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22 June 2010
Media Backgrounder: Fossil Fuel Subsidies
In November 2009, the G-20 formally pledged to phase out fossil fuel subsidies. This represents a significant
opportunity to engage decision-makers at the highest level to address a key issue in the climate change debate.
Leaders also mandated their Energy and Finance Ministers to report back on implementations strategies and
timelines ahead of the 25 June 2010 Summit in Toronto.
This backgrounder intended to help media understand the issue and help spot the subsidies in their country. It
contains:

Background brief on fossil fuel subsidies

Facts about fossil fuel subsidies

Table of G-20 CO2 emissions by country
Background Brief
Basic definition
A subsidy, in short, is an economic incentive from governments, either as distributed funds or foregone
revenue, to a particular sector of the economy. Several organizations, institutions or academics have offered
definitions of subsidies and, predictably, the only internationally agreed definition that has some legal weight
internationally – from the WTO – is a barebones one: “as a financial contribution by a government or any public
body within the territory of a member that confers a benefit to a recipient” (WTO, 1994; See full definition in Annex
1). On the other hand, “[b]roader definitions attempt to capture other types of government interventions that affect
prices or costs, either directly or indirectly” (UNEP, 2008).
Other “official” definitions include:

An OECD study defined a subsidy in general terms as “any measure that keeps prices for consumers
below market levels, or for producers above market levels or that reduces costs for consumers and
producers.”

The US Energy Information Administration has defined an energy subsidy as “any government action
designed to influence energy market outcomes, whether through financial incentives, regulation, research
and development or public enterprises.”

The International Energy Agency has defines energy subsidies as “any government action that concerns
primarily the energy sector that lowers the cost of energy production, raises the price received by energy
producers or lowers the price paid by energy consumers”.

