Energy price surge shows the need to accelerate clean energy transitions

Investments in sustainable energy infrastructure and the creation of green jobs should increase rather than in fossil fuels

By OECD and IEA November 4, 2021
Courtesy: Chris Vavra, CFE Media and Technology

Countries should resist raising government support for fossil fuels in response to the global surge in energy prices and the economic impacts of the pandemic, according to the OECD and IEA.

Instead, given the existential threat of climate change and the need for a green recovery, they should accelerate investment in sustainable energy infrastructure and the creation of green jobs, as well as meeting the UN Sustainable Development Goals, in particular SDG 7, to ensure access to affordable, reliable, sustainable and modern energy for all.

Despite a 2009 pledge by G20 countries to gradually phase out inefficient fossil fuel subsidies, major economies still support the production and consumption of coal, oil and natural gas with hundreds of billions of U.S. dollars each year, money that would be better spent developing low-carbon alternatives and improving energy efficiency. As well as encouraging fossil fuel consumption, fossil fuel subsidies are an ineffective way to support low-income households compared to targeted benefits and tend to favor wealthier households that use more fuel and energy. In addition, fiscal burdens of subsidies reduce the room for adequate policy actions.

The latest OECD and IEA data shows overall government support for fossil fuels decreased in 2020, yet this was mostly the mechanical result of declining fuel prices and demand as the COVID-19 pandemic led to a lull in global activity. In today’s climate of rising energy prices, it is expected consumption subsidies will increase again in 2021, aided by an uptick in economic activity. Indeed, the IEA estimates consumption subsidies will more than double in 2021 due to higher fuel prices and energy use, coupled with hesitancy on fossil fuel pricing reforms.

“As economic activity and fuel demand picks up, we must ensure that fossil fuel support continues to fall and COVID-19 recovery spending is focused on measures that are positive for the environment and the climate. Support provided in the face of rising energy prices should be designed in a way that helps the most vulnerable, whilst remaining true to our climate commitments,” OECD secretary-general Mathias Cormann said.

“The world urgently needs a surge in investment in clean energy technologies and infrastructure, and phasing out fossil fuel subsidies is one of the essential conditions to make that happen. Governments should be planning for a cleaner and fairer energy future in which everyone benefits from modern energy services. This means expanding access to clean energy, especially for the most vulnerable populations, not maintaining market distortions that favor polluting fuels,” IEA executive director Fatih Birol said.

Government support for the production and use of fossil fuels across major economies totaled $351 billion in 2020, down 29% from 2019 as a drop in global activity and record-low oil prices meant governments spent less on subsidizing energy costs for end-users, according to latest data from the OECD and the IEA. The transport sector alone saw a 15% drop in support due to the slump in fuel use from restrictions on mobility during the pandemic, the OECD data shows. Petroleum saw the steepest drop in 2020, with support down 19% from 2019.

On the production side, the data shows a 5% rise in direct support for the production of fossil fuels across 50 advanced and emerging economies, some of this being the result of large government bailouts to state oil and electricity companies. Were this support to persist beyond COVID-related emergency funding, it would become part of a structural policy landscape that needs to change to phase out fossil fuel support.

COVID-19 recovery measures being implemented around the world offer an opportunity to shift public resources into areas that support environmental and climate goals. OECD data published earlier this month shows that while public spending on green recovery measures in 44 major economies has doubled since April 2021, it still only accounts for 21% of total spending on COVID-19 economic recovery measures. Of the spending announced to date in OECD, EU and key partner countries, 10% is identified as mixed or negative for the environment (Read more.)

The OECD and IEA produce complementary databases that provide estimates of different forms of government support for fossil fuels in 81 major economies. These are combined with IMF estimates in an interactive Fossil Fuel Subsidy Tracker produced by the OECD in partnership with the International Institute for Sustainable Development (IISD).

The OECD’s analysis of budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products in 50 OECD, G20 and Eastern Partnership economies showed total fossil fuel support fell by 10% to $183 billion in 2020. (See the OECD Inventory of Support Measures for Fossil Fuels.)

The IEA produces estimates of fossil fuel subsidies by comparing prices on international markets and prices paid by domestic consumers that are kept artificially low using measures like direct price regulation, pricing formulas, border controls or taxes and domestic purchase or supply mandates. Covering 42 economies, the IEA finds that consumption subsidies dropped to $180 billion in 2020, largely due to lower market prices, and are set to jump by 244% in 2021 to $440 billion. (See IEA key findings on energy consumption subsidies and the IEA’s World Energy Outlook 2021.)

Author Bio: The OECD together with governments, policy makers and citizens, work on establishing evidence-based international standards and finding solutions to a range of social, economic and environmental challenges. The IEA's mission is to work with governments and the industry to shape a secure and sustainable energy future for all by providing authoritative analysis, data, policy recommendations and real-world solutions.