Fossil fuel subsidies a sore point for OECD and IEA climate change hopes

By Melissa Coade

Thursday November 4, 2021

Mathias Cormann
OECD secretary-general Mathias Cormann. (Clemens Bilan/EPA)

The Organisation for Economic Co-operation and Development (OECD) and International Energy Agency (IEA) have warned nations against raising government support for fossil fuels in the face of rising energy prices or as a measure to address the economic fallout of the COVID-19 pandemic.

In a statement, OECD secretary-general Mathias Cormann said he wanted to see more COVID-19 recovery spending focused on positive measures for the environment and climate. 

“As economic activity and fuel demand picks up, we must ensure […] support provided in the face of rising energy prices should be designed in a way that helps the most vulnerable, whilst remaining true to our climate commitments,” Cormann said.

Both the OECD and IEA also produce complementary databases showing estimates of different forms of government support for fossil fuels across 81 major economies. When combined with IMF estimates produced in partnership with the International Institute for Sustainable Development (IISD), the agencies are able to track fossil fuel subsidies worldwide. 

Cormann, a former Australian minister for finance and Western Australian senator, Cormann noted that their latest analysis had determined that last year, fossil fuel support (measured by tracking budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products in 50 OECD, G20, and Eastern Partnership economies) fell by 10% to USD$183 billion. 

In 2020, government support for the production and use of fossil fuels across major economies reached USD$351 billion, which was 29% less than in 2019.

For fossil fuel production, a 5% rise was recorded for direct support across 50 advanced and emerging economies, some of this being the result of large government bailouts to state oil and electricity companies. 

According to Cormann, extending support beyond COVID-related emergency funding would create a problematic ‘structural policy landscape’ if governments recognise the need to phase out fossil fuel support.

Based on the data, the organisations believe that a drop in global activity and record-low oil prices during the pandemic meant governments spent less on subsidising energy costs for end-users. For the transport sector, the slump in fuel use from restrictions on mobility during the pandemic resulted in a 15% drop in government support, and petroleum experienced a 19% decline in support from 2019.

IEA executive director Fatih Birol said more government investment in clean energy technologies and infrastructure was a matter of urgency to tackle global climate change. 

“Phasing out fossil fuel subsidies is one of the essential conditions to make that happen,” Birol said.

“Governments should be planning for a cleaner and fairer energy future in which everyone benefits from modern energy services. 

“This means expanding access to clean energy, especially for the most vulnerable populations, not maintaining market distortions that favour polluting fuels,” she said.

OECD data published in November also revealed that while public spending on green recovery measures in 44 major economies doubled since April 2021, it only accounted for about 21% of total spending on COVID-19 economic recovery measures. Of these spending measures, 10% were identified as being of mixed or negative benefit to the environment.

Both the OCED and IEA argue that the hundreds of millions of dollars spent by major economies producing and consuming fossil fuels could be better spent developing low-carbon alternatives and improving energy efficiency.

“As well as encouraging fossil fuel consumption, fossil fuel subsidies are an ineffective way to support low-income households compared to targeted benefits and tend to favour wealthier households that use more fuel and energy,” Cormann and Birol said.

“In addition, fiscal burdens of subsidies reduce the room for adequate policy actions.”


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