Ten times more is spent by governments on fossil fuel subsidies than is being realised through carbon pricing policies. Jonathan Shopley speaks to Shelagh Whitley, Head of Programme – Climate and Energy at the Overseas Development Institute (ODI), about her recent research that shines a light on government policies which hinder corporate climate action.

In this Climate Leadership series, we ask experts and influencers in business climate action to share their insight into best practice, discuss current and future trends, and debate the most impactful solutions. 

Founded in London in 1960, the ODI is an independent think tank on international development and humanitarian issues. Find out more about Shelagh at the bottom of this article.

 

Jonathan Shopley (JS): Can you tell us what your most recent research is telling us about the current state of fossil fuel subsidies?

Shelagh Whitley (SW): The G20 pledged in 2009 to end fossil fuel subsidies with no set deadline, while G7 has a 2025 deadline and the EU has committed to end harmful subsidies by 2020. My work at ODI is a multi-year programme alongside a number of partner organisations to assess whether the countries in these groups are on track to meet their targets. For example, we recently produced a G7 Scorecard.

The aim is to start conversations, and we’re also trying to get to a point where ODI and other think tanks and NGOs do not have to do this anymore because it will be prioritised by energy ministers as they are increasingly held to account by the facts. The EU has a head start on this because it is now developing a system for reporting and accountability. EU member states have committed to ending fossil fuel subsidies and are setting out how they’re going to do it in their national energy and climate plans. We’re supporting work on a reporting template that would allow EU governments and institutions to track where subsidies are and how they are being phased out.

 JS: Having previously worked in carbon markets – a space we are very familiar with here at Natural Capital Partners - can I ask what led you to work at the ODI?

SW: I was brought into the ODI to work on private climate finance and began focussing on the role of fossil fuel subsidies after reading a piece that you may have read in the Rolling Stone. It’s quite old now, but it was called Global Warming’s Terrifying New Math by Bill McKibben. It was focused on oil and gas companies and the fact that their business models will lead to climate chaos. That article essentially kicked off the divestment movement, and it led me to wonder: what are governments doing?

I have found that the revenue brought in by carbon pricing is minute in comparison to fossil fuel subsidies. Carbon pricing brought in around $38 billion last year globally, whereas the most conservative estimate of fossil fuel subsidies is $300 billion according to OECD figures. I wanted to focus on this larger figure, as that’s where we need to see the greatest change.

JS: What have you’ve found so far?

SW: We found that within the G7 group of countries France is leading in almost all areas across the seven indicators we looked at, with the exception of support to oil and gas production. Yet even France, with the highest score at 63/100, has a long way to go. However, there’s a real opportunity for governments to learn from each other. The G7 energy ministers must move forward at pace to meet their 2025 subsidy phase-out deadline, by linking to EU processes and through leadership within the G20. All that’s in the report recommendations.

JS: What are your thoughts on the impact of this information on countries’ Nationally Determined Contributions (NDCs) under The Paris Agreement?

SW: Around 20 countries have talked about ending subsidies as part of their NDCs, including EU member states. Article 2.1c of the Paris Agreement discusses the need for governments to ensure financial flows are consistent with low carbon, resilient, development. It’s written in high-level language, so we need to consider what this means on the ground. We’re going to release a report at the UNFCCC COP24 meeting in Poland in December about the parts of the Paris Agreement architecture that support consistency in reporting financial flows. Climate finance is obviously a financial flow, but it can be used in a way that is focused on unlocking much broader flows though policy change.

JS: When you listen to politicians talk about climate policy, conversation is framed as a balancing act across emission reductions, jobs, health, economic growth and other political priorities. How do you feel your work interacts with this aspect of realpolitik?

SW: Firstly, energy systems have never existed without government support, ever, anywhere. Seventy percent of fossil fuel based energy production – oil and gas, coal production and fossil fuel generated power - is state-owned[1]. Our fossil fuel based energy system still requires huge amounts of government support, and the transition to new clean energy systems is going to need huge amounts of government support. There isn’t a clear answer for what proportion of that support should be the responsibility of energy companies versus the government and tax payers, and for how long that support should remain in place. So, it’s critically important that more research is done on the role of fiscal instruments in the transition, and fossil fuel subsidies are an important angle to look at - $300 billion is significant. 

Secondly, subsidies use fiscal space, so when a government is using subsidies to support fossil fuels and fossil fuel companies, it’s not using that money to support other things like health, education or security or whatever the national priorities are. As noted by the International Energy Agency, the effect of most subsidies is to encourage consumers to waste energy, putting added pressure on energy systems and the environment, and often straining government budgets. As such, subsidies are a roadblock on the way to a cleaner and more efficient energy future.

