business climate change energy politics

Fossil fuel subsidies – any progress to report?

In 2009 the OECD promised to phase out fossil fuel subsidies, and in order to track that promise, it started measuring global support for them. The 2015 report came out this week, detailing who is still supporting fossil fuels and how much they are spending.

fossil fuel subsidies 2015First the good news – the amount spent on fossil fuels has dropped this year. But the bad news is that spending on subsidies had also gone up, and are really no lower than they were in 2009.

Of all the energy policies to be pursuing in the 21st century, measures to encourage the burning of fossil fuels are the most perverse. Yet somehow, the 34 governments of the OECD have over 800 programmes to support fossil fuels between them, totaling $160-200 billion in annual spending. They vary from grants for research, tax breaks for exploration, underwriting loans to bring new production online, lower taxes on various fuels, right through to the most egregious of them all – using subsidies to reduce prices at the pump for consumers.

The last one on that list accounts for about half of the OECD’s support. There is a case to be made for reducing prices for poorer households, but often governments choose to reduce prices for consumers for political reasons. This reduces the incentive to use energy more efficiently and is a huge waste of money.

The worst countries for subsidising fossil fuels aren’t actually in the OECD – see countries like Iran or Venezuela – but they haven’t promised to cut subsidies, and the OECD and the G2o have. And as the graph shows, we’re making slow progress on that promise so far. This year’s dip is almost entirely due to falling expenditure in Mexico, who have been cutting their floating excise tax for petrol and diesel. Austria and the Netherlands have also wound down support for diesel fuels for agriculture. The decline in BRIICS spending is led by India and Indonesia phasing out diesel subsidies.

Others have plans in place, and are withdrawing gently. Germany is winding down support for its coal mines. France will gradually reduce tax breaks for domestic gas use. (This is an important form of support for gas in Britain too, who have no such plans.)

As it turns out, promising to cut subsidies is one thing. Actually removing them is difficult, even in times of austerity. Once subsidies are granted, people will fight to keep them. The inventory of all those programmes shows that two thirds of the OECD’s subsidy schemes were introduced before 2000, and continue despite the changes in energy context. Some go back to the 1970s and the oil crisis, but remain in place as if nothing had changed. There is “a certain degree of policy inertia” as the report puts it, and “there might be a need for countries to reassess the relevance of some of their support measures in today’s context.”

Britain has a maze of tax exemptions, allowances and deductions for fossil fuel extraction, some of them dating back to 1975, so let’s hope somebody at the Treasury pays attention to the report. At times it seems as if the Chancellor is unaware that we are even a member of the OECD, since we continue to add new support schemes for fossil fuels, especially for wringing the last out of the North Sea, and for fracking.

As OECD secretary-general Angel Gurria said at the launch of the report, “We’re totally schizophrenic. We’re trying to reduce emissions, and we subsidize the consumption of fossil fuels. These policies are not just obsolete, they’re dangerous legacies of a bygone era when pollution was viewed as a tolerable side effect of economic growth. They should be erased from the books.”

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