Subsidizing Fossil Fuels in Times of High Energy Prices | Fossil Fuel Subsidy Reform in Trade and Climate Discussions
16 May 2022
Venue: International Environment House II & Online | Webex
Organization: International Institute for Sustainable Development, Friends of Fossil Fuel Subsidy Reform, Geneva Environment Network
Effectively addressing fossil fuel subsidies is key to reducing greenhouse gas emissions and limiting climate change, thus allowing member states to achieve global goals. Fossil fuel subsidy reform (FFSR) will deliver trade, economic, social, and environmental benefits and release government funds to support green and climate-resilient investments. This event was co-organized by the Friends of Fossil Fuel Subsidy Reform (FFFSR), the International Institute for Sustainable Development (IISD), and the Geneva Environment Network (GEN) ahead of pivotal Stockholm+50, United Nations Framework Convention on Climate Change (UNFCCC), and World Trade Organization (WTO) meetings this June. This event was also part of the OFF of the European Energy Transition Conference.
About Fossil Fuel Subsidy Reform
Formed in June 2010, the Friends of Fossil Fuel Subsidy Reform (FFFSR) is an informal group of non-G20 countries aiming to build political consensus on the importance of fossil fuel subsidy reform. Current members of the “Friends” group are Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland, and Uruguay.
At the WTO Eleventh Ministerial Conference (MC11) in 2017, a coalition of 12 WTO members signed the FFFSR’s first Ministerial Statement, calling on the WTO to “achieve ambitious and effective disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption including through enhanced WTO transparency and reporting that will enable the evaluation of the trade and resource effects of fossil fuel subsidies programmes.” The Ministerial Statement also noted that any efforts to phase out fossil fuels must consider the needs of the poor.
Building on that effort, the initiative renewed its statement in December 2021 and is now supported by 45 WTO members. The renewed statement seeks the rationalization and phase-out, along a clear timeline, of inefficient fossil fuel subsidies that encourage wasteful consumption and calls on WTO members to join those efforts. The statement recognizes that reforming fossil fuel subsidies must consider the specific needs and circumstances of developing countries and minimize the possible adverse impacts it may have on their development. The statement also identifies the WTO as a forum to advance discussions for ambitious and effective disciplines on fossil fuel subsidies, in part by using enhanced transparency and reporting to enable the evaluation of the trade and resource effects of fossil fuel subsidy programs.
About this Session
With strong momentum on FFSR in both climate and trade negotiations in 2021, negotiators looked ahead to 2022 with a lot of promise for progress. This included expectations of progress within the WTO after delays of in-person meetings due to COVID-19 in 2020 and 2021. Additionally, the inclusion of fossil fuel subsidy reform as a key part of the Glasgow Climate Pact symbolized a turning point where countries could use FFSR with increased focus as a tool to assist in achieving the Paris Agreement goals.
This was, of course, turned on its head in February with the invasion of Ukraine and the associated crises and instability in global energy markets. Within their energy sectors, many countries are facing pressure to diversify their energy supply. In the short and medium terms, this includes increasing the production and consumption of clean energy sources while also managing immediate pressure to mitigate the impacts of high energy prices on consumers. The pressure and allure of subsidizing fuel prices has been very high; in some cases, we have already seen governments agreeing to price relief, for example, instating “holidays” for the collection of motor vehicle fuel taxes while oil prices are high.
In 1972, the United Nations Conference on the Human Environment made the link between environment and poverty and placed it at the forefront of the international agenda. Now, five decades later, with the international community gathering for the “Stockholm+50: a healthy planet for the prosperity of all – our responsibility, our opportunity” conference, and pivotal meetings of both the UNFCCC and WTO also looming in June, this hybrid in-person and virtual event came at a timely moment. The event brought together trade and climate experts to outline how they look to address the energy pricing crisis strategically through various forums and collectively work to avoid the pressure to subsidize fossil fuels in the immediate term, while still maintaining momentum on FFSR and the clean energy transition in the longer term.
H.E. Amb. Clare KELLY
Permanent Representative of New Zealand to the World Trade Organization
Ana Laura LIZANO
Counsellor, Permanent Mission of Costa Rica to the WTO
Senior Director of Energy, International Institute for Sustainable Development | Moderator
Senior Economic Affairs Officer, United Nations Environment Programme
Aik Hoe LIM
Director, Trade and Environment Division, World Trade Organization
Laurie VAN DER BURG
Global Public Finance Campaign Co-Manager, Oil Change International
Peter WOODERS | Senior Director of Energy, International Institute for Sustainable Development
Fossil fuel subsidies reform is essential as they are inconsistent with the Paris Agreement and halting the achievement of the 1.5° goals. Still, they are not easy to reform. In non-war times, this discussion would be centered about reforming the system from the point of view of trade, UNFCCC. The current situation dramatizes the situation and pushes this discussion on topics such as energy security and high fossil fuel prices. This has led to countries introducing new fossil fuel subsidies or exploring options to do so, extending tax holidays longer than they would normally have done.