Subsidies are complex and are deeply embedded in the global political economy and in individual national
economies and G-20 countries are preparing to spend some time debating definitions.
A powerful tool
Subsidies in general are a “powerfully distortive factor at the heart of most governments’ economic activities”
(Myers and Kent, 1998; p.xv-xvi). Yet subsidies, aimed at favoring (and, hence, disfavoring) certain targeted
sectors of the economy, often have unintended adverse effects. In 1998, it was estimated that “that in most
instances, the proportion of all subsidies that is made up of perverse subsidies ranges from half to three quarters”
(Myers and Kent, 1998; p.xv), with such perverse subsidies totaling roughly US$ 1.5 trillion per year (Myers and
Kent, 1998). In such accounting, however, methodology and reference criteria are key. For example, UNEP
considers even the bureaucratic costs of subsidies: “per-unit cash payment to producers or consumers is the
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simplest and most transparent form of subsidy, but can entail considerable accounting and transaction costs
[which] involves a direct financial burden on the national treasury” (UNEP, 2008).
Ending or reforming subsidies, on the other hand, “would release enormous funds for more productive forms of
fiscal management” (Myers and Kent, 1998; p.xvi). Reforming subsidies reforms are thus “an inexpensive
policy option… providing huge benefits at negative total cost (Victor, D, 2009; p.9). This is notably the case for
energy subsidies, which overwhelmingly support fossil fuels versus renewable forms of energy (See Annex 4 for an
illustration of this in US energy subsidy distribution).
Indeed, a recent survey of six studies found that “fossil-fuel subsidy reform would result in aggregate
increases in GDP in both OECD and non-OECD countries” (Ellis, J, 2010; p.7), with expected increases ranging
from 0.1% in total by 2010 to 0.7% per year to 2050 (Ellis, J, 2010). Furthermore, fossil-fuel subsidy reform is an
extremely effective step on the way to addressing climate change. The most recent study reviewed, by
Burniaux et al. (2009) found that world CO2 emissions would be reduced by 13% and GHG emissions by 10% by
2050 if consumer subsidies for fossil fuels and electricity in 20 non-OECD countries were phased out. In Pittsburgh
in 2009, the G-20 itself recognized that eliminating fossil fuel subsidies by 2020 would reduce global
greenhouse gas emissions in 2050 by 10% (G-20, 2009).
In spite of these potential gains, there has been little progress in reforming fossil-fuel subsidies largely
because of lack of understanding of the importance and political economy of subsidy policies (Victor, D, 2009).
Indeed, “while subsidies are abhorrent to economic analysts and can be a particularly pernicious form of public
policy, they mainly exist because they are rooted in a political logic that is often difficult to alter" (Victor, D,
2009; p.10). There is also considerable effort put in by the fossil-fuel lobby to continue or introduce new subsidies.
Two main “customers” of subsidies
Consumer subsidies are often the easiest to identify, and for this reason are often those that come under the
most pressure to reform. Guaranteed prices for petrol, for example, can easily be quantified in national budgets.
These are the most visible as they ostentatiously spread the benefits to a large number of people – such as
cheaper gas at the pump, or cheaper kerosene to cook or heat a home. In some circumstances – for example
when a subsidy consists in supplying cheap generators or cooking fuels to remote, off-grid areas in poor region –
such subsidies can be justified and weighed favorably against their negative impacts, notably on the climate. In the
end, since consumer subsidies are the easiest to identify and quantify, they have long been synonymous with
energy subsidies; in reality, they are the tip of the iceberg.
Producer subsidies are more difficult to quantify, though fairly easy to define: they represent the financial or
economic support to government toward the production of fossil fuels. This may come in the form of tax rebates
for producers, guaranteed loans, which shift the risk burden significantly toward taxpayers, infrastructure
support, fixed prices, grants for land or capital, etc (for a comprehensive list of subsidy measures, see Annex 2
and 3).
Example: Coal prices (through electricity), though coal itself receives relatively small direct subsidy as a final
product (consumer side), are nevertheless “lower than true full cost due to soft budgets that prevail in many stateowned coal mining and transport companies” (Victor, D, 2009). Producers are thus given tax write-offs or allowed
non-market operation as state-owned coal enterprises, for example, that bring the real price of coal artificially
down. In addition, the fossil fuel industry as a whole receives subsidies (going back to section above) in the form of
“relaxed environmental standards for site remediation, and for air and water pollution” (Victor, D, 2009; p.15).
Quantifying fossil-fuel subsidies
Because accounting for the full cost of fossil fuel subsidies is extremely complex – in defining criteria and
methodology but also in actually retrieving the vast amount of dispersed data – empirical studies of subsidies often
use a conventional definition that simply assumes market prices and costs largely because it is extremely difficult
to quantitatively assess the magnitude of externalities (UNEP, 2008).
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No study has comprehensively accounted for all consumer and producer globally with an accepted methodology,
let alone one that accounts for an internationally recognized methodology on externalities.
The frequently cited figure of US$ 310 billion which the IEA published in its 2008 World Energy Outlook, for
example only concerns consumer subsidies, and then only those provided by 20 countries. A more recent figure
was given by The Global Subsidies Initiative from IISD at US$ 500 billion per year. On 6 June 2010 leaked IEA
data revealed that the latest estimate for fossil fuel subsidies in developing countries was US$ 560 billion annually.
Survey of existing international commitments
G-20: Leaders' Statement, 25 September 2009, Pittsburgh
To date, the G-20 Leaders’ Statement made at Pittsburgh in November 2009 represents the strongest wording and
mandate to phase out fossil-fuel subsidies. The preamble thus states:
“24. To phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted
support for the poorest. Inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy
security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate
change.
25. We call on our Energy and Finance Ministers to report to us their implementation strategies and timeline for
acting to meet this critical commitment at our next meeting.”
While the Full Statement commits to:
“29. Enhancing our energy efficiency can play an important, positive role in promoting energy security and fighting
climate change. Inefficient fossil fuel subsidies encourage wasteful consumption, distort markets, impede
investment in clean energy sources and undermine efforts to deal with climate change. The Organization for
Economic Cooperation and Development (OECD) and the IEA have found that eliminating fossil fuel subsidies by
2020 would reduce global greenhouse gas emissions in 2050 by ten percent. Many countries are reducing fossil
fuel subsidies while preventing adverse impact on the poorest. Building on these efforts and recognizing the
challenges of populations suffering from energy poverty, we commit to:
Rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage
wasteful consumption. As we do that, we recognize the importance of providing those in need with
essential energy services, including through the use of targeted cash transfers and other
appropriate mechanisms. This reform will not apply to our support for clean energy, renewables,
and technologies that dramatically reduce greenhouse gas emissions. We will have our Energy
and Finance Ministers, based on their national circumstances, develop implementation
strategies and timeframes, and report back to Leaders at the next Summit. We ask the
international financial institutions to offer support to countries in this process. We call on all nations
to adopt policies that will phase out such subsidies worldwide.
30. We request relevant institutions, such as the IEA, OPEC, OECD, and World Bank, provide an analysis of the
scope of energy subsidies and suggestions for the implementation of this initiative and report back at the next
summit.
APEC, 16th APEC Finance Ministers' Meeting Joint Ministerial Statement, 12 November 2009,
Singapore
“26. We agreed on the importance of rationalising and phasing out over the medium term, inefficient fossil fuel
subsidies that encourage wasteful consumption. We recognised the importance of providing those in need with
essential energy services, including through the use of targeted cash transfers and other appropriate mechanisms.
We will work with our Ministers responsible for energy policies to develop implementation strategies and
timeframes that reflect our individual circumstances. We ask the IMF and MDBs to offer support to economies in
this process.”
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Facts about Fossil Fuel Subsidies

