Bye-bye fossil fuel subsidies? Not so fast

In the latest G20 declaration, world leaders reaffirmed their commitment to getting rid of fossil fuel subsidies. The idea behind the phaseout of inefficient subsidies – any measures that encourage the production and consumption of coal, natural gas, and oil – is commendable. Such a move is expected to disincentivize the use of fossil fuels, reduce greenhouse gas (GHG) emissions, and bring clean(er) air to the cities. It will also potentially free up more taxpayer money for investment in clean energy. Economic, societal, and environmental benefits are numerous, yet our path toward a subsidy-free world is difficult. Canada, a large oil producer, has become one of the first countries to comply with the G20 pledge. However, its plan to cut fossil fuel subsidies is dubious and offers a glimpse of the battle lying ahead of us for a more sustainable future. 

How we all agreed about something important: the origins of the commitment

In 2009, at a summit in Pittsburg, the world’s twenty largest economies agreed to phase out and rationalize over the medium term inefficient fossil fuel subsidies, which “encourage wasteful consumption, reduce energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change”. When the United Nations General Assembly formulated the Sustainable Development Goals for 2030 in 2015, the elimination of fossil fuel subsidies was included in Goal 12 – Responsible production and consumption. Finally, at COP26 in 2021, governments signed the Glasgow Climate Pact that called upon the parties to accelerate the phaseout of fossil fuel subsidies. 

And yet, the subsidies are not going away any time soon. According to the IMF, in 2022 global fossil fuel subsidies reached a whopping $7 trillion compared to $5.9 trillion in 2020. In the meantime, the International Institute for Sustainable Development (IISD) estimates that in 2022 the G20 countries provided $1.4 trillion in fossil fuel subsidies, of which $440 billion went to production. Energy crises and economic disruptions complicate the fight against fossil fuel subsidies. When the pandemic hit the world in 2020, many states stepped in to support oil and gas producers. Once the world started to recover from COVID-19, energy prices skyrocketed, and governments had to provide assistance to consumers.  

Starting it right: Canada defines subsidies

Last year, the country’s total fossil fuel subsidies amounted to $38 billion, or 2 percent of GDP. The ruling Liberal Party promised to address the subsidies in its 2021 election platform and released a framework and guidelines in July 2023. 

It’s tricky that the whole problem may lie in one simple word. Say, the Canadian government assumed the internationally recognized definition of a ‘subsidy’ by the World Trade Organization (WTO): a financial contribution by a government or any public body within the territory of a Member, which confers a benefit. Therefore, an initiative would be considered a fossil fuel subsidy if it disproportionately benefits the fossil fuel sector, supports fossil fuel consumption, or solely supports fossil fuel activities. It could be anything: a tax credit, a budget grant, or underpricing of goods or services. The members of the G20 will peer-review Canada’s framework by the end of 2024, when it will come into force (at the earliest). We now have a better understanding of the government’s plan, but there are still big questions about its effectiveness. 

Eyes wide shut: How do you calculate the share of an unknown sum? 

The Canadian government announced that there are nine tax measures that are being phased out and 129 non-tax measures that would fall under the framework. But here is the problem: nobody outside the government knows neither the details of the measures nor the targeted amount. The estimates from international organizations provide some guidance, but the lack of information from the government casts doubt on the credibility of the effort. Without a dollar figure, we are unable to understand the actual impact of the phaseout. Moreover, Canadian provinces, such as Alberta, the heart of the country’s oil and gas industry, have their own supportive mechanisms, and it remains unclear whether the framework will apply to provinces. 

One step forward, two steps back: Navigating loopholes

There are six major exemptions from the framework, which are primarily intended to leave the door open for the promotion of low-carbon and clean-energy investment. However, some exemptions could provide an opportunity for developing hydrocarbon projects that would be incompatible with Canada’s climate goals. Take, for example, exemption 5: subsidies that support Indigenous economic participation in fossil fuel activities. Essentially, an oil company may encourage the participation of an Indigenous community in a new project and obtain incentives or government funding that would otherwise fall under the definition of a fossil fuel subsidy. Again, navigating loopholes isn’t that big of a problem for an oil company if they simply use their imagination!

Even more questions come to mind when we look at exemption 6: subsidies that support abated production processes, or projects that have a credible plan to achieve net-zero emissions by 2030 (carbon capture, utilization and storage [CCUS]). What kind of plan will be considered as ‘credible’? And who will decide that the plan is ‘credible’? In the absence of clear and stringent criteria, the decision will be left to a minister’s discretion, who could be influenced through lobbying. Overall, the lack of transparency is the biggest problem of the framework. More and more companies and industries across the globe are required to disclose climate- and sustainability-related information. Canada’s government may also need to disclose much more information about fossil fuel subsidies to demonstrate the genuine nature of its intention to eliminate them. 

It isn't a Canadian boat that’s sinking. We’re all in it together

The oil and gas industry plays an important role in the Canadian economy, and this far-from-ambitious attempt to remove fossil fuel subsidies underscores the need for more political courage from the country’s leadership. It could be even more difficult to eliminate them in the developing world, where cheap fuel is at the center of government policy to support low-income citizens. And yet, this year the Nigerian government scrapped its fuel subsidies, which led to a sharp increase in petrol prices, but sparked no large-scale protests. The reason? The authorities implemented an effective communication strategy explaining to the population the negative impacts of subsidies. Back in 2014, India, which is heavily reliant on fuel imports, removed government subsidies for diesel, because it was the right moment: diesel was cheap enough even without supportive measures as a result of an international oil price collapse. However, India’s fossil fuel subsidies are still nine times (!) higher than those for clean energy. The Canadian government has enough financial capacity and administrative resources to shift the focus from fossil fuels to low-carbon and renewable energy. But does it have political will? We’re all in the same boat, but the crew pretends that she’s unsinkable.

Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.