We are currently facing a juxtaposition of short-term and long-term needs of countries, particularly the necessity to phase out from fossil fuels and achieve an energy transition. Fossil fuel subsidies are working against that objective.
H.E. Amb. Clare KELLY | Permanent Representative of New Zealand to the World Trade Organization
What is the link between fossil fuel subsidies and trade? What are the impacts? Why is it important to deal with fossil fuel subsidy reform through the WTO and trade more generally? What are your views on the progress of the ACCTS and on the upcoming 12th WTO Ministerial Conference (MC12)?
The current situation in Ukraine shows the need to transition away from fossil fuel subsidies. Along with supporting a transition away from fossil fuel, it is in most WTO members’ immediate interests. Fossil fuel subsidies work against those efforts to address climate change by artificially lowering the cost of fossil fuels and encouraging their ongoing use. On top of its planetary detrimental impacts, it is costing governments about $500 billion US dollars a year.
New Zealand has been at the forefront of this issue for a long time, and attempts to push forward this goal in many fronts: regional and plural lateral trade architecture New Zealand is part of, smaller groups bilaterally, and in the WTO. Being this a long-term goal, it needs to outlast electoral cycles because politicians want results much faster than the WTO can generally deliver.
Agriculture and fisheries subsidies are active avenues of discussion and reform in the WTO process and the fossil fuel subsidy reform is starting to get in similar positioning. This delay is not due to a lack of attention or acknowledgement, but rather to the complexity of the issue.
- The G20 and the 21 Asia-Pacific Cooperation Forum (APEC) economies have committed to action on fossil fuel subsidies in 2009.
- Friends of Fossil Fuels Subsidy Reform, the V20 (Vulnerable Groups of Twenty), the Pacific Island Forum Leaders and the G7 have issued statements calling for the phase-out of Fossil Fuels subsidies.
- All UN member countries have endorsed the need for fossil fuels subsidy reform in the SDGs.
- WHO has recognized fossil fuels subsidy form as one of the prescriptions for a green COVID-19 recovery. This signals move in a common direction.
Unless tackle fossil fuel subsidy reform use is not tackled, the goal set out in the Paris Agreement will be impossible to reach.
New Zealand is continuing to advocate actively internationally for fossil fuel subsidy reform and bringing this conversation beyond the environmental fora, advancing the issue in trade and economic institutions. Subsidies affect trade and investment decisions and competitive environments for renewable energy and reforming fossil fuels subsidies is a key policy tool for internalizing the environmental cost of emissions. The WTO is the first place New Zealand is driving this conversation at since it is well equipped to address such subsidies in its existing legal frameworks, transparency mechanisms and previous experience in disciplining other subsidies.
In December 2021, New Zealand along with other 45 WTO members launched the Joint Ministerial Statement on a Fossil Fuel Subsidy Reform, aiming at building a supportive international setting and eventually supporting an environmental setting for addressing fossil fuels subsidies multilaterally as well as to is domestic reform.
- We are conscious of the need to take into account the specific needs and conditions of developing countries and minimize any potential adverse effects on their development and we are hoping that by encouraging information and experience sharing of reforms in the WTO we can achieve transparent and effective disciplines that will have a multilateral uptake.
- The next phase of this work consists of a work program that supports the objectives of the joint ministerial statements. New co-sponsors are welcome as a diverse range of views and experience and different levels of development amongst proponents as necessary to ensure that we get a robust outcome.
APEC can also be used as a means to advance this fossil fuels subsidy reform. Last year, APEC members committed to a voluntary standstill on inefficient fossil fuel subsidies a practical step that has taken us forward in our host period. With Thailand as chair, we are supporting APEC economies to hold the region to account to tackle inefficient fossil fuel subsidies.
The Agreement on Climate Change, Trade and Sustainability Negotiations (ACCTS) aims to explicitly use trade rules and practices to support sustainable development and climate goals. We intend to develop disciplines that are comprehensive, transparent, and consistent with WTO rules while considering the development dimensions of implementing fossil fuel subsidy reform. The ACCTS represents a very interesting coalition of countries taking forward this work as the way it is composed should allow it to be sufficiently robust to come into the ruling WTO environment in due course.
In terms of bilateral cooperation, New Zealand works on trade agreements and sustainable development chapters which cover environmentally harmful subsidies including cooperative commitments mostly at this stage on fossil fuel subsidies.
Now is the time to accelerate the transition toward greener energy systems, we have history on our side.
