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But if public funds continue to prop up fossil fuels, UN secretary-general António Guterres warns that they will “boost hurricanes, spread droughts and fuel heatwaves”.
Subsidies can take the form of grants, tax breaks, favourable loan terms or other price controls. Any policy action that lowers the cost of a given form of energy production, raises the revenue of producers or lowers the prices paid by consumers fits the description.
The International Monetary Fund estimated that the pre-tax value of energy subsidies was $5.2 trillion in 2017. Meanwhile, the International Renewable Energy Agency (IRENA) reported that the value of the world’s “direct” energy-sector subsidies – those that involve an actual payment of funds – was $634bn in 2017. Of this total, $447bn, or 70%, went to fossil fuels, while renewables received $128bn, or 20%. The remaining funds were directed at biofuels and nuclear power.
These imbalances might seem stark given what we know about the pace and scale of change required to cut greenhouse gas emissions. However, IRENA’s analysis also revealed that direct subsidies only make up a fraction of the benefits enjoyed by the fossil-fuel industries. This is because “unpriced externalities” – the costs imposed on society from air pollution and climate change impacts – are not borne by oil and gas producers. The costs of outdoor air pollution alone were estimated to be $2.3 trillion in 2017.
Campaign focus
Fossil-fuel subsidies have understandably been an area of focus for climate campaigners – and politicians looking to prove that they’re serious about tackling the crisis are taking heed.
US president Joe Biden has ordered federal agencies to end their fossil-fuel subsidy programmes. “I don’t think the federal government should give handouts to big oil,” he said. The campaign group Oil Change International claims that the US oil and gas industry receives $15bn a year in federal subsidies. Only a small percentage of those funds come under Biden’s remit, as many such financial incentives are managed by Congress. So getting rid of them will require legislation. Fossil-fuel subsidies can’t be erased overnight.
EU backs change of policy
The EU has also indicated that stemming the flow of public funds to oil and gas is a priority. Fossil-fuel subsidies among the EU’s 27 countries increased by 6% from 2015 to 2018, although a handful of member states bucked the trend. At the start of this year, the bloc’s foreign ministers called for an end to fossil-fuel subsidies around the world. However, detailed plans for an EU-wide phase-out have yet to be drawn up.
Generous subsidies are part of the reason why Europe’s offshore wind sector has become a success story. A study in the journal Nature Energy last year found that the era of subsidy-free windfarms could begin as early as 2023. Researchers analysed offshore wind projects in Germany, Denmark, the UK, Belgium and the Netherlands and found that those due to be built after 2020 were converging towards a record-low price of €50-70/ MWh. It was previously believed that the industry wouldn’t cross that threshold until mid-century.
Perhaps more significant is the fact that six UK windfarms auctioned in September 2019 will likely become the first “negative subsidy” projects in the world – meaning that they’ll pay money back to the government over their lifetimes.
It has been estimated that subsidies for fossil fuels in the early stages of their emergence were far larger than the renewable subsidies of today. Since the dawn of steam power, it has been clear that government incentives can help new energy technologies to scale up.
As the costs of mature renewables, such as wind and solar, continue to fall, subsidy regimes will no doubt be required to boost other emerging technologies. For policymakers, the key will be to ensure that they’re pulling the right financial levers to limit planetary warming.
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