Friends with benefits: Fossil fuel subsidies debate at Warsaw climate talks

A feature of any international negotiation process, and the latest round of international climate talks in Warsaw is no exception, is the entirely predictable – but almost always interesting – tendency for domestic policies and politics to inconveniently crop up at the precise moment that ministers

tim groser climate change talks warsawThe case for limiting fossil fuel subsidies is compelling; most economists and politicians concede that on the whole, they are Not A Great Thing, distorting markets and draining public resources.

A feature of any international negotiation process, and the latest round of international climate talks in Warsaw is no exception, is the entirely predictable – but almost always interesting – tendency for domestic policies and politics to inconveniently crop up at the precise moment that Ministers and diplomats are attempting to nobly position themselves on issues of global significance.

Sometimes where especially contentious domestic policies are being implemented, the heat is expected to be just too much. National political representatives simply don’t turn up to international negotiations to face the scorn of their convention counterparts. But more often than not, negotiators and Ministers doggedly press on, expecting (not unreasonably perhaps) that party and public criticism will go unnoticed, or pass quickly, and will in any event not overly impede them from sailing their charted course.

Along these lines, an intriguing interchange on aspects of New Zealand’s domestic energy policy took place at a session in Warsaw on Tuesday evening.  It was a side-event to the official talks fronted, amongst others, by Trade and Climate Change Minister Tim Groser, and former Minister for the Environment, now head of the OECD Environment Directorate, Simon Upton. The event was co-hosted by the ‘Friends of Fossil Fuel Subsidy Reform’ and the Geneva-based NGO, Global Subsidies Initiative to raise awareness for fossil fuel subsidy reform.  This is an issue that Minister Groser has pursued in the international arena with enthusiasm (and some success) for over three years, including as de facto head of the ‘Friends’, a group of eight non-G20 countries who have all confirmed their support and interest in advancing fossil fuel reform efforts around the world.

The case for limiting fossil fuel subsidy policies is compelling. Estimates vary according to definitions and methodologies, but a commonly cited figure published recently by the IEA has the global sum of fossil fuel subsidies at $544 billion in 2012.  To put this in context, it has been reported that domestic subsidies in developed countries outstrip international climate finance provided to help address climate change in developing countries by a ratio of 7:1.

Almost all economists, and most politicians, if pressed, will concede that although well-designed and targeted subsidies can play a useful role in supporting some aspects of public policy, on the whole, subsidies are Not a Great Thing. They distort markets and create a drain on public resources. From a resource use and environmental perspective, subsidies create excess demand for products which, in turn, causes a range of negative environmental impacts. The role of subsidies in contributing to the current collapse of fish stocks is well documented. In the climate change area, fossil fuel subsidies lead to excess demand and use of fuels, which result in greenhouse gas emissions. They ‘tilt the playing field’ against emerging renewable energy technology, making it more difficult to transition to cleaner energy sources.

Fossil fuel subsidies are typically divided into two categories.  The first – ‘consumption subsidies’ – describes forms of government support that make fuels cheaper for consumers.  The IEA observes that countries that export fossil fuels see fuel subsidies as a way to "share out" the benefits of energy exports among their population. It is often argued (often not convincingly) that subsidising fossil fuels is to help lift poorer members of society out of energy poverty. 

The second category is ‘production subsidies’. These are various forms of government support for the fossil fuel industry: often hidden within layers of complex tax, favourable royalty, insurance or other indirect means of support.  Like consumption subsidies, they distort the market, by making it easier for firms to enter and operate within the fossil fuel exploration, production and processing sector, implicitly gaining a competitive advantage over non- or less-subsidised industries, such as renewables.

There are very strong arguments for why fossil fuel subsidies should be curbed, and ultimately eliminated.  The ‘Friends’ group has played an important role in raising the profile of the issue. Along with his panel colleagues Minister Groser presented a typically energetic and engaging précis of the case for the affirmative.

So far so good. Then came a question from a young woman from Norway, Live Kvelland, a member of environmental NGO ChangeMakers. In imperfect English, she asked, a little hesitantly:

In Norway we have.. [energy production support systems] such as R&D, discount rates and exploration support. I’m wondering if you also have this in New Zealand? And if you do consider them to be subsidies, do you want to phase out the subsidies as well, now that you are doing this good job with consumption subsidies?

The question was neither naïve, nor irrelevant. Earlier this year, WWF published a report on fossil fuel subsidies in New Zealand, estimating that New Zealand government support for the oil and gas industry was worth around $46m in 2013.  In international terms, that figure is low. But it contributes to a much larger chunk of funds spent globally on production subsidies for fossil fuels.  (An OECD inventory complied in 2013 identified over 550 measures that support fossil-fuel production or use in its 34 member countries, with an overall value of around US $55-90 billion a year between 2005 and 2011.)