Ana Laura LIZANO | Counsellor, Permanent Mission of Costa Rica to the WTO
What is the status and what are the plans for the Fossil fuel subsidies reforms under the Trade and Environmental Sustainability Structured Discussions (TESSD)?
TESSD is currently co-sponsored by 71 WTO members and through discussions that occurred between 2021 and 2022, four informal working groups (IWGs) have been established to delve deeper into the technical aspects of priority topics members identified:
- Environmental Goods and Services
- Trade-Related Climate Measures
- Circular Economy and Circularity
Fossil fuel subsidies reform (FFSR) has been addressed under the Subsidies group and so far, it has achieved encouraging results by revamping this topic among sponsors and beyond. For instance, during the second formal meeting to present the informal working groups, the session dedicated to FFSR had to be extended due to the elevated interest encountered. The expectations placed in the IWGs are high: it has been tasked to identify the environmental effects and trade impacts of relevant subsidies (i.e. agricultural, fossil fuels, among others).
This group is also expected to identify information gaps related to these impacts to generate a broader understanding. IISD and other stakeholders have provided invaluable support to carry on this work by providing science-based data. There is a great opportunity for members to understand the issue of fossil fuel subsidies.
Costa Rica is one of the ten members of the Friends of Fossil Fuels Subsidy Reform Group along with Denmark, Ethiopia, Finland, Netherlands, New Zealand, Norway, Sweden, Switzerland, and Uruguay. Each of those countries, after facing the crisis of COVID-19 is now challenged with increased energy prices and security. How is your national government balancing all these crises together, providing crisis response while advancing climate change goals?
A new government took office in Costa Rica two weeks ago but this does not dramatically affect policies when it comes to trade or the environment. The incoming government brought one great news as Franz Tattenbach, former IISD president and CEO from 2010 to 2012, has been appointed as the new Minister for Environment.
Costa Rica has been ambitious on fossil fuel subsidies reform from the start as it continues following its three-decade old development model where the trade and environment are in a synergetic relationship. In that sense, Costa Rica is highly interested in the environmental goods and services agenda.
The current energy crisis has affected Costa Rica, therefore the steps that will be taken towards zero emissions and decarbonization by 2050 will be small but strong ones. Costa Rica has pilot programs on electric bus routes that still require a lot of work, but which benefit from a 100% electrical renewable grid. Costa Rica is also an active participant in the Agreement on Climate Change, Trade and Sustainability Negotiations (ACCTS) where fossil fuels subsidy reform is a strong pillar. Our goal for this pillar is to transition to renewables and despite being cognizant that these Negotiations are challenging because of the newness of the change they are implementing. This is supported by with a very strong technical team that is currently active in preparing definitions and having the transparency commitments sorted out. Interestingly enough, all the participants in the ACCTS.
Joy KIM | Senior Economic Affairs Officer, United Nations Environment Programme
SDG 12 requires countries to rationalize inefficient fossil fuel subsidies by removing market distortions and it has a specific indicator to measure fossil fuel subsidies as the number of subsidies per GDP both on the production and then consumption sides. Fossil fuel subsidies can range from 500 billion to 5 trillion US dollars, as in the case of the International Monetary Fund (IMF) for instance. The reason for this kind of disparity is because the different organizations use different methodologies to calculate fossil fuel subsidies: IMF figures include environmental externality costs which is uncommon, but can also cause confusion.
In 2019, together with the OECD and an IISD, UNEP developed the methodology to measure fossil fuel subsidies. I presented the methodology at the WTO hoping it would actually provide guidance to countries on how to measure fossil fuel subsidies. Besides this, there are various international databases for measuring fossil fuel subsidies, such as the OECD database, IMF’s, IEA’s (International Energy Agency), and more.
Nevertheless, the SDG process differs from all these globally available data as it uses a bottom-up approach where countries are encouraged to collect data and then report and measure fossil fuel subsidies.
- This offers countries an opportunity to also coordinate within themselves, allowing different countries’ approaches to be adopted as in some cases it is the ministry of finance in charge of subsidy issues while in others it is the energy ministry.
- In the SDG process officially countries are asked to designate a national focal point for this SDG indicator, most of the times being the statistical department. Therefore in countries, there is coordination among the statistical department, the national focal point and whatever ministries are charged with subsidies to better understand the volume of subsidies they are providing.
- The first call for submission of this data was in March this year but the deadline has been extended until June this year. Being this the first year countries are asked to submit data, we attempted to call for a submission on a quarterly basis.
As demonstrated by the discrepancy between the country reported fossil fuel subsidies and the globally calculated ones, in many countries, there is still a capacity gap to start measuring and collecting data on fossil fuel subsidies. This does not come as a surprise because some countries do not actually have a definition of fossil fuel subsidies although they may actually have energy subsidies.
