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Background to fossil fuel subsidy reform

"We pretend subsidies are for the poor, but we are subsidising the middle class. The poor have no cars, no access to electricity. Someone in a village in Africa pays almost 10 times as much for electricity than someone in New York does. Subsidies need to be discontinued and the money set aside to give the poor electricity."

Kofi Annan, Former Secretary General, United Nations in his opening keynote at the One Young World Summit, 2015

There is a growing consensus that in order to rewire the economy towards decarbonisation, fossil fuel subsidies will need to be phased out. However this is politically, socially and economically complex, with a series of barriers preventing rapid progress.

However the present moment looks like a key opportunity, with low oil prices, offering more scope to move forward without causing siginificant political backlash. The IEA's World Energy Outlook on Energy and Climate (2015) states that, "despite the recent prolonged period of high oil prices, which pushed the cost of subsidies to crippling levels in some countries, the political climate to enact reform has become more conducive in many cases as international prices have fallen". The report shows that in particular lower prices have been fundamental to recent fuel pricing reforms in parts of Asia such as Indonesia, recently eliminated gasoline subsidies and capped diesel subsidies. Other countries have also eliminated subsidies, such as Malaysia for both gasoline and diesel, and Thailand for liquefied petroleum gas (LPG) and partially for compressed natural gas (CNG). Also of note is the Indian government's recent deregulation of diesel prices.

These reforms have been concentrated in net-energy-importing countries, but there are also good reasons to expect reforms in net-exporting countries as oil export revenues decline and governments seek to protect other spending priorities. One such example is Venezuela, which raised its fuel prices for first time in 20 years by a staggering 6,000 per cent to support its failing economy. As in importing countries, reforms may be more palatable to consumers at a time of relatively low international prices. Kuwait (among the largest subsidisers) is considering reforms, while Iran has previously made reforms and has more scheduled.

"Poorly implemented energy subsidies are economically costly and damage the environment."

World Bank, Implementing Energy Subsidy Reforms: An Overview of the Key Issues, July 2012

The G7, G20, IMF, IEA, OECD and the World Bank have all referred to the phase-out of inefficient fossil fuel subsidies as essential to transition to a low carbon economy and necessary to reduce our global carbon footprint. The G7 stressed again their commitment to eliminate inefficient fossil fuel subsidies at their meeting in Schloss Elmau in June 2015 in Germany.

Contact

Eliot Whittington

Eliot Whittington, Programme Director, Policy