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As the annual ritual known as “COP” — the UN climate conference — gets under way in Dubai, expect a hullabaloo.
Green activists will be yelling about the grotesque parody of having a huge fossil fuel producer, the United Arab Emirates, as COP host: Sultan al-Jaber, COP president, also runs Adnoc, the state-owned oil group. Meanwhile the UAE government will be touting its investment in renewable energy — it has spent around $200bn in international energy investments in the last year, mostly green tech.
There will also be noise around UN initiatives to curb methane leakage, reduce coal use and provide poor countries with (a bit) more money for green energy. Efforts are even under way to finally deliver that long-promised pot of $100bn aid for climate transition.
But amid all this shouting, there is one issue on which there is a near-silence: the subsidies that governments currently provide for fossil fuels, for example by offering petrol or coal to consumers and companies at artificially cheap prices. And this is not just odd, but increasingly absurd. Consider it the polluting elephant in the COP28 room.
To understand why, consider some research conducted this year by the IMF into the energy subsidies in 170 countries. This exercise starts by acknowledging that this is fiendishly difficult to calculate since “the vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel”. Moreover, the implicit costs of the carbon price can only be calculated against an implied baseline about the underlying climate trajectory — and assumptions about that vary wildly.
However, the IMF number crunchers reckon that explicit government subsidies for fossil fuels in those 170 countries reached $1.3tn in 2022, double the level of two years before. This was partly because many governments tried to shield their citizens from rising energy costs after Russia invaded Ukraine. “Differences between efficient prices and retail fuel prices are large and pervasive,” it says, noting that “80 per cent of global coal consumption was priced at below half of its efficient level in 2022.” Yikes.
The IMF also reckons that the future damage caused by emissions that consumers do not pay for — ie implicit subsidies — reached $5tn in 2022, using a baseline that assumes the world observes the Paris climate goals. Thus total subsidies were around $7tn, or 7.1 per cent of global gross domestic product, a record high.
However, a group of scientists suggested last year in Nature that the real “socio-economic” cost of fossil fuels is even higher, since the world is not hitting those Paris goals. (They put the “real” carbon price at $185 a tonne, more than three times US government models.)
If that is correct, those implicit subsidies are probably nearer $10tn, the IMF notes. Either way, the key point is that there are trillions of dollars of incentives behind fossil fuel consumption. That makes the fight about a $100bn aid pot seem almost irrelevant. It even dwarfs America’s $369bn Inflation Reduction Act, with all its subsidies for clean energy.
What should be done? The blindingly obvious answer is for governments to reduce fossil fuel subsidies and make renewable energy cheaper instead. That could be done directly through fiscal policy, or more subtly by creating greater clarity around carbon prices in public discourse.
Either way this topic of subsidies “needs discussion,” as Ajay Banga, head of the World Bank recently noted with masterful understatement. Or to cite the IMF research again: “Full fossil fuel price reform would reduce global carbon dioxide emissions to an estimated 43 per cent below baseline levels in 2030 . . . while raising revenues worth 3.6 per cent of global GDP and preventing 1.6mn local air pollution deaths per year.”
The problem, as Banga admitted, is that “some of those subsidies [are] mission-critical to the social contract with the government and its citizens”. In plain English: governments fear a citizen revolt if energy prices rise. It is easy to see why. France was rocked by gilets jaunes riots a few years ago, when its government attempted modest changes to its subsidies regime.
But change is possible — just look at Nigeria. It used to be assumed that it would be political suicide for any Nigerian government to cut fossil fuel subsidies, given its role as an oil producer. But when Bola Tinubu became president this May, he announced precisely that.
Economists duly warned that inflation and poverty would surge, and Nigeria’s National Labour Union threatened mass strikes. But the union then backed down and the policy has so far been implemented without a revolt. Meanwhile, renewable energy usage is now rising fast in the country, Nigel Topping, UN climate envoy, told me this week — partly because solar energy is becoming cheaper.
This should be thought-provoking for other poor nations, particularly those facing fiscal squeeze. It should inspire rich ones too. So if Jaber wants to stymie his critics at COP, he and other global leaders must start shouting loudly about the absurdity of those subsidies. Otherwise, any upcoming COP rhetoric will still sound dangerously hollow. And nobody can afford that.