At the G20 Summit in Hangzhou, China, in September 2016, the G20 leaders reaffirmed their commitment to rationalise and phase-out inefficient fossil fuel subsidies that encourage wasteful consumption over the medium term, while recognising the need to support the poor. This is not exactly new – similar commitments have been included in past summit communiques. Expectations are growing, however, that a time limit for ending fossil fuel subsidies will be agreed at the 2017 Summit in Hamburg, Germany.

Background

According to a study by the Overseas Development Institute (ODI) and Oil Change International (OCI), G20 governments were providing US$444 billion in average annual subsidies to fossil fuel production in the oil, gas and coal sectors in 2013 and 2014. This amount includes;

  • national subsidies delivered through direct spending (e.g. government budget expenditures on infrastructure that specifically benefits fossil fuels) and tax breaks (e.g. tax deductions for investment in drilling and mining equipment) of US$70 billion,
  • investments by majority state-owned enterprises (according to the ODI/OCI study, governments own more than half of the world’s fossil fuel productions and control as much as 70% of oil and gas production through entities that are wholly or majority-owned by governments) that account for US$286 billion, and
  • public finance from majority government-owned banks and financial institutions (including multilateral development banks) for domestic and international fossil fuel investments that amount to US$88 billion per year on average in 2013 and 2014.

Based on the ODI/OCI study, more than 200 civil society organisations urged the G20 leaders for the following to be included in the 2016 G20 communique;

  • a clear timeline for the full and equitable phase-out by all G20 members of all fossil fuel subsidies by 2020, starting with the elimination of all subsidies for fossil fuel exploration and coal production,
  • a clear timeline for the phase out of domestic and international public finance for oil, gas and coal production by 2020, except in extreme cases where there is clearly no other viable option for increasing energy access to the poor,
  • a commitment of all G20 members to be fully transparent from 2017 onwards about all fossil fuel subsidies in a consistent format that is publicly available on an annual basis.

A similar letter was signed by insurers with more than US$1.2 trillion in assets under management, referring to climate change as “the mother of all risks”. However, the G20 leaders did not agree on such clear short term commitments in 2016 (even though it has been reported that the United States was seeking a 2021 phase-out deadline) and only reaffirmed their previous general “medium term” commitment. At the same time, China and the United States were the first G20 countries to have their fossil fuel subsidies reviewed in a peer-review process chaired by the OECD.

Expectations for 2017 G20 Summit in Germany

Two factors could prompt the G20 leaders to agree on a time limit for ending fossil fuel subsidies in 2017. First, as the Paris Agreement on climate change entered into force on November 4, 2016, key G20 countries are under pressure to implement climate-effective policy changes helping them to lower their CO2 output. All G20 members but Saudi Arabia have signed and ten members have already ratified the Paris Agreement. Second, based on Germany’s track record as a climate change and renewable energy policy leader, various interest groups expect the host of the 2017 G20 Summit to push for hard commitments. It remains to be seen whether countries such as India, which have pointed to the need to subsidise cooking gas for the poor and electricity for farmers, will move along and agree on rather short-term time limits.

Possible Implications

The fossil fuel industry in general is heavily driven by national subsidies, investments by majority state-owned enterprises, and public finance. A short term phase-out of such subsidies would affect the business cases of many industry players and the financing of future investments. On the other hand, a phase-out could divert subsidies to the renewable energy industry and create new business opportunities.