During last year’s energy crisis, when prices soared due to Russia’s invasion of Ukraine, the Group of 20 (G20) nations provided $1.4 trillion to boost energy supplies and keep prices from climbing even higher, according to the thinktank International Institute for Sustainable Development (IISD).
Financial support from the G20 was in the form of money borrowed from public financial institutions, subsidies and investments made by state-owned enterprises (SOEs), the IISD report, “Fanning the Flames: G20 provides record financial support for fossil fuels,” said. About one third of these funds were to back new fossil fuel projects.
According to the report, instead of subsidizing fossil fuels to reduce prices, prices need to be maintained at a level that reflects fossil fuels’ negative cost to society, in order to curb their use.
“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 also severely limits the possibilities of achieving climate objectives set by the Paris Agreement by incentivizing greenhouse gas (GHG) emissions while undermining the cost-competitiveness of clean energy,” the report said. “G20 governments need to shift their financial resources away from fossil fuels to instead provide targeted, sustainable support for social protection and the scaling-up of clean energy.”
Fossil fuel subsidies by the G20 in 2022 were more than four times those in 2021, mostly thanks to expanded support for consumers.
“The largest category of consumption subsidies 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 and SOE budgets, either due to direct spending or foregone revenue,” the report said.
An extra $1 trillion could be raised per year if an increased carbon tax of $25 to $75 for each ton of greenhouse gases was set, the IISD found, as reported by The Guardian.
“There is huge potential in subsidy reform,” said Richard Damania, a World Bank chief economist of a sustainability group, as The Guardian reported. “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.”
France, Germany and Italy provided $213 billion in energy crisis support last year.
“Helping households and businesses during an energy crisis is understandable and necessary, but there are better ways to do it than subsidizing fossil fuels, which keeps consumers locked into emissions-intensive, polluting, and price-volatile energy sources,” the IISD report said.
IISD recommendations for G20 nations included setting a deadline for the elimination of fossil fuel subsidies. The Group of Seven most advanced economies in the world chose 2025, which the IISD said “is appropriate for all developed countries.”
The IISD also recommended ensuring that low-income workers, consumers and communities have “alternative welfare mechanisms” in place during the phasing out of fossil fuel subsidies, and that the G20 report on fossil fuel subsidies each year.
“The energy crisis has caused energy poverty and hardship, which have warranted strong government intervention. But fossil fuel subsidies are a notoriously inefficient way to help the poor and are perpetuating dependence on fossil fuels. Governments should instead provide social welfare through other mechanisms, like targeted welfare payments,” the report said. “Where such programs do not yet exist or cannot be implemented, energy subsidies should be targeted to the poor and vulnerable while governments incubate alternative clean energy technologies.”