The recent Global Initiative Studies from IISD placed the cost of fossil fuel subsidies at $500 billion a year.
The upcoming studies for G-20 are likely to find an even higher number.

Fossil-fuel subsidy reform would be beneficial to national economies, resulting in aggregate increases in
GDP in both OECD and non-OECD countries, with expected increases ranging from 0.1% in total by 2010,
to 0.7% per year to 2050.

Fossil-fuel subsidy reform would help address climate change and energy security: a recent study
reviewed found that world CO2 emissions would be reduced by 13% by 2050 if consumer subsidies for
fossil fuels and electricity in 20 non-OECD countries were phased out; this would add to the case if
producer subsidies in OECD countries are also phased out.

Despite this, there has been little progress in reforming fossil-fuel subsidies largely because of lack of
understanding of the importance and political economy of subsidy policies, and because they are rooted in
a political logic that is difficult to alter.

The G-20 itself has recognized that eliminating fossil fuel subsidies by 2020 would reduce global
greenhouse gas emissions in 2050 by 10%.

Leaders in the G-20 held in Pittsburgh on 25 September 2009 stated “inefficient fossil fuel subsidies
encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources
and undermine efforts to deal with the threat of climate change.”

The G-20 Leaders have mandated their Energy and Finance Ministers to “develop implementation
strategies and timeframes, and report back to Leaders at the next Summit”. The Leaders have also asked
“the international financial institutions to offer support to countries in this process.”

These reports, due in Toronto in June, should constitute the first step in reforming fossil-fuel subsidies.
These need to be given the high profile they deserve.
G-20 countries energy-related CO2 emissions
Emissions
China
United States
Russia
India
Japan
Germany
United Kingdom
Canada
Republic of Korea
Italy
Mexico
South Africa
France
Australia
Brazil
Indonesia
Saudi Arabia
Turkey
Argentina
TOTAL
Proportion
(% of total G-20
(ktCO2)
emissions)
6,103,493 27.58%
5,752,289 26.00%
1,564,669 7.07%
1,510,351 6.83%
1,293,409 5.85%
805,090 3.64%
568,520 2.57%
544,680 2.46%
475,248 2.15%
474,148 2.14%
436,150 1.97%
414,649 1.87%
383,148 1.73%
372,013 1.68%
352,524 1.59%
333,483 1.51%
301,340 1.36%
269,452 1.22%
173,536 0.78%
22,128,192 100.00%
Proportion
(% of total world
emissions)
21.78%
20.52%
5.58%
5.39%
4.61%
2.87%
2.03%
1.94%
1.70%
1.69%
1.56%
1.48%
1.37%
1.33%
1.26%
1.19%
1.08%
0.96%
0.62%
78.95%
Source: IHS 2009
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