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Globally, governments spend more than $500 billion on subsidies for fossil fuels that contribute to inefficiency, inequity, and negative externalities. Despite this obvious problem, efforts at reforming fossil fuel subsidies across the world have been piecemeal. If countries are to achieve the decarbonization goals of the Paris Agreement on climate change, they need to urgently address these subsidies as part of the transition away from fossil fuels.
In doing so, countries need to accurately measure all types of support offered to fossil fuels and devise solutions accordingly. This means that they need to identify and tackle both production and consumption subsidies. Production subsidies increase the profitability of extracting and transporting fuels, usually by offering tax breaks, production credits, or accelerated depreciation for capital investment. The Organization for Economic Cooperation and Development (OECD) found that production subsidies increased by 30% in 2019, reversing a five-year downward trend. On the other hand, consumption subsidies, which make energy products cheaper for end consumers, declined on average but rose in key economies like India.
The United States now has a unique opportunity to lead this global effort. President Joe Biden’s executive order for government agencies to stop fossil fuel subsidies and the United States’ renewed commitment to the Paris Agreement serve as strong commitments to domestic reform. By leveraging these signals, making tangible progress, and showing that it has every intention of eliminating subsidies, the United States can then credibly push for international reform as well.
To lead a global subsidy reform effort, the United States should first use the Group of Twenty (G20) to create a working group that develops a collective reform strategy, with the buy-in and participation of members. Second, the United States can recommend that countries, including itself, concretely link reform strategies with their Nationally Determined Contributions under the Paris Agreement. Lastly, it should develop a program to provide Least Developed Countries (LDCs) with technical and financial assistance to remove subsidies while also promoting economic recovery and growth.
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