from Russia’s invasion of Ukraine has forced governments in Europe and across the world to step in and try to cover some of the gap between the high cost of energy and what citizens can afford. The original energy price guarantee announced in the UK was forecast to cost more than GBP 100 billion (now much reduced). The EU put in place similarly generous subsidies for their consumers. Citizens expect their politicians to protect them from huge external shocks of this kind. But such subsidies are temporary and, as oil and gas prices have fallen, are now being rapidly withdrawn.
Second, and more damaging, many governments persistently sell fuel far below its cost because doing so is popular. In poorer countries, without effective systems of public service delivery, politicians often try to buy loyalty from voters by fixing prices – and one of the key prices is energy. Keeping electricity and fuel prices cheap shows that the government is doing something for the people. Despite the fact that the vast majority of the benefits go to the better off, surveys repeatedly show strong support across the population for keeping subsidies since they are regarded as a crucial part of the social contract. Unfortunately, this makes removing subsidies extremely difficult, with attempts to do so often resulting in protests and riots.
Third, fossil fuel subsidies, while they may cost a fortune to some governments, can directly benefit vested interests. For example, prior to the recent reforms by President Tinubu in Nigeria, the country lost $10 billion a year in fossil fuel subsidies. Some of this was likely to have been directly siphoned from the national oil company. In addition, millions of litres of petrol were flowing across the borders to neighbouring countries where the prices were much higher. Those organising the smuggling were wealthy and, allegedly, well-connected to the political machinery of the state.
Given the entrenched political challenges of reform, the current approach to reforming fossil fuel subsidies has got nowhere. In addition to the G20 ‘commitments’, the G7 made a similar commitment. The World Trade Organization has also called for an end to such subsidies, as did both the COP26 and COP27 climate conferences. None have made any difference.
Climate change is an existential challenge for the planet. Yet, astonishingly, governments still subsidise fossil fuels. Ban Ki-moon, former Secretary General of the United Nations
The reason why we are failing to make progress is because fossil fuel subsidy reform is being treated as a technical problem, when it is fundamentally a political one. My book argues for a much more politically savvy approach, drawing on the lessons we have learned in recent years about Thinking and Working Politically. Specifically, it argues for a three-step approach:
- Analyse the politics
There are endless reports analysing the technical aspects of fossil fuel subsidies in different countries, but far less rigorous analysis of the politics of reform. Doing so could help reformers and also external actors to support change in a more politically savvy way.
- Compensate … but make sure you include key non-poor groups
When reform is planned, donors focus overwhelmingly on protecting the poor. That is important – but it is not only the poor that vote. Politically feasible reforms must provide benefits to groups that may not be the poorest, but whose interests must be taken into account.
- Identify and support the vision of local political actors
Sustainable subsidy reform comes from within countries. Successful reformers construct politically attractive ‘offers’ in return for reform. For example, President Joko Widodo in Indonesia used the savings from an earlier subsidy reform to deliver free health and education to millions. Fossil fuel subsidy reform has to be part of something bigger that has real political salience in each context.
To have any chance of averting catastrophic climate change, fossil fuel subsidies need to be eliminated. Taking a politically- informed approach to fossil fuel subsidy reform could enable external actors to more effectively support local champions to end fossil fuel subsidies for the long-term benefit of all.
Access Neil McCulloch's book here
This book explains what fossil fuel subsidies are, how they inflict harm and what steps are being taken to reduce them. It also shows why subsidies persist and why existing efforts have been so ineffective. Drawing lessons from countries which have tried to remove fossil fuel subsidies, it explains that the fundamental challenge to reform is not technical, but political.
Learn more by reading the OECD report: Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT)
How can fossil fuel producers and mineral-rich developing countries design realistic, just and cost-effective low-carbon transition pathways? Taking into account the heterogeneity of low-carbon trajectories, the Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT) provides options for policy makers, industry and finance institutions in search of the answers.