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G20 nations must end harmful fossil fuel subsidies

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South China Morning Post
Comment›Insight & Opinion
2014-11-13

Kevin Watkins

Kevin Watkins calls on G20 governments to stop supporting the carbon industry and the exploration of reserves through subsidies, as it undermines their pledge to curb emissions

The number of chances that the world will have to address climate change is dwindling. One of them comes with this week’s G20 summit in Brisbane, Australia, where leaders of the world’s advanced and major emerging economies can signal serious intent by cutting the fossil fuel subsidies that fuel global warming.

Five years ago, the G20 pledged to phase out “inefficient fossil fuel subsidies” as part of a wider strategy for combating climate change. Yet the subsidies have continued to grow. Globally, some US$600 billion is spent to support carbon-intensive energy, compared to just US$90 billion for clean energy.

That makes no sense. Fossil fuel subsidies encourage investors to put resources into the fuels that drive climate change. They generate the terrible pollution that blights cities in China and India. And most of the benefits of the subsidies are captured by the middle class, not the poor.

Subsidies directed towards discovering and exploiting new fossil fuel reserves are among the most wasteful – and the most damaging. Along with the rest of the international community, G20 governments are committed to the target of limiting global warming to less than 2 degrees Celsius above the planet’s pre-industrial level. According to the International Energy Agency, no more than one-third of known reserves can be exploited if this goal is to be achieved.

So why throw public finance at discovering more unburnable carbon? That is a question that G20 taxpayers might want to ask their political leaders.

The Overseas Development Institute and Oil Change International have provided the first financial audit of subsidies allocated specifically to the discovery of new fossil fuel reserves by G20 countries. Their report, published this week, identifies around US$88 billion in public financial support provided through an assortment of tax breaks, spending by state-owned enterprises and transfers mediated through financial institutions such as the World Bank.

Every G20 country is participating in the exploration subsidy fest. The host government for the Brisbane summit spends some US$3 billion annually. The US has doubled funding for fossil fuel exploration – to more than US$5 billion – since 2009. Britain provides around US$1.2 billion, principally in the form of tax breaks for North Sea oil exploration, generating windfall transfers for companies like Total and Chevron.

State-owned energy companies in Brazil, China and India are at the forefront of high-carbon exploration. Russia’s Gazprom gets tax breaks to support investment in ecologically fragile Arctic areas.

Subsidies for fossil fuel exploration are where the politics of the greenhouse meets the economics of the madhouse. Consider, first, the climate change effects. If current fossil fuel reserves are exploited, we will be faced with potentially catastrophic global warming of 4 degrees over the course of the 21st century. Governments are using public money to discover new reserves that, if exploited, will drive the world to climate disaster even faster.

The economic case for exploration subsidies is weak and getting weaker. Public money is being used to boost private profit and bail out a failing industry. Taken collectively, G20 governments are spending twice as much on exploration as the 20 largest private energy companies. In other words, they are putting taxpayer money where commercial companies fear to tread. With prices for oil, coal and gas declining, and the cost of new discoveries rising, much fossil fuel exploration is commercially unviable.

If we are to keep within the 2-degree threshold, governments should be putting a high and escalating price on carbon, linked to emission reduction targets. As the Global Commission on the Economy and Climate has shown, plummeting renewable energy costs have created new opportunities to avoid dangerous climate change without sacrificing economic growth.

Indeed, several major pension funds and institutional investors are now divesting from fossil fuel companies. But the absence of credible carbon price signals, along with the perverse incentives created by fossil fuel subsidies, continues to hold back the investments and technologies needed to drive a low-carbon transition.

Nowhere is this more evident than in the European Union. Political leaders have set the ambitious target of achieving a 40 per cent cut in carbon dioxide emissions by 2030. Yet prices set by the EU’s emissions trading scheme, the largest in the world, are languishing at around US$7 a tonne – and coal is making a comeback. Surely it is time for EU leaders to align climate targets with carbon prices – and to cut the carbon subsidies.

It is easy to be cynical about the G20 Brisbane summit. The host government has been actively rolling back legislation aimed at addressing climate change. Indeed, the Australian authorities have tried to keep the issue off the agenda altogether. Moreover, the G20 itself is short on credibility; what was once considered a workshop for a new system of global economic governance is now widely regarded as an increasingly irrelevant talk shop.

Yet when it comes to climate change, cynicism is a luxury that we cannot afford. Decisive action by the G20 would help to galvanise international cooperation ahead of the key negotiations leading to next year’s United Nations climate summit in Paris. Redeeming the pledge to phase out fossil fuel subsidies would also help to restore the reputation of the G20 itself.

An agreement to eliminate financial support for exploration would be a significant step in the right direction – and it would save taxpayers money, too.

Kevin Watkins is executive director of the Overseas Development Institute, a leading UK think tank on international development and humanitarian issues.

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