The methodology thus offers definitions of scope and how to measure fossil fuel subsidies. Moreover, to support countries in digging up data and to better understand how to measure fossil fuel subsidies, UNEP together with OECD, IEA, IMF, IISD, and UN regional bodies has been providing regional and sub-regional level capacity-building training on how to measure and report fossil fuel subsidies.
A template for the country’s national focal point to fill in has been developed and we have delivered so far:
- Caribbean Region together with the UN ECLAC (Economic Commission for Latin American and the Caribbean)
- Latin America
- East Africa with the UNECE (United Nations Economic Commission for Europe). The upcoming workshops and training will take place in Europe in collaboration with UNECE;
- in West Africa; and
- in Asia Pacific Regions together with the UNSCAP (UN Social Commission for Asia and the Pacific) in June this year.
Hopefully, these capacity building training workshops will actually alert countries that this indicator requires countries to look at their fossil fuel subsidies and learn how to measure and report them for the SDG process.
Unlike popular belief there is no standard definition of fossil fuel subsidies, the agreed definition is in the Agreement on Subsidies and Countervailing Measures (ASCM) under the World Trade Organization (WTO). It is signed by 164 members and then the methodology under SDG 12.c.1 goes into further detail then about how you define subsidies and what to include and what not to include. The issue often comes not from a lack of a definition but rather from a disagreement by countries that the subsidies they are providing are necessarily bad ones.
What differences are you seeing since the Russian invasion of Ukraine in terms of subsidies? Are countries thinking of them differently and are new subsidies being introduced?
Many countries are alerted by the increasing price of energy and food. Countries seem to hint at a desire to increase even the subsidies on pesticides as a part of agriculture subsidies and fossil fuel subsidies.
Still, if we think about what happened with the post-pandemic recovery fund, the situation has not drastically changed now because of the current conflict. In spite of discussion on how the recovery fund represented a good opportunity to actually reform fossil fuel subsidies, countries did not take advantage of the funds received and actually went in the opposite direction. Recovery spending amounted to 17 trillion US dollars for 86 countries but a calculation UNEP conducted with the University of Oxford showed that the fund allocated to the green recovery amounted to only $970 billion US dollars.
Unsurprisingly, the G20 countries have supported carbon-intensive and fossil fuel-intensive industries to an amount of to 233 billion US dollars and the 34 major economies used 40% of their recovery budget to support fossil fuel-intensive industries. Therefore, there are reasons to be skeptical that the current energy price crisis indicates a moment for countries to reform fossil fuel subsidies. Countries may face political challenges at this moment but this is the moment to draw lessons from the recent experiences of recovery, learning that rather than spending and investing in short-term unsustainable expenditures such as fossil fuel subsidies, it is important to invest in long term low-carbon solutions.
Many countries are facing various constraints to also support the current pandemic crisis, but for them to go back on track on achieving and financing sustainable development goals, they must consider what inefficient government expenditures can be revisited, and how they can also sort of release a little bit about the current severe fiscal constraint.
In this very severe fiscally constrained period, fossil fuel subsidies are making the fiscal burden swell. If countries are unable to address these very fiscally heavy fossil fuel subsidies, they are likely to pay a higher cost later if they do not actually invest in the long-term solutions.
There is an acknowledgement that by just using 30 to 40% of fossil fuel subsidies we can pay for a clean energy transition. So, this crisis can be an opportunity for countries to rethink how they can make long-term low carbon oriented decisions.
Aik Hoe LIM | Director, Trade and Environment Division, World Trade Organization
In the last few years WTO, the trade architecture and agreements in general have become much more central to the fossil fuels subsidies reform. What is the so-called revitalized agenda on trade and environmental sustainability about?
What first emerged in discussions about fossil fuel subsidy reforms is the need to reduce the demand for fossil fuels. It is about getting towards a structural change where the economy has less reliance and need for fossil fuels. If that can happen, the issue of subsidies becomes a bit less prominent. This represents a chicken and egg question as it is not easy to achieve that structural change if subsidies are still provided.
It is useful back to what the Glasgow Glasgow Climate Pact achieved at COP26. In an interesting wording choice, it “calls upon Parties to accelerate the development, deployment and dissemination of technologies, and adoption of policies to transition towards low emission energy systems including by rapidly scaling up the deployment of clean power generation and energy efficiency measures essentially accelerating towards clean tech”. [Read more on the outcomes of COP26.]
