Trade and Investment

If you were in charge of energy, how would you spend $400 billion?

A general view shows solar panels to produce renewable energy at the photovoltaic park in Les Mees, in the department of Alpes-de-Haute-Provence, southern France March 31, 2015. The solar farm of the Colle des Mees, the biggest in France, consists of 112,780 solar modules covering an area of 200 hectares of land and representing 100 MW of power.    REUTERS/Jean-Paul Pelissier - PM1EB3V182301

$400 billion could buy about four billion solar panels or pay for the global eradication of malaria four times over Image: REUTERS/Jean-Paul Pelissier

David Parker
Attorney-General; Minister of Economic Development, Environment, Trade and Export Growth; and Associate Minister of Finance, New Zealand
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Decarbonizing Energy

This article is part of: World Economic Forum Annual Meeting

Every year, governments spend at least $400 billion making it cheaper to buy oil, gas, coal and other fossil fuels. That sum could buy about four billion solar panels or pay for the global eradication of malaria four times over.

The amount spent on supporting fossil fuel production or consumption could be even higher given that new subsidies are being uncovered and measured. The bottom line is simple: subsidizing fossil fuels doesn’t make sense as the world seeks to tackle climate change and as energy use currently accounts for about 72% of global greenhouse gas emissions

When governments spend money to lower the price of fuel it can seem like a good deal for consumers, but it is problematic in the long term. Subsidies to the fossil fuel industry aren’t particularly well targeted at the poorer members of our societies. Research from the International Energy Agency and the Organization for Economic Cooperation and Development (OECD) estimates that removing these subsidies could reduce global carbon dioxide emissions by some 10% by 2050.

Not doing so will result in more air pollution, which could claim up to six million lives every year. The money spent on supporting fossil fuel use also complicates the deployment of renewable energy and cleaner and more energy-efficient technologies. Electric cars, for instance, are a tougher sell when petrol is artificially cheap. And although we’re already seeing industry leaders starting to turn the tide, political signals that fossil fuel use could be constrained in the future may conversely provide a perverse incentive to produce as much as possible now.

Energy is, however, the lifeblood of our global economy. We’re going to need a lot of it to continue to ensure inclusive growth and development for all. Given the current composition of the energy mix, any transition will take time. We need to find a way to sustainably transition to cleaner sources. Moving away from supporting fossil fuel sources isn’t going to solve climate change overnight, but it could make an important contribution while removing associated market distortions to boot.

G20 and APEC (Asia-Pacific Economic Cooperation) leaders in 2009 committed to reform inefficient fossil fuel subsidies over the medium term and have reaffirmed that commitment several times since. World leaders also included a similar pledge as part of the UN Sustainable Development Goals (SDGs).

New Zealand is working with a group of countries, the Friends of Fossil Fuel Subsidy Reform to promote both transparency and ambition around this pledge. Members of the deliberately non-G20 grouping include Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland and Uruguay. Some countries, including New Zealand, China, the US, Mexico and Germany have also voluntarily undertaken peer reviews of their support levels – a useful exercise to identify what’s being supported and where.

Overall, however, progress has been limited. Cutting cash to fossil fuels is politically challenging – it’s much easier to announce new programmes than to remove existing ones. Many countries, especially developing countries, rely heavily on fossil fuels to drive growth. Others feel they must share the bounty of large fossil-fuel endowments with their populations, including through subsidization. Energy security is a concern for some countries, not to mention issues around energy prices and industry competitiveness in a globalized economy. But all is not lost – perhaps at the heart of the problem lies the solution.

The World Trade Organization (WTO) is the only global institution where countries have legally enforceable obligations and commitments that bind all members – small, large, developed or developing – to address subsidies. This is because subsidies can affect the cost of production and, in turn, market prices. A specific WTO agreement outlines acceptable parameters for subsidies and regulates actions countries can take to counter the effects of these by others.

But these rules need to be added to or adjusted to better capture fossil fuel subsidy impacts. Doing so would require talks on how much fossil fuel support countries can provide now and over a longer period of time. Actual subsidy elimination and overall reductions would need to be discussed. It would also be very important to look at exceptions where targeted subsidies can be justified – for example, where they help improve access to energy for the world’s poorest. A step before all of this would be identifying, and then sticking to a good system of notifying support levels.

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The WTO and other international bodies already have some helpful mechanisms to support aspects of this work, such as greater transparency. Existing regular notification procedures could be used to report on and examine fossil fuel subsidies at the OECD. There’s also scope to use the WTO Trade Policy Review Mechanism (TPRM) to improve transparency – something that New Zealand, working with others at the WTO has already sought to do. We should be using these channels more, while also looking to bring the broader issue of subsidy reform into the WTO for negotiation and real reductions and reforms.

To this end, at a December 2017 WTO Ministerial meeting in Buenos Aires, Argentina, a group of 12 countries issued a ministerial statement encouraging further work on fossil fuel subsidies. In particular, they aim to “advance discussion in the World Trade Organization aimed at achieving ambitious and effective disciplines” on fossil fuel subsidies.

As ever, change won’t be simple to achieve. Even opening new negotiations on the topic at the WTO is a big ask in the current trade context – let alone addressing important details. However, the SDGs and the trade system should be seen as mutually reinforcing, rather than separate. Using available trade frameworks to house an effort to reform fossil fuel subsidies is an opportunity to demonstrate to increasingly sceptical international and domestic communities that trade policy can and should contribute solutions to urgent global challenges.

We need to build global support for the cause. Momentum is underway to address climate change from almost all stakeholders, but more action is needed. Rules in the WTO could put a brake on fossil fuel subsidies – as they have done on industrial and agricultural subsidies in the past, helping to make global food markets fairer, for example. Put simply, trade policy could be applied to correct unfair trade caused by these subsidies, help mitigate climate change and free up a chunk of cash to drive development. The potential for a triple win is considerable – for the economy, the environment and development, in short, for sustainable development.

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Trade and InvestmentEnergy TransitionNature and Biodiversity
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