There is also the small matter of a proposed government bailout of the troubled state-owned coal mining company Solid Energy - difficult to describe in terms other than Large Government Subsidy.  So there were fair questions to ask, and a fair expectation of a response.   

Kvelland’s query elicited the following response from Minister Groser. He didn’t answer the question. Instead, he said:

… Don’t get hung up about every single little thing that you might say was a subsidy in one form or another. Just tackle the big issues that are spending between 6 and 700 billion dollars a year. It’s a question of going for the money, and not getting carried away with trying to have a completely purist approach … I would strongly encourage those of you who are interested in this policy area not to go down the path of trying to get too pure on what is a subsidy and get the last bit of economic rationality into this. The problem is huge. Let’s just get going and look at the obvious issues. It will be for the next generation to take the step further.

Earlier in the presentation (perhaps anticipating a question along the lines of Kvelland’s, the Minister had said:

This [Friends initiative] is not an attack on the whole system and use of fossil fuels, and quite deliberately so. That is decades away: the complete removal of fossil fuel from the fuel and energy system. What this is, is the process of an attack, a concerted attack, on inefficient subsidies. I know that sometimes political commentators, political players, in this field find it very difficult to get their head around those qualifiers. But it’s very important, because, that’s already beyond what the traffic will bear. Extend this further, into a wholesale attack on the use of any fossil fuel, and I’m sorry, this will be a rhetorical exercise only.

The young Norwegian delegate’s question, and Minister Groser’s response, provoked a cascade of further questions and comments. Another Norwegian delegate, referring to a long-standing Norwegian policy of allowing oil exploration subsidies, asked the Minister how he would regard them in terms of the Minister’s preferred "traffic light" categorisation (red – damaging, not OK; green - not damaging, OK; orange - not clear). 

The Minister said

Intuitively I would put [the Norwegian oil production subsidies] into the green or the orange, but not the red.  Because the real damage is being done, frankly, by consumption subsidies. I'd have no question in saying where the real target is at this point.

It’s worth reflecting for a minute or two on these responses.  Perhaps there are some subtleties to the Minister’s views. But if there were, they were not articulated. In the space of few short statements, the Minister swept off the table up to $90 billion of fossil fuel subsidies. Production subsidies are either non-issues, or not worth devoting any significant attention to (at this stage at least) in the grander aim of eliminating consumer subsidies in countries such as Malaysia, Indonesia, India, Saudi Arabia or other similar countries.

It will escape few that the particular subsidies in place in New Zealand are, on the whole, production subsidies. A similar situation exists in many other developed countries.  New Zealand, and potentially other members of the Friends group, has narrowed the scope of its attention to one category of subsidies - admittedly the largest - that tend to be administered by developing countries. Tackling fossil fuel production subsidies is a job for the next generation.   

Unsurprisingly, other views were voiced. Steve Kretzmann, a respected US commentator on energy subsidies, responded in this way:

Without a doubt, we have to think about putting production subsidies, and particularly, subsidies for new exploration, in the red category. And that’s because we have IEA, and IPCC telling us we need to leave roughly two thirds of the existing fossil fuels in the ground if we’re going to meet our goals of staying under 2º of climate change. Why, in God’s name, are we spending millions more incentivising companies to find more of something that we can’t burn. It makes absolutely no sense.

Speaking with Kretzmann after the event, he added:

There’s also an equity issue, which I find, frankly, offensive, where…people..want to focus on consumption subsidies in the developing world and not on their own subsidies, putting aside what the historical subsidies for the oil industry and the rest of fossil fuel industry in the developed have been, which actually stretch back much farther than many of the consumption subsidies…

It was telling that Simon Upton distanced himself and the OECD from Minister’s Groser’s approach:

I’m not sure that I'd agree with [the Minister] that you just say, well “consumption is the thing” and we won’t worry about production… And we know that the United States has actively tried to get rid of some production subsidies. They’re not trivial. They’re in the billions.  But the [US] government decided that it wanted to go for that. It had labelled them itself, which was at least in the amber box. So in the first instance it is actually getting the stuff out there, and then you can argue over the priority with which you attack it.

Upton’s approach – and that of the OECD - has the advantages of logic, consistency and pragmatism. Not all fossil fuel subsidies, whether production or consumption, are born equal. Nor should their continuance or demise necessarily be equal.

A case might be made for some New Zealand, Norwegian, and other developed country production subsidies. Most are likely to be found wanting.

But to discard the possibility of putting a global total of up to $90 billion annually of production subsidies under the microscope represents a deeply myopic view unbecoming of the Friends initiative, which in all other respects deserves applause and support from the international community.