The Scope of Fossil-Fuel Subsidies in 2009 and a Roadmap for Phasing out Fossil-Fuel Subsidies

This is the second detailed report on fossil fuel subsidies prepared by the assigned agencies to support the G20 subsidy phase-out commitment.  It was prepared to support the November 2010 meeting of the G20 in South Korea.  The report estimates the scope of fossil-fuel subsidies in 2009 and provides a roadmap for phasing-out fossil-fuel subsidies.  The IEA estimates that direct subsidies that encourage wasteful consumption by artificially lowering end-user prices for fossil fuels amounted to $312 billion in 2009.  In addition, a number of mechanisms can be identified, also in advanced economies, which effectively support fossil-fuel production or consumption, such as tax expenditures, under-priced access to scarce resources under government control (e.g., land) and the transfer of risks to governments (e.g., via concessional loans or guarantees).  These subsidies are more difficult to identify and estimate compared with direct consumer subsidies.

Phasing-out fossil-fuel subsidies represents a triple-win solution.  It would enhance energy security, reduce emissions of greenhouse gases and bring immediate economic gains.  This is highlighted by estimates from the IEA that indicate that if fossil-fuel subsidies were completely phased-out by 2020, it would cut expected growth in global energy demand by 5%.  This amounts to the current consumption of Japan, Korea, and New Zealand combined.  In terms of oil demand, the savings amount to 4.7 mb/d, or around one-quarter of current US demand.  It would also represent an integral building block for tackling climate change as expected growth in carbon-dioxide emissions would be cut by 2 gigatons.

Furthermore, OECD and IEA analyses suggest that subsidy reform would bring about immediate economic gains as in many cases they are creating market distortions, imposing an unsupportable fiscal burden on government budgets, and are weakening trade balances.  For example, the IEA estimates that, in the absence of reform, spending on fossil-fuel subsidies is likely to reach almost $600 billion in 2015, or 0.6 percent of global gross domestic product.  As countries emerge from the economic crisis, the revenues that can be sved from removing inefficient fossil fuel subsidies, or redicrected to more directly tackle pressing priorities such as poverty alleviation, health, and education, will be important.