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

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Don’t choose extinction © Shutterstock / Noiel

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

This brilliantly produced video, which is part of an impressive campaign called “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 questioned whether world leaders would agree to commitments strong enough to significantly tackle climate change. COP 26 is now over and the agreement that emerged, namely the Glasgow Climate Pact, calls on the parties to accelerate “efforts to phase out coal-fired electricity and inefficient fossil fuel subsidies. “It may be music to Frankie’s ears, but unless some decisive action is taken, we should expect to see more of Frankie.

Fossil fuel subsidies are bad for the environment, unnecessary and inefficient. They create distortions and create a level playing field – between fossil fuels and cleaner alternatives, and between international trading partners with different decarbonization ambitions. Subsidies on fossil fuel consumption disproportionately benefit the richer citizens who use more energy than the poor, as such they are an inefficient way to help the poor. They divert scarce fiscal resources from health, education or clean energy and, by encouraging the use of fossil fuels, undermine climate change mitigation efforts.

Annual global spending on energy subsidies is many times the funding needed to achieve universality access to electricity and a clean kitchen by 2030. There is a strong knowledge base on the scale and impact of grants, thanks to the work of key agencies such as the OECD, OUCH, and the IMF, highlighting the direct (and less obvious) ways in which support is funneled into fossil fuels around the world. In 2020, direct consumer subsidies to $ 180 billion worldwide, against about $ 310 billion. Unfortunately, it appears that this reduction is mainly due to falling oil prices and lower economic activity resulting from the COVID-19 pandemic. The recent upward trend in oil prices and subsequent new measures being considered by various governments as they strive to protect households and businesses during the economic recovery are sure to increase subsidies again. Meanwhile, the IMF estimate that implicit subsidies, which focus on under-invoicing environmental costs, social costs and lost consumption taxes, are reaching record levels.

There is a general consensus that fossil fuel subsidies need urgent reform. The opportunity cost of subsidies is particularly important for developing countries as they strive to boost prosperity and eradicate poverty despite budgetary constraints. Developing countries are at risk of being disproportionately affected by the impacts of climate change linked to the use of fossil fuels , bearing approximately 80% of the damages costs (WDR 2010). Armed with this recognition, many countries have attempted to reform subsidies in recent decades, but progress has often been limited, fragile and reversible.

The main challenge is to convert knowledge into action to reform subsidies while protecting the poor and vulnerable. This is precisely the objective of the Energy Sector Management Assistance Program and the World Bank (ESMAP) Energy Subsidy Reform Facility (ESRF). The ESRF provides technical assistance to developing countries, through multisectoral teams of the World Bank. Driven by demand from countries, the work of the ESRF focuses on various dimensions of reform, from identifying and quantifying subsidies to understanding the political and macro-fiscal context, to assessing the impacts on households, businesses, industries and the economy at large. From 2014 to 2021, the ESRF supported activities in more than 65 countries, which in turn generated $ 20.5 billion in World Bank loans and specific reform actions in 22 countries.

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

In our next blog post, we will introduce 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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