One of the key objectives of the Paris Agreement is to align financial flows with pathways that lead to low greenhouse gas (GHG) emissions. To achieve this, countries must not only mobilize additional ‘positive’ financial flows for climate actions but also reduce ‘negative’ forms of finance. Fossil fuel subsidies (FFSs) are a prime example of such negative financial flows, as they encourage environmentally damaging economic activities. In this regard, rationalizing FFSs (Sustainable Development Goal target 12.c) is broadly considered as a policy priority in response to climate change. Withdrawing FFSs also creates fiscal space, which can be used to reinvest in green initiatives or support vulnerable population impacted by the subsidy removal.
But removing FFSs has proven challenging due to political economy factors. Although the Asia-Pacific region accounts for more than half of global spending on FFSs, only 9 countries (most of which have relatively small carbon footprints) have addressed FFSs in their Nationally Determined Contributions (IISD, 2023). Among other reasons that make removing FFSs challenging, higher energy prices, with spillover impacts on prices of other goods and services, often trigger opposition from the public. This is exacerbated by other challenges in the region, such as the carbon lock-in provided to fossil fuels related activities through COVID-19 recovery packages, which delays the transition towards low-carbon development (ESCAP and GFPN, 2023).
Nonetheless, several Asia-Pacific countries have delivered some successful reforms. For example, Indonesia has completed three rounds of reforms since 1997 (Chelminski, 2018), with the 2014 reform having saved 10.6 percent in public expenditures (IISD, 2016). The Government utilized this fiscal space to implement social assistance programmes and make sustainable development investments. An effective communications campaign further mobilized broad political support for these reforms. Similarly, countries such as Bangladesh and Sri Lanka have begun to phase out FFSs while strengthening their social security nets, while India used the freed-up fiscal space to triple public investments in renewable energy.
A regional approach to removing FFSs is essential. This is because the progress made in one country can often be offset by carbon leakages exacerbated in its neighbouring countries (CFMCA, 2024). As a result, regional initiatives such as the Asia-Pacific Economic Cooperation (APEC) have aimed at promoting more efficient FFS reforms by establishing a peer-review mechanism along with promoting voluntary standstill commitments (IISD, 2022).
About the author
Minhyuk Hong
Associate Expert at the United Nations Environment Program, Economic and Trade Policy Unit
