The Paris Agreement on climate change creates a clear direction of travel for policy-makers, businesses and investors to stimulate a profound rewiring of the global economy, where resilience, sustainability and transparency are the watchwords.
As all countries are expected to turn their pledges into action, the first steps to transition to a low – or zero – carbon economy are being taken by a growing number of regions adopting carbon pricing systems, aimed at measuring, regulating and reducing carbon.
Yet, governments globally are blunting the effectiveness of their moves to price carbon by spending over US$500 billion each year on subsidies for oil, gas and coal, outstripping subsidies for clean renewable energy by a factor of four. Pricing carbon whilst subsidising the fuels that drive emissions is inefficient and counterproductive.
At COP21 in Paris, business leaders from The Prince of Wales’s Corporate Leaders Group and We Mean Business joined Heads of State from countries to deliver the Friends of Fossil Fuel Subsidy Reform Communiqué calling for the rapid elimination of inefficient, perverse fossil fuel subsidies.
The communiqué, endorsed by over 40 countries, hundreds of businesses and respected international organisations such as the World Bank, OECD and International Energy Agency (IEA), was presented to former UN Framework Convention on Climate Change (UNFCCC) executive secretary, Christiana Figueres, and inspired pledges to reform from the US, Morocco, UK, among others.
Eliminating fossil fuel subsidies frees up public resources for cutting taxes, investing in education, healthcare and infrastructure. It also allows sustainable energy sources to compete on a more level playing field. The Global Subsidies Initiative (GSI) modeled the impact of subsidy removal in 20 countries and found that eliminating subsidies can, on average, cut national emissions by 11% between now and 2020.
By redirecting 30% of subsidy savings towards renewable energy and energy efficiency, national emissions could be reduced by as much as 18% on average by 2020, by when the Paris Agreement is likely to have come into effect.
According to the IMF, eliminating the subsidies that provide false consumer price advantages for oil, gas and coal offers financial gains in advanced economies equal to half of corporate income tax or one quarter of public health spending. In emerging economies, the revenue is worth double the corporate income tax revenues or public health spending.
More broadly, phasing out fossil fuel subsidies is a major opportunity to reallocate public expenditure in developing countries and for developed countries to free up resources to help fund their development commitments.
This is particularly important to support the delivery of the Sustainable Development Goals by 2030. This will require innovative financing, where public investment catalyses far greater private funding flows to meet the needs of Asian countries, including China, to eradicate poverty and create resilient communities for the future.
Developed and developing countries will also need to meet escalating costs due to increasingly severe climate-related weather disruptions, which disproportionately impact poor communities.
Directing public funds away from fossil fuels and towards sustainable development can be a significant win-win.
Many argue that by artificially depressing the cost of fossil fuels, subsidies distort the comparative cost of renewable energy and energy efficiency, limiting their growth. Already energy efficiency is recognised as the most efficient way to cut emissions and incur fiscal savings. Low-carbon sectors demonstrate healthy growth of 4% p.a. or better globally, offering much needed job creation. These gains can be expected to continue.
Perverse subsidies that contradict this agenda can cause confusion and restrict private sector engagement, acting as an impediment to the acceleration of climate friendly, resilient innovations and investments.
Clarity that public resources are shifting away from fossil fuels offers a powerful signal to the private sector that the time is right to invest in the growing alternatives such as renewables, electric vehicles and low-carbon infrastructure, which are the economic success stories of the future.
For example, the Asian Development Bank (ADB), backed by China, other Asian countries and a number of G20 developed nations, catalyses investments and leverages public funds to stimulate larger private funding flows. It has recently launched a US$200 million privately funded initiative to enable small and medium sized cities in China to turn their solid waste into a sustainable source of renewable energy.
The potential to unleash even greater investment exists, but is often impeded by the contradictory investment of public funds in bolstering fossil fuel production and consumption.
China’s G20 Presidency
China is set to introduce a national carbon pricing system in 2017, yet remains the largest global spender on fossil fuel subsidies in dollar terms, according to the International Monetary Fund (IMF) July 2015 report.
Speaking in Hong Kong on 23 February, Xie Zhenhua, China’s special representative for climate change, said that a 50% cut in carbon intensity by 2020 puts China on track to achieve its bold 2030 equivalent target of a 60-65% cut and also reduces the economy’s dependence on fossil fuels.
Removing and redirecting fossil fuel subsidies could be a key contributor to delivering these goals. China’s leadership in this respect will not only influence private sector investment within China, but as recent history has shown, it will be highly influential on private and public sector spending intentions globally.
The G20 was one of the first international bodies to put fossil fuel subsidy reform on the global agenda. As early as 2009 the largest global economies, as members of the G20, committed to “phase out and rationalise over the medium term inefficient fossil fuel subsidies”. Despite regular reaffirmation of this pledge, including last year in Turkey, action has been slow.
In the lead up to the G20 Heads of State meeting in China in May 2016, and with energy prices at an all-time low, now could be the time for the G20 to act to phase out these inefficient subsidies with a gentler impact on consumers and national economies. A clear action plan from G20 governments would likely earn the trust and support of global business, as well as citizens.
Xi Jingping’s speech at the 10th G20 Summit in 2015 in Turkey set the tone and theme for China’s G20 Presidency: "Innovative Growth that Benefits All". To deliver action behind the sentiment, eliminating fossil fuel subsidies and introducing carbon pricing could be a major and influential step.