Oil Well

G20 countries spent more than £1.1tn on fossil fuel subsidies after Ukraine war

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Following Russia’s invasion of Ukraine, G20 governments spent around £1.1tn on fossil fuels in the form of subsidies, investments and lending, a study has shown.

At COP26 in 2021, member countries agreed to accelerate “the phase-out of unabated coal power and of inefficient subsidies for fossil fuels” in a bid to slow climate change.

But according to the think tank International Institute for Sustainable Development (IISD), subsidies the following year from G20 countries reached $1tn – over four times the amount provided in 2021.

Much of the total support provided was for consumers, but around one-third ($440bn) was driving investment in new fossil fuel production. Many production facilities such as oil wells or coal mines are expected to operate for many decades – long after the current energy crisis is expected to be over.

According to the report: “This support perpetuates the world’s reliance on fossil fuels, paving the way for yet more energy crises due to market volatility and geopolitical security risks.”

It urges G20 governments to shift their financial resources away from fossil fuels and towards targeted support for clean energy infrastructure. It also wants fossil fuel prices to reflect the cost that they impose on society due to their impact on the climate.

As G20 chair, India actually bucked the trend, having reduced its fossil fuel subsidies by 76 per cent from 2014 to 2022 while significantly increasing support for clean energy.

One of the suggested ways to incentivise shifts away from fossil fuels is by setting minimum carbon taxation levels between $25 and $75 per tonne of carbon dioxide equivalent, depending on the income of the country.

The revenues generated could provide support to low-income and vulnerable households through redistributive measures, with targeting based on income and assets, as well as additional funds being used to scale up clean energy.

The largest category of subsidy was “price support” – governments fixing retail fossil fuel prices below the international market price. Below-market pricing was more common in G20 emerging economies, where it created large holes in government budgets either due to direct spending or foregone revenue.

But even when fuels were sold above international market prices, G20 governments provided large subsidies to reduce energy bills for transport fuels, electricity and heating. Germany, France and Italy alone provided $213bn in fossil fuel crisis support in 2022. Many of these measures were temporary, but not all were targeted.

The UK government has recently made efforts to ramp up North Sea fossil fuel production with more than 100 new oil and gas drilling licences issued last year.

This is despite warnings from climate scientists that the expansion will do little to lower bills or improve security in the near term, while also counteracting efforts to curb global warming.

Richard Damania, chief economist of a sustainability group at the World Bank and lead author of the study, said: “By repurposing wasteful subsidies, we can free up significant sums that could instead be used to address some of the planet’s most pressing challenges.

“Governments should prioritise reforms that build public acceptance, protect the most vulnerable and show how the money is being spent to meaningfully improve people’s lives.”

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