OECD analysis of budgetary transfers, tax breaks and spending programmes linked to the production and use of coal, oil, gas and other petroleum products in 50 OECD, G20 and European Union (EU) Eastern Partnership (EaP) economies shows that total fossil fuel support rose by 5% year-on-year to USD 178 billion in 2019, ending a five-year downward trend. The analysis builds on the OECD 2020 Inventory of support measures for fossil fuels, which documents over 1,300 government measures providing preferential benefit to the production and consumption of fossil fuels.
The increase in support was driven by a 30% rise in direct and indirect support for the production of fossil fuels, primarily in OECD countries. In 2019, oil and gas industries in several countries received additional support, mostly through direct budgetary transfers to alleviate corporate debt and underpin fossil-fuel infrastructure investments, and tax provisions providing preferential treatment for capital expenditures for fossil-fuel production. This trend is set to have continued in 2020, with many countries targeting state aid to shore up fossil fuels and related industries in the wake of record low fuel prices arising from the disruptions caused by the COVID-19 pandemic – despite the major opportunity to prioritise sustainable investments and broader well-being objectives as part of stimulus measures for economies battered by the COVID-19 crisis.
Support for the consumption of fossil fuels hovered at between USD 125-131 billion annually from 2017-19, despite fluctuations in average fuel prices, especially oil, and that crude oil and petroleum products continue to attract the bulk of government support both in OECD and partner economies (75%). This reflects that the set of countries included in the OECD Inventory, taken as a whole, tend to provide support to fossil-fuel consumers in ways other than the under-pricing of fuels, blunting the impact of international oil price fluctuations on Inventory estimates. The picture changes considerably based on combined OECD-International Energy Agency (IEA) data, because IEA data focuses on government interventions that keep end-user process artificially low, closely tying estimates to global oil price fluctuations. The OECD-IEA combined estimates of government support for fossil fuels across 81 economies fell by 18% year-on-year in 2019, to USD 475 billion, principally due to the mechanical effect of the drop in average fuel prices on consumption subsidies. Support for consumption represented 89% of the overall figure. The historic plunge in fossil fuel prices provoked by the COVID-19 crisis will enhance 2019 consumer subsidy reductions across countries that intervene to keep end-user prices artificially low, but has not yet translated into widespread, additional momentum for pricing reform.
By inducing increased greenhouse gas and air pollutant emissions, such policies go against domestic efforts to curb climate change and improve air quality. They maintain economies locked up in energy- and pollution-intensive technologies; they jeopardise efforts to modernise economies and strengthen the competitiveness of clean, low-carbon sectors; and they may be socially inequitable. By encouraging combustion of fossil fuels, such government support contributes to exposing people to air pollution, which can exacerbate vulnerability to pandemics like the COVID-19.
The OECD has been supporting international efforts to reform fossil-fuel subsidies and other forms of support for almost a decade, through analysis on the nature and scale of government budgetary transfers and tax expenditures in support of fossil fuel production and consumption as documented in the OECD Inventory of support measures for fossil fuels, and how governments might expedite reform. The Inventory now includes sectoral breakdown of support measures, across production and supply, energy transformation, and final consumption in transport, residential, and industry end-use sectors. The OECD Companion to the Inventory, produced every 2-3 years, provides an overview of trends arising from Inventory data.
In addition to collaborating with the IEA to produce the combined OECD-IEA estimates of government support for fossil fuels, the OECD chairs the G20’s voluntary peer reviews of inefficient fossil fuel subsidies and produces a regular update report to the G20 on progress against its 2009 commitment to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.”