Explainer: Global fossil fuel subsidies on the rise despite calls for phase-out

South China Holdings

23/11/2023 10:59

By Sarah McFarlane
       Nov 23 (Reuters) - World governments agreed at the COP26
climate summit in Glasgow two years ago to phase out
"inefficient" fossil fuel subsidies to help fight global
warming. 
    Since then, however, global fossil fuel subsidies have risen
$2 trillion to $7 trillion, according to the International
Monetary Fund, as governments around the world moved to protect
consumers from rising energy prices.
    At this year's climate gathering in Dubai, EU countries will
be looking to harden the COP26 deal to phase out the subsidies
by pushing for a deadline of 2030 to get it done, but it is
unclear how much support the proposal will gain.
    EU governments were among those that have increased support
for fossil fuels since Glasgow, mainly as a response to energy
security concerns following Russia's invasion of Ukraine.
    Here are some examples of how fossil fuels are subsidised
around the world.
    
    CHINA
    China's total fossil fuel subsidies were the highest in the
world at $2.2 trillion in 2022, amounting to 12.5% of the
country's total GDP, according to the IMF.
    The bulk of the subsidies are "implicit", a category which
includes undercharging for environmental costs or forgoing tax
revenues, the IMF said.
    Support offered to coal-fired power plants includes direct
funding, preferential loans, and power purchase guarantees.
    China also unveiled a new scheme earlier this month that
pays coal-fired power plants not for the electricity they
supply, but for making capacity ready and available to the grid
when needed – a measure also used by grid operators in the U.S.
to keep such plants from retiring.
    A 2020 study by professors at Nanjing Audit University said
China's coal subsidy policies effectively reduced China's coal
prices by 4.2% and drove up output by 7.6%.
    China also regularly intervenes to keep consumer power and
fuel prices low. For example, it subsidises its refiners when
global oil prices rise above $130 a barrel so they can keep fuel
prices affordable.
   
    UNITED STATES
    U.S. fossil fuel subsidies stretch across the U.S. tax code,
which makes detailing their costs complex. The IMF estimates
they stood at $760 billion in 2022, a figure topped only by
China.
    One U.S. tax break called intangible drilling costs allows
producers to deduct a majority of their costs from drilling new
oil wells. The Joint Committee on Taxation, a nonpartisan panel
of Congress, has estimated that eliminating it could generate
$13 billion over a decade.
    Another, the percentage depletion tax break which allows
independent producers to recover development costs of declining
oil gas and coal reserves, could generate about $12.9 billion in
revenue over 10 years, it has said.
    President Joe Biden, a Democrat, has proposed axing fossil
fuel subsidies in his annual budget, largely a political
document used in negotiations with Congress. 
    But his efforts have gone nowhere amid only a thin
Democratic majority in the Senate and as Republicans control the
House of Representatives. 
    
    RUSSIA
    The world's top seaborne exporter of diesel and third
largest producer of oil spent $420 billion on fossil fuel
subsidies last year, according to the IMF.
    These include payments to oil refineries to compensate them
for selling fuel on the domestic market instead of exporting it
for a higher prices. 
    Russia's coal industry is supported by measures including
preferential rail tariffs, direct budgetary transfers for coal
exploration, and tax relief on some coal mining, according to
think-tank ODI.
    
    INDIA
    Fossil fuel subsidies in India totaled $350 billion last
year, according to the IMF. Coal dominates India's electricity
production and the country is one of the world's top producers.
    Coal subsidies include exemption of customs duty on coal
mining equipment, reduced haulage rates for long-distance rail,
and low-interest loans for coal power plants, according to the
International Institute for Sustainable Development.
    
    EU
    European governments more than doubled fossil fuel subsidies
to $310 billion in 2022 in response to the energy crisis, IMF
data showed. 
    At least 230 temporary subsidy measures were taken by
governments across the EU last year, according to a European
Commission report, after Russia cut gas supplies to the region.
    This reversed the trend in place since 2018 of shrinking
support.
    Most European governments plan to reduce their reliance on
fossil fuels, with the clearest commitments in coal power and
fossil fuel-based heating in buildings.
    
    MIDDLE EAST
    Oil and gas producers in the Middle East including Qatar and
Saudi Arabia had some of the highest fossil fuel subsidies per
person, IMF data showed. 
    Historically, governments in the region have kept energy
prices artificially low, in part to redistribute resource wealth
among their populations.
    Qatar provides free electricity to its citizens, for
instance.

    CANADA
    Earlier this year Canada unveiled plans for eliminating
inefficient fossil fuel subsidies. 
    Oil and gas projects could still receive support, however,
if projects included plans for emissions reduction technologies
such as carbon capture, and environmental groups criticized the
plan for lacking details and leaving open certain loopholes.

 (Reporting by Sarah McFarlane, Timothy Gardner and David
Stanway; Editing by Jan Harvey)
 ((sarah.mcfarlane@thomsonreuters.com;))