Members of WTO, or governments more generally, need to address it with a wider range of policy instruments to accelerate and make this structural change possible. Fossil fuel subsidy reform is one very major part of this change, but it is not the only one. Other policy instruments for this rapid scaling up and deployment of clean power generation are environmental goods and services. Services may even be a bigger obstacle than goods because services often face high barriers, and this impediment is what the Glasgow Climate Pack is asking to be removed. A whole spectrum of technologies allowing to make this acceleration possible is necessary. Tariffs are part of it and the difficulty to act on them so far opens up the question of whether it is possible to reduce tariffs on goods that are needed to make this transition.
This is being attempted under the ACCTS and now increasingly at WTO and TESSD. Despite not being within the scope of WTO finance investments and climate finance require attention. It is important to understand how investors see different transition pathways if they still want to invest in fossil fuels or rather in clean tech. We must constantly ask and assess what may drive value in the future. The market itself can drive change, but governments can use certain regular policies and instruments to achieve this.
Ample strands of research, like this paper by Joseph Shapiro, address environmental biases in trade policy, showing that dirty industries face fewer tariffs than clean industries. These levers, if used correctly and appropriately can help reduce the demand for fossil fuels. Unless this demand is not reduced, governments will continuously be in this vicious circle of having to subsidize for sometimes, to avoid the impact on the poor and the most vulnerable. The vicious cycle can therefore be broken only if strategies to make that structural transformation possible are enacted.
The Glasgow Climate Pact already includes these assumptions as it requires phasing out of inefficient fossil fuel subsidies while providing targeted support to the poorest and most vulnerable, in line with national circumstances, and recognizing the for support towards a just transition. It recognizes many of the difficulties identified in having an abrupt change to the system, considering or not the inflationary crisis we are facing.
Nevertheless, these challenges are not unique to the fossil fuel sector: any sector that has been heavily subsidised faces these adjustment pressures. It is not easy to reform it but other sectors have shown the need for other policies to be produced to deal with adjustment costs, precisely to help the poor and most vulnerable. It is critical to then ask whether subsidies are indeed helping the poor and most vulnerable and if subsidies are targeted. In order to get this structural transition right, we must design subsidies that respect what Glasgow Climate Change Pact asks.
There is increased interest and activity at WTO in relation to this, culminating in three ministerial statements launched last year: the TESSD Ministerial Statement, the one on plastics and the Fossil Fuel Subsidy Reform Ministerial Statement Initiative. It is quite historic for the WTO to issue these three statements. It is interesting that these are in fact being launched ahead of MC12 as they can start discussions at the WTO for addressing specific points as in the work program and the working groups.
For members to make progress and one key point is having many more developing countries participate. Developing countries are already there but certainly bigger participation in TESSD meetings will be beneficial. If the fossil fuel reform becomes central in the meetings taking place during this year, we will successfully revitalize the WTO agenda.
Laurie VAN DER BURG | Global Public Finance Campaign Co-Manager, Oil Change International
Having the issue of fossil fuels subsidy reform in the UNFCCC has been widely cheered, what has this meant to you as a campaigner as an activist? What does this mean for climate action and how is this going to go forward to COP27?
The COP decision to include a reference to fossil fuel subsidies is an important breakthrough. Already at the first World Climate Conference in 1979, it was aknowledged that fossil fuels are the single biggest driver of climate change and yet this is the first time a COP decision explicitly acknowledges the need to phase out fossil fuels and fossil fuel subsidies. This could provide an important building block for further progress on this topic.
This is not the first time countries have made this commitment. The G20 committed to ending fossil fuel subsidies more than 10 years ago and the EU committed to ending environmentally harmful subsidies without delay in 2013. Since then we have seen countries participate in voluntary peer reviews and remove some of their fossil fuel support, but often subsidies have later been reintroduced or replaced with new subsidies. To date, no gold standard example exists of countries that have adopted a roadmap towards a full phase-out by a set date in line with their existing commitments.
The Netherlands signed in 2015 a Friends of Fossil Fuel Subsidy Reform calling for an end to fossil fuel subsidies but up until 2019, the government claimed that the Netherlands did not provide any such support. After an OECD and IEA review of the Netherlands fossil fuel subsidies the government has now agreed to phase out subsidies for gas in the horticulture sector, but it has increased subsidies for gas extraction, introduced a new subsidy for CO2 neutral gas fire power plants, and more recently, it has lowered energy and fuel prices in response to the war in Ukraine, a measure that is predominantly subsidizing high income rather than low-income households.
Rather than introducing new fossil fuels subsidies, governments should now more than ever use their public resources strategically to reduce the demand for fossil fuels and reduce dependency on these volatile energy sources, whether they are producing Russia or domestically or elsewhere. Governments also have an opportunity to introduce a windfall tax on the profits of the oil and gas industry, the revenues of which can be used to support low-income households that are facing high-energy bills.
