Amid the upcoming G20 summit in New Delhi, where global leaders are poised to deliberate on critical topics including climate change, a study reveals a conflicting trend. Attending countries had substantially increased financial support for fossil fuels in 2022, which is in glaring contradiction to achieving the climate objectives set by the Paris Agreement, claims the study.

Conducted by the International Institute for Sustainable Development (IISD), the study found that G20 member countries extended an all-time high of $1.4 trillion in public funds to bolster the fossil fuel industry in 2022. This includes $1 trillion for fossil fuel subsidies, approximately $322 billion invested by state-owned enterprises, and an additional $50 billion allocated as loans from public financial institutions.

G20 governments are clearly still directing significant public funds towards fossil fuels, despite the increasing evidence of links with climate change, points out the lead author and Senior Associate at IISD, Tara Laan.

Subsidies for fossil fuel

The worldwide sum of fossil fuel subsidies was $7 trillion in 2022, according to a separate report released on August 24. India is among the top five nations, contributing substantial subsidies to fossil fuels, notes the report by the International Monetary Fund (IMF). The $7 trillion in subsidies is made up primarily (82%) of implicit subsidies which come through undercharging for environmental costs and omitted consumption taxes. The remaining 18% is explicit subsidies which involve charging below supply costs.

The IMF report notes that explicit subsidies have more than doubled since the previous IMF assessment, surging from $0.5 trillion in 2020 to $1.3 trillion in 2022. However, a significant portion of this increase is attributed to temporary measures aimed at stabilising prices. Thus, if international prices continue to drop from their peak levels, explicit subsidies are predicted to decrease.

On the other hand, implicit subsidies are anticipated to rise. This projection stems from the growing prominence of fuel consumption in emerging markets, where local environmental costs tend to be higher. This trend suggests that implicit subsidies will continue to increase as these markets expand, says the IMF report. China remains the biggest subsidiser of fuels, followed by the United States, Russia, the European Union and India.

Financing the fossil fuel market

Government-owned companies dealing with fossil fuels within developing G20 countries can have a big impact on the country’s job market, energy access and more.

According to the IISD study, government-owned companies spent $322 billion on new fossil fuel projects in 2022, with plans to increase investments this year.

Experts point out that if they instead focus on financing clean energy, they can help in achieving net-zero objectives, especially in developing countries. This shift is already happening. The International Energy Agency (IEA) found 50 companies across the world that have begun or are planning to invest in clean energy. Around 13% (7 out of 56) of them claimed so in their annual reports, says the IISD report.

The study recommends that the G20 countries set a timeline for these government-owned energy companies to achieve “net zero emissions” and to focus on using clean energy. It also suggests examining the risks of continued investments in fossil fuels, including stranded assets, carbon pricing, and carbon border adjustments.

Challenges for renewable energy

Establishing clean energy infrastructure, however, is facing many challenges. The study claims that the substantial subsidies to fossil fuels undermine the cost-competitiveness of clean energy.

“Fossil fuel subsidies (FFS) undermine the competitiveness of renewable energy in two ways. Firstly, consumption subsidies reduce the price of fuels for end users. For example, suppressing coal prices reduces the cost of coal-fired electricity generation. This makes it harder for renewable sources to compete. Secondly, production subsidies often focus on the early stages of resource exploitation, including exploring and developing new coal mines or oil and gas wells. This creates a perverse incentive for fossil fuel companies to continue investing in new fossil fuel production. For example, a tax break for exploration will reduce current tax liabilities, so a company may as well invest in new production rather than pay tax,” explains Laan.

She adds that such policies end up encouraging ongoing investment in fossil fuels rather than renewables.

The study found that the Russia-Ukraine war forced several countries to increase their funding towards fossil fuels. Energy security is often cited as a reason to subsidise fossil fuel production, says Laan. “However, this only perpetuates our reliance on these price-volatile and geopolitically risky sources of energy. The world has had multiple energy crises that will continue as long as we are fossil fuel dependent. With cleaner and price-stable alternatives, governments need to stop supporting fossil fuel production and rapidly scale up support for renewable energy generation and transport electrification. This is the only long-term solution to energy security and the ongoing energy crisis,” Laan says.

