The global momentum to reform support to fossil fuels has led to the implementation of several significant reforms since 2015 in several countries. Multilateral fora, such as APEC, the G-20, and the G7, have called repeatedly to phase out inefficient fuel subsidies and several countries that have voluntarily undergone APEC or G20 peer reviews have identified inefficient fossil fuel subsidies they are planning to phase out. These efforts are reflected in the latest Inventory of Support to Fossil Fuels, which highlights a sustained downward trend in fossil-fuel support identified by the OECD.
For a number of OECD and partner countries, recent government reforms have sought to reign in support that encourages the production and use of fossil fuels, and weighs heavily on government budgets. Countries like India, Indonesia, and Mexico have reformed prominent fuel pricing policies that used to support fuel consumption. Phasing out fossil fuel support results in a dual benefit of addressing climate policy objectives to reduce CO2 emissions and local pollution, and raising public revenues.
The will to phase-out inefficient and distortive support measures has been echoed in various international platforms, and has taken shape in several policy changes and peer reviews. The four peer reviews undertaken to date, by the People’s Republic of China, Germany, Mexico, and the United States, have identified several fossil fuel subsidies as inefficient and have described plans to phase them out over the short or medium term. These peer reviews highlight the importance of transparency in this domain. They have proven to be instrumental for learning and sharing best practices on estimating support, assessing its effectiveness on meeting public-policy objectives, and on sequencing reform. They have also revealed existing definitional gaps, both among and within countries (i.e. across ministries), particularly over what constitutes a “fossil fuel subsidy” and under what conditions a given subsidy can be considered “efficient”.
Through its Inventory of Support to Fossil Fuels (hereafter the Inventory) and its support to existing peer-review processes, the OECD contributes to improving transparency of public policies and aims to shed light on how public resources are spent by reporting on a broad scope of support granted in favour of fossil fuel production or consumption. The OECD continues to identify, document, and estimate direct budgetary transfers and tax expenditures that confer a benefit or preference for fossil-fuel production or consumption relative to alternatives. The 2017 Inventory includes more than 1 000 individual policies identified as supporting the production or consumption of fossil fuels in OECD countries and eight partner economies (Argentina, Brazil, Colombia, the People’s Republic of China, India, Indonesia, the Russian Federation, and South Africa).
Using data obtained from government sources, the report finds that the many measures the database contains had an overall value of USD 151-249 billion annually over the period 2010-2016, with support for the consumption of petroleum products accounting for the bulk of that amount. Producer support is much more significant in relative terms when looking at countries that are relatively well endowed with crude oil, natural gas or coal (e.g. Canada, Germany, the Russian Federation, or the United States).
Compared with the previous edition of the Inventory, support has flattened out over the past two years in OECD countries, but the downward trend in partner economies continues to be driven in part by Indonesia’s recent reform of subsidies for the consumption of gasoline and diesel fuel.
The present report provides more transparent information on global support to fossil fuels. It provides a way to reconcile the estimates of budgetary support and tax expenditures detailed in the Inventory with another major set of national estimates of fossil-fuel support, provided by the International Energy Agency (IEA), which estimates price support to consumers. Combining the two datasets provides a single estimate of the magnitude of support to fossil fuels for both production and consumption. The resulting aggregate estimates of support to fossil fuels range between USD 373 billion and USD 617 billion over the period 2010-2015. The combined dataset covers 76 economies that collectively contribute 94% of global CO2 emissions.
With a similar but more mid-term perspective, the report also proposes a method to estimate the support element of government credit assistance, a type of foregone revenue that has yet to be quantified in the Inventory. This is a source of support that can confer benefits to the production and use of fossil fuels, as well as induce revenue losses for the government. Although data on the principal amount disbursed for direct loans or loan guarantees grants by governments is often available, the support element of such loans or guarantees has yet to be quantified in a systematic way due to methodological difficulties. In order to compensate for this methodological gap, the Companion proposes the credit-rating based approach developed by Professor Deborah Lucas of the MIT to calculate the support element of government credit assistance.
Preliminary results show that the subsidy-element, i.e. the revenue forgone, of government credit assistance to fossil-fuel-related projects could reach up to 20% of the face value of a loan, which implies that government credit assistance granted by G20 countries and multilateral development banks could be worth as much as USD 14 billion annually.
Although this report highlights that the progress towards phasing-out fossil fuel subsidies has been significant, further efforts are still needed. Over the past two decades, only a quarter of the total number of measures in the Inventory has been phased-out, and 21 measures have been added over the past two years. Since most support measures in place today have been introduced before 2000, countries would benefit from a critical self-assessment to revisit the relevancy and effectiveness of these measures in meeting their policy objectives.
The OECD collaborates with many of the several institutions that develop information on fossil-fuel support to ensure these efforts do not overlap as well as to enhance transparency in this area. But further co-ordination is needed and can be improved, especially as inconsistencies in definitions and data are sometimes used as an excuse to postpone action. Greater co-ordination efforts could also help move towards a consensus on key concepts, such as the conditions under which support to fossil fuel is not considered as “inefficient”.