Science tells us that there can be no investments in new coal, oil, and gas supply and that the emissions from existing infrastructure already bring the world beyond 1.5 degrees of global warming. Recent research shows that investments in energy efficiency and renewable energy combined with increased use of already existing fossil fuel infrastructure can replace Russian oil and gas without a need for investment in new long-lasting Liquefied Natural Gas (LNG) infrastructure.
At the same time, governments are significantly underinvesting in affordable clean energy solutions and while shifting fossil fuel subsidies and public finance is critical to unlocking the needed clean energy investments, this is not yet happening at the skill necessary and the reasons for this include political inertia, strong fossil fuel lobbies, and a lack of public awareness.
On top of this the endless debates on fossil fuels subsidy definitions, despite being important, have also distracted from the necessary action. Another reason why this is not yet happening at the scale necessary is that a fossil fuel subsidy phase-out and fossil fuel phase-out are not easy and can go terribly wrong.
Still, elaborate research allows us to know how a fossil fuel subsidy reform can be done well. Among other things, this requires a transparent process involving cross-ministry collaboration, effective public communications of the reform plans and also a redistribution of freed up resources in a way that alleviates any negative impacts on low-income households.
In order to build momentum towards COP27, we need a small set of governments to lead by example. There are ample multilateral initiatives that are pushing for progress on this issue at the multilateral fora, but we need to have a small set of governments that lead by example and that can set a gold standard that can be followed by other governments. In my view, they should:
- Put an immediate halt to subsidies for fossil fuel production;
- Avoid the introduction of new subsidies in response to the war in Ukraine and introduces a windfall tax on oil and gas company profits; and
- Adopt a road map for a full phase-out of fossil fuel subsidies by the end of this year, including plans for redirecting resources to low-income households and just transition support.
Small but ambitious diplomatic initiatives have demonstrated to be effective in generating gold standard examples it can help drive progress at the multilateral level. At last year’s climate conference, the Beyond Oil and Gas Alliance committed to immediately and new licenses for oil and gas production and another group of countries signed a joint commitment to end international public finance for fossil fuels by the end of 2022. Alongside the Friends of Fossil Fuel Reform group and the ACCTS initiative, these diplomatic ventures create opportunities for countries to step up and deliver concrete and comprehensive action on fossil fuel subsidies by COP27.
If governments fail to act, they are also increasingly likely to face litigation. Over a thousand climate litigation cases have been filed in the last six years and there is already a first example of a fossil fuel subsidies case as the UK government is currently being sued over its subsidies to oil and gas companies.
If there is one lesson that we can draw from both the pandemic and the war in Ukraine, it is that bold political action is possible and that large sums of money can be shifted in a short amount of time in response to urgent threats. The climate crisis is such an urgent threat and ending fossil fuel subsidies is a key part of the solution to the compounding crisis that the world is currently facing, thus it is really critical that governments take comprehensive action now.
Christian Lau, attending the event, has been brought to the panel for its engagement on possible multi-country agreements on fossil fuel subsidies and was asked to outline what sort of elements need to be in those agreements and how might they be formatted.
Christian Lau | Lawyer at the Sidley Austin Group LLP
Along with colleagues in our Brussels and Geneva offices, we have thought about the content of the fossil fuel subsidy agreement and what questions one would need to answer in securing such an agreement. Discussions also touched on the impact of the war in Ukraine on fossil fuel prices and subsidies but convened that it might still be a good moment despite thinking more about the technical elements that should be addressed in setting out an agreement.
The definition of subsidies is the first step and a lot of work has been undertaken in that direction. Despite a definition already existing, the approach taken in the agreement on agriculture is slightly different. Deciding upfront on that definition is quite important because it will frame the discussion on how disciplines should work.
On the discipline side, there are lots of different options to pursue. Prohibitions are the most straightforward ones, even though this method required a long time an agreement on the fish discussion. As per agriculture, people have taken a different approach namely the number or the amounts of subsidies that could be subject to disciplines.
In the ACSM agreement, there is an effects-based discipline, which has been quite challenging to administer, and looking at the environmental effects context, it might be even more challenging to administer but at least it remains one option that countries could pursue. Standstill is also being put in place as an interim measure that could be useful. A combination of the disciplines is surely possible.
The development dimension is also important in the discourse on disciplines as we must build special and differential treatment into an agreement and into disciplines especially when the thing you are disciplining, like fossil fuel subsidy reform, is not purely economic.
Q: In terms of enforcement, it would be good to hear from the panel where you see the right fora to push that agenda forward: do you see the development of a gold standard amongst smaller groups as the way forward and if so, which is the right forum for that and how do you see a process towards multilateralizing it?