Responding to the trend of investment in fossil fuels, Mattias Soderberg, Global Climate Lead at DanChurchAid, a Danish humanitarian non-governmental organisation, says, “We face a climate crisis and if fossil finance isn’t turned quickly into green finance, we will never limit global warming to the 1.5 degrees governments promised in the Paris Agreement.”

Reacting to the trend of fossil fuel investments and subsidies, as shown by both studies, Alexander Hogeveen Rutter, a Private Sector Specialist at the International Solar Alliance (ISA), says, “I think this trend highlights that we are not going to tackle fossil fuels by directly hobbling fossil fuel projects. As long as there is demand for energy, no country (developing or developed) is going to compromise its energy access, affordability and security. These three will always take priority over sustainability, regardless of what politicians may say.”

This emphasises the need to build alternatives (i.e., renewable energy and electric vehicles), he says, adding that only if humanity’s need for energy can be addressed in alternative ways can we cut the need and therefore supply of fossil fuels.

Carbon taxation

The IISD report highlights how fossil fuels, while once enhancing quality of life, now come with substantial societal costs, including air pollution-related health issues and climate change. The IMF has projected these costs at $5 trillion annually.

“Someone has to pay for these costs and it’s not the producers or consumers directly because, for the most part, these costs aren’t captured in retail prices. Increasing the price of fossil fuels through subsidy reform and taxation would encourage lower use and therefore reduce impacts and costs on society,” says Laan.

To tackle escalating financial requirements, the study recommends implementing a carbon tax to incentivise both consumers and investors to transition towards cleaner options. Current explicit carbon pricing remains considerably below the levels necessary to effectively tackle climate change, it says.

Thirteen G20 governments have established a direct carbon pricing mechanism, which includes either a carbon tax or an Emission Trading System (ETS). These measures accounted for the coverage of 49% of all energy-related CO2 emissions within G20 nations in 2021. However, the average price for ETS in G20 countries was $3.2 per tCO2e, while the average for carbon tax remained below $1.05 per tCO2e in the same year.

Based on an estimate by the IMF, an average carbon price of $100 per tonne of carbon dioxide equivalent (tCO2e) is needed by 2030 to limit the average global temperature increase to 1.5°C.

If G20 nations promptly increase their effective carbon rates, the combined annual revenue across the G20 could reach $927 billion.

This shows how carbon taxation to generate funds can facilitate an equitable shift. This could involve supporting social welfare, directed energy accessibility, and advancements in clean energy. Simultaneously, the implementation of such measures would communicate price indicators to both consumers and investors, encouraging carbon emissions reduction.

The role of G20 summit

The G20 summit in 2023 is being held in New Delhi, India, on September 9 and 10, where global influential leaders will convene to discuss a sustainable future. This summit is projected to be crucial for important decisions around fossil fuel investments.

“In 2009, the G20 committed to reform fossil fuel subsidies. In 2023, it needs to step up through concrete actions, setting deadlines and plans to shift public money from fossil fuels to clean energy. This can shape vital climate talks at the United Nations Climate Change Conference (COP 28) in November, inspiring other countries to raise their climate efforts,” says Laan.

The report suggests that the G20 sets a timeline to end fossil fuel subsidies. The G7 has chosen 2025, suitable for developed nations. Under the United Nations Sustainable Development Goals (SDGs), all countries aim to reform subsidies by 2030 at the latest.

According to the IISD report, India reduced funding for fossil fuels by 76% from 2014 to 2022 and substantially increased support for clean energy.

Furthermore, the study recommends these nations annually report about fossil fuel subsidies using UN indicator 12.c.1. While this is a commitment for all UN member countries, only a few have implemented it so far.

Banner image: Miner walking in NCL Krishnashila Opencast Coal Mine. Photo by Rosehubwiki, Kuber Patel/Wikimedia Commons.

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Aditi Tandon Senior Production Editor

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Air PollutionClean EnergyEnergyPollutionGlobalIndia

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