Frankie says… don’t relax (on fossil fuel subsidy reform)

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Tyrannosaurus rex on black background
Don't choose extinction © Shutterstock/Noiel

A few weeks ago, an unexpected message popped into our inbox. Entitled “must see” and featuring the thumbnail image of a dinosaur, we both had similar reactions – is the new Jurassic Park movie out? A click and we were both captivated by an imposing Frankie the Dino entering a UN General Assembly meeting and addressing the forum to warn humans of dire consequences of climate change, sharing his personal experience with extinction. In his moving speech, Frankie emphasizes the absurdity of continuing to subsidize the production and consumption of fossil fuels, thereby helping drive humanity to extinction. Frankie urges humans to stop making excuses and to start making changes to save themselves from extinction.  

This brilliantly produced video, part of an impressive campaign titled “Don’t Choose Extinction” led by UNDP, was a dynamic call to action as delegates gathered for COP 26 in Glasgow. The campaign set a somber tone, as the global community wondered if world leaders would agree on strong enough commitments to meaningfully address climate change. COP 26 is now over and the agreement that emerged, namely the Glasgow Climate Pact, calls upon parties to accelerate “efforts towards the phase-out of unabated coal power and inefficient fossil fuel subsidies.” This may be music to Frankie’s ears, but unless decisive action is taken, we should expect to see more of Frankie. 

Fossil fuel subsidies are environmentally harmful, wasteful and inefficient.  They are distortionary and create an uneven playing field – between fossil fuels and cleaner alternatives, and among international trade partners with different decarbonization ambitions. Fossil fuel consumption subsidies disproportionately benefit wealthier citizens who use more energy than the poor, as such, they are an inefficient way to help the poor.  They divert limited fiscal resources away from health, education or clean energy, and, by incentivizing fossil fuel use, undermine climate change mitigation efforts.

Annual global spending on energy subsidies is multiple times the financing needed to reach universal access to electricity and to clean cooking by 2030. There is a strong knowledge base on the magnitude and impact of subsidies, thanks to work by key agencies such as the OECD, IEA, and the IMF, shedding light on the direct (and less obvious) ways in which support is channeled to fossil fuels around the world. In 2020, direct subsidies to consumption stood at $180 billion globally, down from about $310 billion. Unfortunately, it seems that this reduction is mainly due to the oil price decline and weaker economic activity resulting from the COVID-19 pandemic. The recent upward trend in oil prices, and the new measures subsequently being contemplated by various governments as they work to protect households and firms during the economic recovery are bound to drive up the subsidies again. Meanwhile, the IMF estimates that implicit subsidies, which focus on undercharging for environmental costs, social costs and foregone consumption taxes, are at record highs.

There is overarching consensus that fossil fuel subsidies must be reformed urgently. The opportunity cost of subsidies is particularly large for developing countries  as they work to boost prosperity and eradicate poverty amid fiscal constraints. Developing countries stand to be disproportionately affected by climate change impacts from fossil fuel use , bearing some 80% of the costs of damages (WDR 2010).  With that recognition, many countries attempted to reform subsidies over the past decades, but progress has often been limited, fragile and reversible.

The key challenge is converting knowledge to action to reform subsidies while protecting the poor and vulnerable.  This is precisely the objective of the World Bank and Energy Sector Management Assistance Program’s (ESMAP) Energy Subsidy Reform Facility (ESRF). ESRF provides technical assistance support to developing countries, through multi-sectoral World Bank teams. Driven by country demand, ESRF’s work focuses on various dimensions of reform, from identifying and quantifying subsidies, to understanding political and macro-fiscal context, to assessing impacts on households, firms, industries, and the broader economy. From 2014 to 2021, ESRF supported activities in over 65 countries, which in turn informed $20.5 billion in World Bank lending and specific reform actions in 22 countries. 

In the wake of COP 26 and the Glasgow Climate Pact commitment to accelerate phase down of fossil fuel subsidies, there is likely to be increased demand on this front. At ESRF, we will be ready to support client countries in their reform journey, and work with our international partners, to hopefully deliver better news to Frankie at COP 27.  

In our next blog entry, we will present the Energy Subsidy Reform Assessment Framework (ESRAF), which enables a systematic treatment of the complex subsidy reform agenda, and provides practical tools and approaches to help identify, analyze, and facilitate reform.

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Defne Gencer

Senior Energy Specialist at Energy and Extractives Global Practice and lead of the the Energy Subsidy Reform Facility at ESMAP

Dirk Heine

Senior Economist in the Chief Economist Office of the World Bank’s Economics, Finance and Institutions Vice Presidency and co-lead of the Energy Subsidy Reform Facility at ESMAP

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