Peter WOODERS: There is a tendency within the fossil fuel subsidy world to believe it is necessary to use all of the fora: the UNFCCC, the WTO, we need the G20, the G7, bilaterals, multilaterals and so on. Is that right or is there a need to focus on fewer fora and on the establishment of a gold standard and to use the ACCTS as the precedent setter for everything?
H.E. Amb. Clare KELLY: Our contribution is to try and build the gold standard, or something in that sense, through the ACCTS. By advancing that work with a very diverse group of countries, we hope to come up with a set of standards that is ambitious, broadly applicable and attractive. It is often true that the smallest agreements negotiated in smaller settings are more ambitious. But this is not always the case. The current fisheries negotiation, if they achieve everything that is envisaged, will set quite a standard of a broad-based negotiation. Our particular contribution to the approach is to start with the ACCTS, see where we get to in terms of setting a very high standard with like-minded countries and then go from there in terms of broadening. Still, there will have to be a cutoff point at which more dilution cannot be allowed.
Peter WOODERS: The ACCTS is trying to negotiate around this topic and include all those who are willing to participate for it to then be of general use to everybody else who will follow. This allows setting the precedent to a very high standard.
Ana Laura LIZANO: The ACCTS is a trailblazing effort and initiative that will set the standard for what will come. The benchmark that the ACCTS can become for different issues, not only FFSR, but for the approach, we take on environmental goods and services is going to be very important at the WTO. It has a very comprehensive approach to both environmental goods and services but also to how we see the reform of fossil fuel subsidies. We expect this negotiation to advance and conclude soon and for it to become a reference model for discussions at TESSD. We believe it will be a very important milestone in the negotiations at the WTO.
Q: Being this a time of high fossil fuel prices, it is even more evident that governments must reform their subsidies when prices go low. Still, when this is the case, they tend to not feel the urge to do so because of lower prices whereas policy advisors will push in that direction. What does that mean for energy prices if and when the energy transition picks up the pace? Will we see lower prices over time? Will there be a lot of volatility? What is your advice to deal with this volatility issue?
Joy KIM: Do you think that the crisis that we are facing right now is the last crisis? Crises will be repeated and currently we are seeing them one after the other. The most important thing right now is understanding how to build a more shock and crisis resistant system and economy.
The investments we make right now will help to build such an economy and this is the same discussion around building back better and building a green recovery we did not profit from when the pandemic crisis first hit. Energy prices would fluctuate anyway and country-specific policies will not have specific impacts on meeting the Paris Agreement and delivering SDGs, it is about acting together as we fluctuate together. So, countries should zoom out and think about long-term planning and solutions and embrace that a little adjustment might be needed. Indeed, there is a strong element of the political economy always playing behind.
Q: How do we get the true price of fossil fuels? How can that be established when we consider environmental, health, social impacts, etcetera? Are there estimates for these sorts of prices available? How should we take account of those?
Joy KIM: In our methodology, we use the existing approach, developed by IEA, the price and inventory approach and the OECD’s approach, we decided not to use the methodologies used by the IMF, which includes this environmental externality cost.
Environmental external cost provides very good information in terms of its impact on our health through air pollution and its impact on our nature in terms of the extraction of the fossil fuels and how that can actually impact our nature and then water contamination and the land degradation and etcetera. Calculating environmental externality costs is a useful exercise, but when targeting subsidies to reform fossil fuels, we believe it is better to separate these. We provided clear definitions and then scope on what the fossil fuel subsidies subject to reform are what to look at in terms of measuring and reporting, and then eventually reforming.
Q: The WTO has been part of facilitating discussion on different types of subsidies over the years, such as agriculture, industry, and fisheries. These subsidies are often captured and become part of vested interests the various industries that continue lobbying and campaigning for. From your experience in watching how these things have unfolded in the WTO, how have countries been able to make progress even amid those vested interests?
Aik Hoe LIM: Making a link also to Christian Lau’s question, in my experience negotiations are better if whatever is being negotiated has a clear national positioning. That national position must come from a consolidated view of that country on that issue, coming from a whole of government approach and national negotiation amongst all the parties, agencies, government, groups, and private sector. Indeed, when you come to a cross-cutting issue like fossil fuel subsidy reform, countries must be doing these steps prior to entering WTO negotiations, and hopefully each country has already committed to a direction under the Paris Agreement. Dealing with vested interest is not easy, and it has to be dealt with at the national level, otherwise, it becomes a stumbling block at the international or multilateral level as no government will want to back down on national positions, which is seen as giving up on its sovereignty vis-à-vis stakeholders and home.
As a link to the first question, when it comes to gold standards and similar items, we should not make the perfect the enemy of the good. In multilateral level discussions, we tend to look for perfect solutions and not take any action. In these cases, the perfect solution is to take some action. This links back again to political economy, and we should deal with the political economy questions first and worry about the legal issues after. Starting with legal issues might hamper the capacity to reach any sort of deal. Still, there is a lot of complexity around this.
