The world spends a huge amount of USD 423 billion annually to subsidize fossil fuels for consumers on oil and electricity that is generated by burning of gas and oil, says a report by the United Nations Development Programme (UNDP). These funds, paid for by the taxpayers end up deepening inequality and impeding action on climate change.
The report, published ahead of the upcoming G20 and COP26 meetings, is being launched in the context of a growing recognition of the need for reform of fossil fuel subsidies by economists and policymakers as well as the IMF and World Bank.
Achim Steiner, UNDP Administrator, said the COVID-19 pandemic has exposed outdated aspects of the global economy. “It includes the fact that the world continues to spend billions of dollars on fossil fuel subsidies, while hundreds of millions of people live in poverty and the climate crisis accelerates,” Steiner said. “Against this backdrop, we must ask ourselves – is subsidizing fossil fuels a rational use of public money?”
Fossil fuel subsidizes, as per the IMF, are both inefficient and inequitable. Across developing countries, about half of the amount of public resources spent to support fossil fuel consumption benefits the richest 20% of the population.
George Gray Molina, Lead Economist, at UNDP’s Bureau for Policy and Programme Support and co-author of the research, says addressing fossil fuel subsidizes is a politically charged issue. He said facts show that reform is both necessary, and when done correctly, supports the poor, creates jobs and protects the planet.
The main contributor to the climate emergency is the energy sector which accounts for 73% of human-caused greenhouse gas emissions. Fossil fuel subsidy reforms would contribute to reducing CO2 emissions and benefit human health and well-being, and they are a first step towards correctly pricing energy-one that reflects the true and full cost of using fossil fuels to society and the environment.
However, the UNDP’s analysis shows that fossil fuel subsidy reforms can be unfair and harmful for households and society if they are poorly designed. While fossil fuel subsidies tend to be an unequalizing tool, these subsidies also represent an important portion of poor people’s incomes that otherwise must be paid for energy consumption. Fossil fuel subsidies’ removal thus, could easily become an income and energy-improverishing strategy. This contributes to making fossil fuels reform difficult, and imposes a key barrier to transitioning to clean and renewable energy sources.
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As such the UNDP report recommends a progressive and gradual response to reforms. It includes analysis of success stories gathered from several countries across regions as well as offering a toolkit for policymakers to support fossil fuel subsidy and energy pricing reforms. The toolkit allows for a phased approach that is just and equitable and includes income protection, and compensation for less advantaged groups.
