Quick Win No. 4
Negotiate new rules to phase out harmful fossil fuel subsidies
Every year, governments across the world provide large amounts of support to the fossil fuel industry. The OECD and the IEA estimate that, in 2021, fossil fuel support amounted to almost 700 billion USD among the major economies. These policies raise trade and environmental concerns because they give a cost advantage to certain domestic firms (typically operating in emissions-intensive industries) to the detriment of foreign firms that produce like products using more costly unsubsidized inputs. By incentivizing the production and consumption of fossil fuels, such government support also undermines national and international efforts to reach the goal of net-zero emissions in 2050.
Governments have committed to phasing out fossil fuel subsidies on many occasions, including in the Glasgow Climate Pact signed by 197 countries at COP26 in 2021. This decision calls for “accelerating efforts towards the phasedown of unabated coal power and [the] phase-out of inefficient fossil fuel subsidies.”
There are two main stumbling blocks to progress on such international action. First, there is no agreed international method for measuring and monitoring fossil fuel subsidies, nor clear agreement between countries on what is considered a fossil fuel subsidy. Second, there is a lack of transparency regarding government funding that may be tantamount to these types of subsidies.
However, the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) offers a framework that can help address this double definition-transparency issue. For instance, Article 1 of the SCM Agreement provides a definition of what constitutes a subsidy that can provide a starting point for discussion. In addition, Article 25 of the SCM Agreement requires all WTO Members to “notify any subsidy as defined in paragraph 1 of Article 1” with information relevant to assessing the effects of the subsidy (e.g. form of the subsidy, policy objective, duration, and other statistical data). These disciplines should be utilized to report fossil fuel subsidies.
But there are also additional policy tools developed by other international organizations that can assist in reaching such an agreement, starting with transparency. For instance, the OECD Inventory of support measures for fossil fuels provides detailed information on more than 1,500 government measures that encourage fossil fuel production or consumption in OECD and partner economies. The information provided by the inventory can be used to identify the most harmful fossil fuel supports (both in terms of trade and environment) that WTO members would commit to phase out.
Combining these efforts, WTO members should do two things: make sustained efforts to increase transparency by reporting all government interventions that may be considered fossil fuel subsidies; and work towards a new agreement to phase out the most harmful fossil fuel subsidies following a process similar to the WTO Agreement on Fisheries Subsidies, which prohibits harmful fisheries subsidies. Targeting the definitional and transparency issues of fossil fuel subsidies in a new WTO agreement can help meet the real economic and climate-related challenges of these subsidies.
