UPDATE ON RECENT PROGRESS IN REFORM OF INEFFICIENT FOSSIL-FUEL SUBSIDIES THAT ENCOURAGE WASTEFUL CONSUMPTION Contribution by the International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD) to the G20 Energy Transitions Working Group in consultation with: International Energy Forum (IEF), Organization of Petroleum Exporting Countries (OPEC) and the World Bank 2nd Energy Transitions Working Group Meeting Toyama, 18-19 April 2019 Update on Recent Progress in Reform of Inefficient Fossil-Fuel Subsidies that Encourage Wasteful Consumption This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. This update does not necessarily express the views of the G20 countries or of the IEA, IEF, OECD, OPEC and the World Bank or their member countries. The G20 countries, IEA, IEF, OECD, OPEC and the World Bank assume no liability or responsibility whatsoever for the use of data or analyses contained in this document, and nothing herein shall be construed as interpreting or modifying any legal obligations under any intergovernmental agreement, treaty, law or other text, or as expressing any legal opinion or as having probative legal value in any proceeding. Please cite this publication as: OECD/IEA (2019), "Update on recent progress in reform of inefficient fossil-fuel subsidies that encourage wasteful consumption", https://oecd.org/fossil-fuels/publication/OECD-IEA-G20-Fossil-Fuel-Subsidies-Reform-Update-2019.pdf │ 3 Summary This report discusses recent trends and developments in the reform of inefficient fossil- fuel subsidies that encourage wasteful consumption, within the G20 and beyond. G20 member countries continue their commitment to phase out inefficient fossil-fuel subsidies, as reiterated in the Energy Ministers Communiqué of June 2018, in Argentina.1 The latest estimates of support for fossil fuels show that progress in reducing subsidies and government support for fossil-fuel production and use has slowed down in 2017. According to the combined IEA-OECD estimates, which cover 76 economies, the 2013- 16 downward trend in support for fossil fuels, was reversed with an increase of 5% in 2017 compared to 2016, reaching USD 340 billion. Nevertheless, countries around the world have continued to implement energy-pricing reforms. For example, Argentina, India, Indonesia, and several MENA countries took important steps towards reducing their energy subsidies. On the production side, the subsidised hard-coal industry in Western Europe has been phased out and efforts to end state aid to coal-fired power generation in the European Union are continuing. A recent EU decision sets 2025 as the target date for ending state aid to high-emission power plants, effectively eliminating subsidies to coal. At the same time, the oil and gas sector continues to benefit from government incentives in several countries, mostly through tax provisions that provide preferential treatment for cost recovery. Such policies could go against domestic efforts to reduce global greenhouse gas (GHG) emissions. While reforms of inefficient fossil-fuel subsidies have translated in reduced fiscal deficits and a better alignment of prices with costs, recent policy developments show that such gains might be under threat, depending particularly on the evolution of oil prices. Volatility in international oil prices, as happened in during 2018, renders reform more difficult to implement, as increases in domestic energy prices may have adverse distributional consequences. Increasing transparency on the use of scarce public resources is one way to maintain the momentum for fossil-fuel subsidy reform. Six G20 member states have completed voluntary peer reviews of inefficient fossil-fuel subsidies and collectively evaluated more than 100 government interventions relating to both the consumption and production of fossil fuels. Two more member states, Argentina and Canada, are now in the preparatory phase of a peer review. These peer reviews bring to the fore issues around fossil fuel 1 . The G20 work focuses on the phasing out of inefficient fossil-fuel subsidies that encourage wasteful consumption over the medium term. These important qualifications (in italics) are central to the update. Still, for reasons of succinctness and readability in the text, the update may refer to fossil-fuel subsidies without the additional qualifications. RECENT PROGRESS IN REFORM OF INEFFICIENT FOSSIL-FUEL SUBSIDIES THAT ENCOURAGE WASTEFUL CONSUMPTION 4 │ support and the formidable task of undertaking energy subsidy reforms while providing targeted support for the poorest. Further efforts to improve transparency are underway. For example, countries are joining the newly established OECD Paris Collaborative on Green Budgeting, which aims to support governments in using national expenditure and revenue processes to support climate and environmental goals towards developing sustainable and resilient societies. RECENT PROGRESS IN REFORM OF INEFFICIENT FOSSIL-FUEL SUBSIDIES THAT ENCOURAGE WASTEFUL CONSUMPTION │ 5 Table of contents Summary ................................................................................................................................................ 3 Introduction ........................................................................................................................................... 6 G20 voluntary peer reviews of inefficient fossil-fuel subsidies .......................................................... 7 Recent global progress in fossil-fuel subsidy reform .......................................................................... 9 Developments in the reform of fossil-fuel subsidies in other IOs .................................................... 17 References ............................................................................................................................................ 31 Annex A. Additional OECD data on support for fossil fuels ........................................................... 33 Tables Table 1. Summary of G20 peer reviews .................................................................................................. 8 Table 2. OECD Economic Surveys that discuss support to fossil fuels ................................................. 23 Table 3. OECD Environmental Performance Reviews that discuss support to fossil fuels................... 27 Figures Figure 1. Reductions of government support for fossil fuels continue but at a slower pace in the OECD and selected partner economies ......................................................................................... 10 Figure 2. Value of fossil-fuel consumption subsidies from the IEA price-gap estimates indicate an increase of 12% between 2016 and 2017 ...................................................................................... 14 Figure 3. Policy developments to reduce consumption subsidies ......................................................... 15 Figure 4. IEA-OECD combined estimate of support for fossil fuels show that progress has slowed down .............................................................................................................................................. 16 Figure 5. Decomposition of change in government support for fossil fuels for OECD and selected partner economies between 2016 and 2017 ................................................................................... 33 Figure 6. Shares of fossil-fuel support by indicator and by fuel type in 2017 ...................................... 34 RECENT PROGRESS IN REFORM OF INEFFICIENT FOSSIL-FUEL SUBSIDIES THAT ENCOURAGE WASTEFUL CONSUMPTION 6 │ Update on recent progress in reform of inefficient fossil-fuel subsidies that encourage wasteful consumption Introduction The Energy Transitions Working Group (ETWG) of the G20 requested that an update “that captures recent progress in countries, the peer review process and other developments to phase out inefficient fossil-fuel subsidies that encourage wasteful consumption” be prepared by the International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD), in consultation with the International Energy Forum (IEF), the Organisation of the Petroleum Exporting Countries (OPEC), and the World Bank. The report was to be made available for the ETWG meeting, in Toyama, Japan, on 18-19 April 2019. This document responds to that request. Under the recent G20 presidency of Argentina, member states reiterated their commitments, in the medium term, to rationalise and phase out inefficient fossil-fuel subsidies that encourage wasteful consumption, while providing targeted support for the poorest, thus upholding their pledge of the 2009 Pittsburgh Communiqué. The effort to reform fossil-fuel subsidies qualified as inefficient remains voluntary and country-led, recognising the need to provide affordable and reliable energy access to the poor. A continued, concerted commitment by G20 membership to reform their inefficient fossil-fuel subsidies is instrumental in enabling a global transition towards a lower- emissions energy system.2 Inefficient fossil-fuel subsidies can hinder progress in a country’s transition as they distort prices, induce economic inefficiencies and poor environmental outcomes, and put pressure on scare public resources. They can encourage