Financing a Fair Energy Transition through Fossil Fuel Subsidy Reform

Task Force 4. Refuelling Growth: Clean Energy and Green Transitions 1. The Challenge In 2009, G20 members committed to fossil fuel subsidy reform, stating they would “phase out and rationalise over the medium-term inefficient fossil fuel subsidies while providing targeted support for the poorest;” [1] since then, the grouping has reiterated the same commitment every year. Reflecting the G20’s global influence, similar language was adopted by almost all countries in 2015 under the Sustainable Development Goal (SDG) 12.c.1, and in the Paris Agreement under Article 2.1 to align financial flows with reducing greenhouse gas emissions. More recently, there were commitments to the “phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest,” [2] in the cover decisions from the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) 26 and 27, and commitments to reform subsidies that negatively affect biodiversity in the Convention on Biological Diversity (CBD) in 2022. [3] Government support—or “public financial flows”—for energy is important because it influences the movement of much larger private investment flows. It includes subsidies and other forms of support, like investments by state-owned enterprises (SOEs) and lending by public financial institutions. Shifting support away from fossil fuels and toward clean energy sends a strong market signal to drive investment in low-carbon technologies and markets. It can also protect public institutions from becoming ‘lenders of last resort’ for fossil assets and over-exposure to risks of asset stranding. Climate models show that the world needs drastic emissions cuts to get on-track with Paris Agreement goals and keep alive the hopes of limiting global warming to 1.5°C. [4] Urgently needed are commitments to end all new fossil fuel investments and a managed decline of fossil fuel production and consumption. Rapidly phasing out public support for fossil fuels is a critical pillar in any concrete plan to reduce global production and consumption of coal, oil, and gas.