Speakers at a virtual session on the role of fossil fuel subsidy reform in the context of recovery from the COVID-19 pandemic highlighted that if world governments are to succeed in rebuilding better and greener economies, reforming government support to fossil fuels should be a key policy priority.

The 18 November event, which was held as part of the World Trade Organization (WTO) Trade and Environment Week, focused on the theme, ‘Fossil Fuel Subsidy Reform as Part of a Green COVID-19 Recovery.’ It was organized by the Government of New Zealand on behalf of the signatories to the Ministerial Statement on Fossil Fuel Subsidy Reform, which was issued in 2017 at the WTO’s Eleventh Ministerial Conference (MC11) in Buenos Aires, Argentina. Alison Hamilton, Lead Adviser, New Zealand Ministry of Foreign Affairs and Trade, moderated the discussion.

Fossil fuel subsidies and their impacts

Looking at the current landscape of subsidies to the energy sector, Michael Taylor, Senior Analyst, International Renewable Energy Agency (IRENA), emphasized that government support going to fossil fuel is much higher than support for other energy sources. In particular, direct fossil fuel subsidies are over three times higher than subsidies for renewable energy. If the external costs of fossil fuels are included, this ratio rises to 19 times.

For the world to manage its necessary transition to cleaner energy systems, Taylor noted, a rebalancing of public support away from fossil fuels to renewables and energy efficiency will be crucial. “Energy sector subsidies are one part of the energy transition puzzle, but they are an important one,” he said.

Peter Wooders, Senior Director, Energy, International Institute for Sustainable Development (IISD), highlighted that on top of their well-known negative environmental impacts, fossil fuel subsidies can significantly distort international markets and trade. Based on recent research by IISD, he explained that there are various pathways through which such trade impacts can materialize all the way through supply chains. They can affect fossil fuel products, energy-intensive industries using fossil fuels as input, as well as potential alternatives such as goods related to renewable energy, which is a challenge from the energy transition perspective.

Reflecting on whether policymakers know enough about fossil fuel subsidies and their effects to advance reform, Wooders indicated his answer would be a clear “yes.” “We have enough information to know we need to act,” Taylor concurred.

Challenges and opportunities related to COVID-19

According to Taylor, it is important in the current context to raise investments in the energy transition. “It’s an opportune time to talk about leveling the playing field for renewable energy,” he said.

Economic stimulus packages focused on promoting greener energy systems would not only meet environmental objectives, but also have important benefits for jobs and economic recovery more broadly, Taylor added. The decrease in oil prices and increasing pressure on public finance resulting from the COVID-19 pandemic should also help drive public money away from supporting fossil fuels, he said.

Building on that point, Joy Kim, Senior Economic Affairs Officer, UN Environment Programme (UNEP), emphasized that “many countries are now struggling with a very constrained fiscal space,” a challenge that can be particularly acute in developing countries. In that context, it is very important for governments to spend public money wisely and to remove inefficient government expenditures, including fossil fuel subsidies, he said.

As opposed to immediate relief measures taken by governments to soften the blow of the pandemic, longer-term economic recovery strategies will have deep and structural impacts far into the future. “Stimulus packages will change the direction of not only the economy but also society,” Kim stressed.

Based on the results of the recent Energy Policy Tracker, developed by IISD and partner organizations, Wooders indicated that COVID-19 recovery packages in the world’s largest economies tend to support fossil fuels more than renewables. “So far, the money that has been going to COVID-19 recovery has been going more the fossil side than the clean side,” he said. This is despite increasing signs pointing against investing more public funds to support fossil fuels, as more and more fossil fuel projects tend not to be financially viable, Wooders explained.

Both Wooders and Kim, however, emphasized that some countries have taken steps “in the right direction,” including by taking advantage of low oil prices to increase taxation of particular fossil fuel products. A growing number of developing countries are interested in getting support from international organizations to design low-carbon development strategies, including through fossil fuel subsidy reform, Kim indicated.

What role for the WTO and the international trade system?

Looking forward, Wooders underlined that the WTO could play a significant role in advancing the issue of fossil fuel subsidy reform. The topic falls squarely in the WTO’s remit, he argued, because of fossil fuel subsidies’ impacts on both trade and the environment.

Fossil fuel subsides have so far largely remained unchallenged at the WTO, Wooders explained, despite the organization’s trade-focused existing subsidy discipline. Against this backdrop, he shared three recommendations, drawn from a newly-published report, on ways in which WTO rules and practices could be reformed to better address fossil fuel subsidies and support the clean energy transition. These recommendations call for:

• Enhancing transparency around fossil fuel subsidies;
• Better enforcing existing WTO subsidy rules, notably exploring the possibility of launching a legal challenge to a fossil fuel subsidy at the WTO; and
• Launching a dialogue on new subsidy disciplines focused on fossil fuel subsidies.

Efforts to develop international subsidy rules on fossil fuel support would need to be kickstarted by a first mover initiative, Wooders said, which could then inspire broader efforts, including at the multilateral level. From this perspective, the current negotiations among six countries towards a plurilateral Agreement on Climate Change, Trade and Sustainability (ACCTS), which is expected to include disciplines on fossil fuel subsidies, constitutes an important development, he concluded.

Presentations made at this virtual session are available here. [SDG Knowledge Hub Sources]