Both the public and private sectors are going to divest from fossil fuels. We are doing more research on the so-called “just transition” and part of our objective is to ensure there is a balanced role for both governments and the private sector.

JS: What’s the role of schemes like the EU Emission Trading Scheme (ETS)?

SW: The ETS is a powerful instrument, which came about through government intervention. The tools governments have at their fingertips can be broken down into three different categories: information instruments, economic instruments (like subsidies including tax breaks, budget spending, public finance, budgets allocated to state-owned enterprises) and regulatory instruments and frameworks (like the ETS). Governments have all three of those tools but the power play is different. I’d argue that information instruments are important but are the weakest, economic instruments are more powerful, but regulation and legal instruments are the most powerful and have the biggest ability to shape financial flows, despite being the hardest to put into place. The end goal is a legal framework on climate change.

JS: Would you be a proponent of shifting subsidies away from fossil fuels to renewables?

SW: No, I do not believe in hypothecation. If you want this to be politically feasible, you should be redirecting those resources to the things that the people in that country care about and need – part of that could be clean infrastructure. We need to do research that enables divestment to happen in the least disruptive way.

The Local Government in Ontario put the revenue from its carbon pricing initiative into clean energy. Recent changes to political leadership will result in the demise of Ontario’s carbon price. So, we’ve now lost that fund for clean energy. In contrast, in Vancouver the carbon price revenues are redirected into the wider government budget, so it means they don’t lose two things with one policy change, and they’re doing it in a way that’s much more politically palatable to voters. It’s the same thing with subsidies.

JS: Our clients, many of whom have committed to reducing their emissions to net zero, are curious as to how these policies are going to play out and how the energy transition is going to be funded. Some of our larger global clients are quite exposed to national policies around the world. Should they be worried about slow government action on fossil subsidies?

SW: We work with investor groups who are calling for these subsidies to end, because they see them as negative carbon prices that will delay the transition. If you look at our recent investor statement, you can unpick the overview of the relevant industry sector. How the wind-down of these fossil subsidies impacts the private sector and how company operations intersect with fossil fuels policies, is not yet well understood. It will be an area of future research.

JS: What are the next steps for your research?

SW: We’re about to start a study on the net effect of fossil fuel subsidies and carbon prices or taxes that are in place in G7 countries. We’re going to develop a methodology using the data that we just published to look how these instruments are complementary or cancel each other out at a sector level.

Governments have huge numbers of tools to redirect financial flows. So, we also need to do more research on how to make that happen at different levels and look at the different fiscal challenges for each government. We’re going to look at what happens in the UNFCCC frameworks but also the institutions and groups around the edge of that, such as the bilateral, regional, and multilateral development banks, and key groups of investors. We want to understand what Paris means for them and how they can become more engaged to support the objectives of the UNFCCC – because if not, then the Paris Agreement is just words.

JS: I’d categorise ODI as part of the “radical transparency” movement. Are you campaigning around this or is your role to make the research available to other change agents?

SW: This work has three pillars: research and analysis; insider (closed meetings, workshops, roundtables) and outsider (public facing events, discussions, webinars, networking) engagement; and communications and campaigning. As a research institute, ODI is mostly focused on the first pillar, and we partner with others to achieve the second and third.

I believe transparency can be the first step in leading relevant parties being held accountable for their actions, and can ultimately lead to change. Our research will help ensure that the actions of private sector organisations committed to 100% renewable energy and carbon neutrality are supported by consistent policy signals from government.

 

About Shelagh Whitley

Shelagh Whitley is Head of the Climate and Energy Programme at ODI. Shelagh leads ODI’s research on fossil fuel subsidies, green fiscal policy and private climate finance.

Previously, Shelagh worked at Camco, a carbon project developer, on the origination, execution and financing of carbon projects covering a range of low carbon technologies in Asia, Africa, and North and South America. Shelagh was the Chair of the Carbon Markets and Investors Association (CMIA) Voluntary Market stream, and Vice-Chair of the Technical Advisory Committee of the Gold Standard (for carbon credits). Prior to that, Shelagh was a Project Manager with The Climate Group, a non-profit organisation dedicated to advancing business and government leadership on climate change. Shelagh has a Master’s Degree in International Environmental Policy and Finance from the Fletcher School at Tufts University in the United States, and a Combined Honours BSc in Biology and International Development Studies from Dalhousie University in Canada.

 

[1] See second key finding of The IEA's World Energy Investment report 2018, available here: https://www.iea.org/wei2018/