02/11/2021 - Countries should resist raising government support for fossil fuels in response to the global surge in energy prices and the economic impacts of the pandemic, according to the OECD and IEA.
Instead, given the existential threat of climate change and the need for a green recovery, they should accelerate investment in sustainable energy infrastructure and the creation of green jobs, as well as meeting the UN Sustainable Development Goals, in particular SDG 7, to ensure access to affordable, reliable, sustainable and modern energy for all.
Despite a 2009 pledge by G20 countries to gradually phase out inefficient fossil fuel subsidies, major economies still support the production and consumption of coal, oil and natural gas with hundreds of billions of US dollars each year, money that would 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. In addition, fiscal burdens of subsidies reduce the room for adequate policy actions.
The latest OECD and IEA data shows that overall government support for fossil fuels decreased in 2020, yet this was mostly the mechanical result of declining fuel prices and demand as the COVID-19 pandemic led to a lull in global activity. In today's climate of rising energy prices, it is expected that consumption subsidies will increase again in 2021, aided by an uptick in economic activity. Indeed, the IEA estimates that consumption subsidies will more than double in 2021 due to higher fuel prices and energy use, coupled with hesitancy on fossil fuel pricing reforms.
"As economic activity and fuel demand picks up, we must ensure that fossil fuel support continues to fall and COVID-19 recovery spending is focused on measures that are positive for the environment and the climate. 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," OECD Secretary-General Mathias Cormann said.
"The world urgently needs a surge in investment in clean energy technologies and infrastructure, and phasing out fossil fuel subsidies is one of the essential conditions to make that happen. 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," IEA Executive Director Fatih Birol said.
Government support for the production and use of fossil fuels across major economies totalled USD 351 billion in 2020, down 29% from 2019 as a drop in global activity and record-low oil prices meant governments spent less on subsidising energy costs for end-users, according to latest data from the OECD and the IEA. The transport sector alone saw a 15% drop in support due to the slump in fuel use from restrictions on mobility during the pandemic, the OECD data shows. Petroleum saw the steepest drop in 2020, with support down 19% from 2019.
On the production side, the data show a 5% rise in direct support for the production of fossil fuels across 50 advanced and emerging economies, some of this being the result of large government bailouts to state oil and electricity companies. Were this support to persist beyond COVID-related emergency funding, it would become part of a structural policy landscape that needs to change to phase out fossil fuel support.
