Overview
This November, the United Kingdom will host the 26th UN Climate Change Conference (COP26) in Glasgow, from October 31 to November 12, 2021. As part of its preparations, the UK Parliament International Trade Committee recently launched an inquiry on COP26 and international trade. The Committee will be accepting submissions until September 7, 2021 on the series of questions that make up its call for evidence. One of those questions asks,
What discussions, if any, are planned to develop a multilateral approach to carbon pricing systems (including border adjustment mechanisms), green subsidies and investment funds, the curbing of fossil fuel subsidies, a circular economy and sustainable supply chains?
A multilateral approach on most of these issues seems very unlikely, notably border adjustment mechanisms. As discussed in a previous post, the European Union is pursuing its Carbon Border Adjustment Mechanism unilaterally. The United States and others may follow suit. This post explores the possibility of reaching a multilateral agreement on curbing fossil fuel subsidies, which could have serious implications for producers and downstream purchasers.
Phasing out fossil fuel subsidies is widely viewed as a critical step in reaching global greenhouse gas (GHG) emissions-reduction goals. Fossil fuel subsidies include both production subsidies (i.e., incentives to increase the production of fossil fuels) and consumption subsidies (i.e., measures to reduce the price of fuel products for consumers). A recent study by the Institute for Sustainable Development found that production subsidies by the G20 countries averaged $290 billion annually during 2017-2019, the majority of which was provided to the oil and gas sectors. Recent studies also show that eliminating fossil fuel subsidies would make a significant contribution to lowering GHG emissions.
On the surface, momentum on this issue has been building. In May 2021, the G7 leaders agreed to halt international financing for coal projects that emit carbon by the end of the year, and to phase out international support for fossil fuels generally, albeit without specifying a date. US Special Envoy for Climate Change John Kerry has called on G20 countries to do the same. For several reasons, however, the development of a multilateral agreement on fossil fuel subsidies at the WTO (or elsewhere) remains unlikely.
In many countries, including the United States, fossil fuel producers lobby hard and effectively for production subsidies. Removing consumer subsidies is often viewed as politically untenable as well. The political challenges to achieving fossil fuel subsidy reform are clear from the many goals that have been set, including at the UN, APEC, the OECD, the G7 and the G20, and the little progress that has resulted, aside from increased transparency. Indeed, the G20 countries have made commitments to rationalize and phase out “inefficient fossil-fuel subsidies that encourage wasteful consumption” since 2009, but according to the OECD, G20 country support levels remain unchanged in nominal terms to those of a decade ago, at USD 159.3 billion in 2020 compared to USD 161.8 billion in 2010. The United States continues to provide large subsidies to fossil fuels and like many countries, failed to include fossil fuel subsidy reform in its revised Nationally Determined Commitment under the Paris Agreement.
The Biden Administration has committed to tackle this issue and is under pressure to take further actions, but it is confronting serious pushback, as have past administrations. Political opposition weakened the reforms the Administration had promised to include in the recent infrastructure package and rising gas prices will make it more difficult for the Administration to address consumer subsidies. The Administration's tax plan does aim to eliminate fossil fuel subsidies. If successful, this would bolster the United States' ability to lead multilateral discussions on curbing international financing for fossil fuels, but this aspect of the tax plan may not prove politically feasible, even using the budget reconciliation process.
With respect to the potential for reaching a multilateral agreement under the auspices of the World Trade Organization (WTO), the WTO might seem like a promising venue for negotiations, as it already imposes disciplines on certain types of industrial and agricultural subsidies and is working toward an agreement on fisheries subsidies.
Efforts to develop a multilateral approach at the WTO have similarly failed to produce any new disciplines, however. For the past decade, the informal "Friends of Fossil Fuel Subsidy Reform" group has advocated for action to phase out fossil fuel subsidies at the WTO, as well as other international fora. In 2017, New Zealand, a member of the group, delivered a statement on fossil fuel subsidy reform that was endorsed by 12 countries, not including the United States. A follow-on statement is planned for the WTO's 12th Ministerial Conference scheduled for 30 November to 3 December 2021. The draft statement circulated by New Zealand on July 16, 2021 again calls for "the rationalization and phase out of inefficient fossil fuel subsidies that encourage wasteful consumption". The statement commits to increased information sharing and reporting and promises to further elaborate "concrete options" in advance of the WTO's 13th Ministerial Conference.
It will be very challenging to generate support for concrete actions that go beyond increased transparency, however. COVID-19 recovery packages have led to large new subsidies for many sectors, including fossil fuels, with G20 countries committing USD 46.50 to coal alone. These massive new spending programs may also result in greater reluctance to negotiate new disciplines on subsidies, both with respect to fossil fuels specifically and more generally. They may also discourage challenges to fossil fuel support programs under existing subsidies disciplines.
Despite this unpromising track record for multilateral action and continuing conflicting environmental and economic incentives, there is a possibility for substantive movement toward a multilateral approach through new avenues. One possibility is the Agreement on Climate Change, Trade and Sustainability (ACCTS) negotiations. Launched on September 25, 2019 by New Zealand, Costa Rica, Fiji, Iceland, Norway and Switzerland, the scope of the ACCTS negotiations includes "disciplines to eliminate harmful fossil fuel subsidies" among other objectives, notably removing tariffs on environmental goods, new commitments to liberalize environmental services, and the development of guidelines for ecolabelling. The ACCTS countries are open to other countries joining the agreement and hope that plurilateral action will pave the way for an eventual multilateral agreement.
Fossil fuel subsidy reform may well end up as one of the major trade-climate issues on the COP26 agenda, with support from the UK government and others. For the foreseeable future, though, despite the uptick in international rhetoric, changes to subsidies policies that would affect the operations of fossil fuel producers and their supply chains remain more likely to occur at the national level or through plurilateral initiatives, rather than through a multilateral approach.
