Falling Oil Prices and Sustainable Energy Transition. Towards a Multilateral Agreement on Fossil-Fuel Subsidies

Henok Birhanu Asmelash


Governments worldwide subsidize the consumption and production of fossil fuels to the tune of USD$0.5-USD$5.3 trillion, depending on how subsidies are defined and measured (IEA 2015a; Coady etal. 2015). The adverse economic and environmental effects of these subsidies have long been recognized, but countries have been reluctant to remove them mainly for political economy reasons (Burniaux and Chateau 2014; Granado et al. 2010; OECD 1998; Parry etal. 2014; Pitt 1985). While momentum for fossil-fuel subsidy (FFS) reform has been building over the last few years, the sharp drop in international oil prices since the second half of 2014 has intensified calls for—and efforts to bring about—the phasing out of FFSs by making the withdrawal of these subsidies less politically controversial (IEA 2015a). It is, however, uncertain how long the decline in oil prices will persist and, if past experiences are anything to go by, the prices are likely to rise again (IEA 2015a). When oil prices start rising again, the momentum for subsidy reform could dissipate and governments may find themselves under mounting pressure to (re)intro- duce subsidies (Coady and Shang 2015; Kojima 2009). This means that, in addition to seizing the opportunity offered by falling oil prices to reform FFSs,[1] the key challenge is to ensure the durability of the initiated reforms

(Coady and Shang 2015; IEA 2015a). This entails the need for ways to lock in FFS reforms, and it is primarily in this context that an international agreement on FFSs merits consideration. Such an agreement would tie the hands of governments and thereby enhances the credibility of FFS reforms. It would also help governments resist pressure from interest groups to bring back subsidies in the wake of oil price hikes. Currently, there is no binding international agreement to phase out FFSs. The Kyoto Protocol’s call for progressive reduction or phasing out of subsidies in all greenhouse gas emitting sectors, and the G20’s pledge to phase out or rationalize inefficient FFSs, go some way in this direction, but they fall far short of a legally binding commitment to end FFSs.

Against this backdrop, this chapter seeks to explore the challenges of and prospects and possible avenues for negotiating a binding multilateral agreement to phase out FFSs. Fossil-fuel combustion is the largest source of greenhouse gas emission, the increasing atmospheric concentration of which leads to global warming and climate change (IPCC 2014a). In recognition of the critical role that sustainable energy transition will play in combating climate change, more than 160 countries have set renewable energy targets and policies to promote the development and deployment of renewable energy sources (IRENA 2015). The subsidization of fossil fuels runs counter to these policies. By artificially lowering fossil fuel prices, FFSs encourage the wasteful consumption of carbon-intensive fuels and undermine the competitiveness of renewables (Bridle and Kitson 2014). Their elimination would not of itself bring about the transition, but it will clear one of the major obstacles in achieving sustainable energy transition. While FFS reforms take place at the national level, an international agreement will provide legal certainty and the necessary context and basis for undertaking such reforms at the national level.

This chapter is intended to provide a basic framework for the necessary discussions on strengthening the current international legal framework for phasing out FFSs. Section 18.2 will introduce the basic notion of FFSs. Section 18.3 makes the case for FFS reform mainly from a sustainable energy transition perspective. Section 18.4 examines the main barriers to FFS reform and how the collapse in oil prices can help in overcoming them. Section 18.5 reviews existing intergovernmental initiatives to phase out FFSs. Section 18.6 begins by outlining how a binding multilateral agreement helps the global effort to phase out FFSs, before assessing the key issues and challenges in reaching such an agreement. Section 18.7 sums up the discussion.

  • [1] A number of countries including, Angola, China, India, Indonesia, Iran, and Malaysia havealready initiated or accelerated their subsidy reform seizing the opportunity offered by the low oilprices (IEA 2015a).
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