Q: Government pension funds should start to divest from fossil fuel companies until they reach a meaningful reduction in their carbon footprint. How can that fit into this fossil fuel subsidy discussion? How is that linked with the agreement taken at COP26 on International Public Finance?
Laurie van der Burg: International public finance flows, domestic fossil fuels subsidies and licenses for domestic oil and gas production are all interlinked. Science shows that we need a rapid reduction in both the use and production of fossil fuels, in subsidies and public finance, and in government licenses for fossil fuels. Governments must take comprehensive action across all of these different policy areas.
The decision launched at COP saw 39 countries and institutions commit to ending international public finance by the end of 2022. There has been some backlash against that initiative, but it is an important one as it creates the opportunity to shift billions of dollars from fossil fuels to clean energy action. Backlash against this initiative has been presented by some countries who believe that unless domestic support is not given together with ending international public finance for fossil fuels, countries’ leadership is hypocritical.
Therefore, these international level initiatives that are focused on just one element of the fossil fuel phase-out challenge need to be complemented with domestic cuts of domestic fossil fuel subsidies and licensing for new fossil fuel production. Since these topics are all interlinked, we need to see a comprehensive approach and a well-managed and well-planned decline in fossil fuel production overall.
Peter WOODERS: Today’s conversation clarified that fossil fuel subsidies are acting against the goals of the green energy transition, the climate change agendas and so on. On the other hand, various instruments and initiatives coming from governments, intergovernmental initiatives, CSOs and businesses are developing a community and an understanding of what needs to be done about this issue.
Q: Are the high prices that we see at the moment and the Russian war in Ukraine changing everything or is this a temporary issue we have to deal with and which does not affect the long-term direction?
Ana Laura LIZANO: This crisis is just what we have currently on the table and we have to deal with the cards we are served and try to manage it the best we can. The multilateral trading system provides us with the instruments to tackle this situation, we have opportunities that we need to take advantage of. The international situation is challenging for countries like Costa Rica that depend on international trade and are agricultural exporters. Nevertheless, as friends and believers of the multilateral trading system, we are also committed to having conversations on fossil fuel subsidy reform, agricultural subsidies, market access to environmental goods and services, and anything on our agenda that has been ambitious. In that way, are enhancing that ambition. We are on track for adapting to the situation thanks to what was already negotiated in FTAs, with ACCTS and what is to come.
H.E. Amb Clare KELLY: I do not think it changes everything, but it certainly reinforces why we should be doing what we are doing. This crisis is useful strategic reinforcement for what is been viewed as a predominantly environmental issue before then, but it does bring in those strategic elements that have been less at the center of peoples thinking as they go forward in the transition from fossil fuels to greener energy. So, this crisis can only help raise alertness.
Peter WOODERS: We are thinking in a completely opposite way compared to a few months ago as we no longer debate on how to secure the supply of oil and gas, but rather how to cut the dependence on them.
Joy KIM: We must reflect on why this current cost crisis is hitting us very hard. It is because our energy sources are not diversified, and we are far from achieving a clean energy transition. When you look at where the money flows, the answer is evident: money goes into investments in fossil fuel industries therefore no money is flowing for the clean energy transition. There are some examples of divestment from fossil fuels and that is very promising as it can actually contribute to a clean energy transition. To achieve the bigger crisis of climate change and to achieve SDGs, fossil fuel subsidy is only one of the elements. There are many other things related to the finance transition to clean technology and eventually all these things can help to build a systemically more shock-resistant economy and society apt to face the long term crisis of climate change.
Aik Hoe LIM: Shifting away from the concept of change, this crisis certainly puts us in the need to rethink and reflect on how we respond to the crisis. Responses require more international cooperation and a come back to multilateralism as the model that will guarantee more security, peace and economic prosperity. in case something is to change, that should be the direction we change into as for a number of years we have been moving away from multilateralism.
Laurie VAN DER BURG: Rather than backsliding, we need governments to accelerate their work on this agenda in response to the current moment and use this moment to deliver concrete and bold action to end fossil fuel subsidies. One of the key things that foster progress on these issues is research combined with public pressure and a public debate on these issues. All people are affected by fossil fuel subsidies and fossil fuel subsidy reform, and a public debate, either at the domestic or multilateral levels, can be very effective in helping build progress on these issues.
Peter WOODERS: There is still a lot to do on fossil fuel subsidy reform, but today we have demonstrated there is a community and a direction of action, which makes me certain So we will be successful.
In addition to the live WebEx and social media transmissions, the video of the event will be available on this webpage.