- Governments have committed to end inefficient fossil fuel subsidies over a decade ago but progress has been limited, with support fluctuating with fuel prices. Covid-19 provided an opportunity but green recovery spending has been outweighed by continued fossil fuel support. - Reforming fossil fuel subsidies is difficult due to debates around what constitutes a subsidy and inefficiency, as well as economic and social concerns about price rises. However, the OECD provides tools and a sequential approach to identify subsidies and their impacts, and design alternative policies to alleviate distributional effects of reform. Gradual implementation anchored in emissions reduction and periodic review are also recommended.

1. REFORMING FOSSIL FUEL
SUPPORT: AN OVERVIEW
Grégoire Garsous – Trade and Agriculture Directorate
Climate Change Expert Group Global Forum
23 March 2022

2. WHERE DO WE STAND ON FFS?

3. • G20 Summit in Pittsburgh (2009):
– “Rationalise and phase out (…) inefficient fossil-fuel subsidies
that encourage wasteful consumption.”
Governments have committed to end fossil fuel
subsidies more than a decade ago

4. • G7 Summit in Ise-Shima (2016):
– “We remain committed to the elimination of inefficient fossil
fuel subsidies and encourage all countries to do so by 2025.”
Such commitment was reaffirmed many times.

5. • Glasgow Climate Pact:
– Countries commit to “accelerat[e] efforts towards the (…)
phase-out of inefficient fossil fuel subsidies.”
Commitment reitereted at COP26 (2021)

6. How much progress was achieved?
0
20
40
60
80
100
120
140
0
100
200
300
400
500
600
700
800
900
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020p 2021 2022
USD (2020)
billion USD (2020)
OECD-IEA combined estimates (81 economies) - Fossil-fuel support by energy product
Coal Electricity Natural Gas Petroleum Price of oil

7. • In 2015-16, oil prices were
close to record low.
• But not enough fundamental
structural changes occured
(although the picture is
mixed).
• And FFS continue to fluctuate
with fossil fuels prices.
Yet opportunities have arisen

8. Covid-19 was also an opportunity to reform FFS
Carbon pricing changes in the first 20 months of COVID-19 in OECD
and G20 countries
Source: Nachtigall, D., J. Ellis and S. Errendal (2022), "Carbon pricing and COVID-19: Policy changes,
challenges and design options in OECD and G20 countries", OECD Environment Working Papers, No.
191, OECD Publishing, Paris, https://doi.org/10.1787/8f030bcc-en.

9. Government support to fossil fuels over two years
outweighs total green recovery spending
Source: https://www.oecd.org/coronavirus/policy-responses/the-oecd-green-recovery-database-
47ae0f0d/

10. WHY IS GETTING RID OF FFS SO
HARD?

11. • What is a subisdy?
• In which case is it inefficient? To what extent does it
encourage « wasteful consumption »?
• The OECD Inventory of support measures for fossil fuels
identifies more than 1,300 policies that support the
production and consumption of fossil fuels.
• But many policies are considered neither « subsidies »
nor « inefficient » by countries.
Problem #1: Definitions

12. • Peru addressed the question of inefficiency through whether
measures were effective in reaching their intended objectives.
• Italy considered every FF support measures as inefficient.
• Germany covered both direct budgetary tranfers and tax
expenditures.
• Mexico only addressed direct budgetary transfers and not tax
expenditures because the latter were not considered
inefficient.
From the world of peer reviews…

13. • Energy price rise can lead to high inflation and even to an
economic recession:
– Firms competitiveness may be affected by increases in energy
prices.
– It could result in slower growth and higher unemployment –
i.e. stagflation.
– However, today’s empirical evidence does not support this
scenario – partly because of countervailing forces (Porter
hypothesis).
• Removing FFS may have distributional consequences:
– Low-income households are often the target of FFS
programmes.
Problem #2: economic and social concerns

14. Rise in energy prices may lead to social unrest

15. BUT SOLUTIONS EXIST

16. STEP 1: Identify support measures, document their objectives and
estimate their fiscal costs.
Tools: OECD Inventory, IEA estimates, IMF estimates.
STEP 2: Measure the relative distortiveness of support measures
and create a ranking.
Tools: Effective tax rates, sectoral models of oil and gas
production.
STEP 3: Identify the winners and losers of FFS reforms and
analyze their distributional consequences.
Tools: micro- (firms- and household-based) and macro-simulation
models (CGE models).
STEP 4: Evaluate alternative policies that accompany FFS reforms
to alleviate distributional consequences.
Tools: micro- (firms- and household-based) and macro-
simulation models (CGE models).
The OECD sequential approach to reform FFS
Source: Elgouacem, A. (2020), "Designing fossil fuel subsidy reforms in OECD and G20 countries: A robust sequential
approach methodology", OECD Environment Working Papers, No. 168, OECD Publishing, Paris,
https://doi.org/10.1787/d888f461-en.

17. The OECD Inventory is a good starting point!

18. Another helpful tool is the OECD-IISD FFS tracker

19. • Gradually implement:
– Removing all measures in a « bing bang » reform may have major
economic and social impacts (and be politically difficult).
• Anchor reforms in broader energy policies aimed at reducing
emissions:
– Allocate savings from phasing out FFS to clean and affordable energy
push.
• Conduct periodic reviews of policies that may translate into
FFS:
– Reforms are vulnerable to changing policy contexts. Hence the need
to keep an FFS inventory updated.
• Communicate on the benefits of reforms:
– Use of freed-up fiscal resources should be transparent.
Other good practices

20. Learn more:
OECD support for fossil fuels: http://oe.cd/fossil-fuels
The OECD-IISD FFS tracker:
https://fossilfuelsubsidytracker.org/
OECD government support and subsidies portal:
https://www.oecd.org/subsidies/
Thank you!