Public financial flows for fossil fuels are a major barrier to the transition to sustainable societies. These flows lock in overconsumption and -production of fossil fuels. They come in various forms, including subsidies, investments by state-owned enterprises (SOEs), and other forms of public finance (which can be international or domestic).
Yet international commitments to address these financial flows have had varying degrees of impact. While the 2021 Glasgow Statement, now institutionalised through the Clean Energy Transition Partnership (CETP), has helped to limit international finance for fossil fuels, commitments to phase out domestic fossil fuel subsidies, from the 2009 G20 commitment to the SDGs and the 2021 Glasgow Climate Pact, have had no discernible effect. In fact, in 2022 global fossil fuel subsidies doubled to at least $1.5 trillion. Progress towards the Paris Agreement’s broader goal to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” is also limited.
Against this background, experts from Lund University, Cambridge University and the International Institute for Sustainable Development organised a workshop on “Strengthening International Commitments to Shift Public Financial Flows Away from Fossil Fuels” in Paris ahead of COP28.[i] The event brought together experts from a range of backgrounds, including international organisations such as IMF, OECD, UNDP and UNEP, civil society organisations such as Oil Change International and Business for Nature, researchers, and national government representatives. They engaged in open discussions about the obstacles limiting the effect of international commitments to reduce public financial flows for fossil fuels, and how to overcome these obstacles.
Three sets of insights from the workshop deserve to be highlighted.
Why reforming public financial flows for fossil fuels is difficult
Public financial flows for fossil fuels are difficult to reform due to the fear of public backlash, often tied closely to equity issues and incumbent interests. While public financial flows for fossil fuels generally are regressive, phasing them out may hit poor household hard unless effective compensation is in place. Moreover, incumbent interests may utilise dissatisfaction with reform to mobilise people against reform. In countries with low administrative capacity it may be more difficult to provide equitable compensation.
The shortcomings of international commitments
International commitments suffer from important shortcomings. First, most commitments lack deadlines. The G7 has a deadline for phasing out fossil fuel subsidies (2025) and the Glasgow Statement contains one for international public financial flows for fossil fuels (2022). However, no other commitments have deadlines. Such deadlines can have a substantial impact on a country even if it does manage to meet it fully: (1) because the efforts to meet it may mean that subsidies are lower than they otherwise would have been; and (2) not meeting the deadline will further increase the pressure to phase out subsidies. Second, many commitments lack precision. This is most evident especially in the qualifier that only “inefficient” subsidies should be reformed, leaving it up to the country to define which subsidies that are inefficient and which ones are efficient. Third, the commitments are limited in scope in that they do not cover finance provided through SOEs such as national oil companies. Lastly, the commitments lack mechanisms to support an equitable phase-out of public finance for fossil fuels. Phasing out such financial flows should be done in an equitable way because it is normatively right and because it limits the risk of pushback and subsequent policy reversal. Yet, many lower-income countries lack the finances and capacity to implement such a phase-out, which makes them less inclined to commit.
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- What to do about this
These obstacles can be addressed by strengthening international commitments. Measures for doing so that emerged from the workshop are:
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- Broaden the scope of the commitments to include all public financial flows, including both domestic and international public finance and investment made by SOEs.
- Add deadlines for the phase-out of public financial flows for fossil fuels.
- Remove qualifiers such as “inefficient” and “wasteful consumption”.
- Require governments to develop roadmaps for such a phase-out.
- Acknowledge – especially in the assessment of the roadmaps mentioned above – that “one size does not fit all” when it comes to phasing out such financial flows: pathways to phase out that work in one kind of country may not work in others. For instance, it may be crucial to roll out alternative fuels in advance of reform in some countries (something which takes time), whereas stakeholder dialogue (that takes less time) may be important in others.
- Provide support for capacity-building or renewable energy to advance the phase-out in countries with limited administrative capacity and a limited share of renewable energy in their energy supply.
- Utilise the success of the CETP to institutionalise it further – e.g., by recognising it in a UNFCCC COP decision and/or integrating it in the dialogue on Article 2.1(c) of the Paris Agreement – and in this way induce more countries to join.
- Revise the CETP so as to also include domestic public financial flows, and in this way encourage the countries that have phased out their international public financial flows under the CETP to do the same with their domestic finance.
- Broaden the scope of the commitments to include all public financial flows, including both domestic and international public finance and investment made by SOEs.
Conclusions
The struggle to phase out public financial flows for fossil fuels has been going on at least since the G20 committed fossil fuel subsidy phase-out in 2009, however without resulting in meaningful implementation. If the recommended changes would be reflected in international commitments, this would substantially strengthen the scope of these commitments and increase accountability that they are more likely to achieve their intended results.
[i] With funding from the Swedish Energy Agency.
About the authors:
Jakob Skovgaard is an associate professor of political science at Lund University, Sweden. His research focuses on national, EU, and international climate politics, and he holds a doctorate from the European University Institute in Florence. From 2007 to 2010 he worked in the international climate change team of the Danish Finance Ministry. His research interests include the interplay between economic and environmental objectives and actors, notably in the case of fossil fuel subsidies.
Harro van Asselt is the Hatton Professor of Climate Law with the Department of Land Economy, and a Fellow with Hughes Hall, University of Cambridge. He is also Professor of Climate Law and Policy with the University of Eastern Finland (UEF) Law School, Visiting Research Fellow with the Copernicus Institute of Sustainable Development at Utrecht University, and Affiliated Researcher with the Stockholm Environment Institute.
Jonas Kuehl is a Policy Analyst in the Energy program of the International Institute for Sustainable Development (IISD). With a background in Political Science and Sustainable Development, his work focuses on promoting fossil fuel subsidy reform and just transition strategies internationally as key elements of the transition away from fossil fuels, building on research, diplomacy and advocacy efforts.
