Fossil fuel subsidy phase-out stalls as states hide behind international coordination

Ending fossil fuel subsidies is key as governments around the world continue to keep them "artificially competitive, delay clean alternatives, and create distributional tensions," according to a joint position by the 57 governments that participated in the first-ever conference to move away from fossil fuels in Colombia in April.   

The Netherlands, as co-host of the conference, highlighted fossil fuel subsidy reforms before and during the event. However, despite the country’s outspoken position on these subsidies in international forums for years, little progress has been made beyond efforts to increase transparency.

International coordination for a fossil fuel subsidy phase-out is "part of a series of climate commitments where implementation has been hard, and at this point, it's mostly about making sure that countries keep their promises," said Bronwen Tucker from Oil Change International, an advocacy and research organisation.

In terms of its own phase-out of fossil fuel subsidies, the Netherlands is primarily looking to the European Union to take the lead, with the last two governments emphasising the importance an EU level phase-out wherever possible. However, the question remains of how feasible any EU-wide reform on tax policies will be, considering it would require unanimous agreement among all 27 member states. 

"I doubt it will happen on a European level," said Jochen Flasbarth, state secretary at the German environment ministry, who has extensive experience in international climate negotiations. The EU "might be a driver in the debate, but not in setting the rules."

Focusing too strongly on international collaboration risks creating a policy deadlock, with countries failing to take national action, explained Marco Della Maggiore, from the COFFIS Observatory, a civil society organisation tracking the progress of an international coalition to phase out fossil fuel subsidies.

"Governments use international complexity and competitiveness concerns as a ‘chicken-and-egg’ dilemma to delay domestic action," he said.  

This while countries have policy tools available and "full autonomy to act to phase subsidies out and to make sure that domestic competitiveness is not badly affected," according to Della Maggiore. 

The Netherlands has tried to leave its mark on international discussions by recalculating what constitutes fossil fuel subsidies – starting with an analysis of its own.

Using a new definition, a 2023 government report showed that fossil fuel subsidies in the Netherlands were nine to ten times higher than originally stated. Then-climate minister Rob Jetten – now prime minister of the country – asked his ministry to recalculate fossil fuel subsidies after months of protests by activist group Extinction Rebellion calling for a phase-out. The subsidies were found to be between 39.7 and 46.4 billion euros, instead of the 4.5 billion euros the government had stated previously.

The Netherlands has been promoting this calculation method internationally as an important first step towards phasing out fossil fuel subsidies. It would help to create an agreement on the definition of these subsidies, ensuring subsequent transparency, it has argued.

"We believe we have some practical experience to share and one example is the phase-out of fossil fuel subsidies – a tricky issue," said Stientje van Veldhoven, current climate minister of the Netherlands in the lead-up to the first conference on moving away from fossil fuels in Colombia. "We have conducted a comprehensive analysis of all fossil fuel subsidies in the Netherlands and we have assessed their economic, social and environmental impacts." 

Besides increased transparency, the Netherlands has also driven efforts to increase international coordination.

At COP28 in Dubai, a few months after the climate ministry’s recalculation of fossil fuel subsidies, the Netherlands established COFFIS – the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies. The coalition had 11 original members, including Spain, Canada, Costa Rica and France, and has grown to 17. Both Germany and Brazil are in talks with the coalition secretariat about potentially joining this year.

However, despite increased transparency and international collaboration, the question remains how to move toward an actionable phase-out.

One key hurdle for fossil fuel subsidy reforms is that large parts of these subsidies are internationally determined, such as taxation on fuels for aviation or shipping. "That kind of hurdle can only be overcome through cooperation on a multilateral scale," said Natalie Jones senior policy adviser at the International Institute for Sustainable Development (IISD).

"While it is true that international entanglements are complex, they are frequently used as a cop-out," said Della Maggiore from the COFFIS Observatory.

Two years after joining, members of the COFFIS coalition are required to present a phase-out plan. Of the eleven original members, the Netherlands is the only country to have done this so far. The plan was labelled “unambitious” by the COFFIS Observatory, which noted that 87 percent of the country’s fossil fuel subsidies currently have no phase-out pathway assigned to them. 

Around half of the country's current subsidies not included in phase-out plans could be addressed on a national level according to the Observatory. 

"The biggest challenge in the Netherlands to phasing out fossil fuel subsidies is political will. We’ve had the overview for a few years now," said Sjoukje Oosterhout, from political party Progressive Netherlands, the country’s biggest opposition party. 

"Fossil fuel subsidies have been made clear and transparent, but it is also important to move on to step three of the COFFIS coalition’s plan and actually phase them out," she added. 

Looking ahead, one way to make the phase-out of fossil fuel subsidies more successful is for COFFIS countries to join the Fossil Fuel Treaty initiative, said Della Maggiore – an initiative for a binding, legal instrument to manage the international phase out of fossil fuels.

"Endorsing the call for such a binding treaty, and most importantly a treaty component addressing the international phase-out of fossil fuel subsidies, would show that COFFIS countries are serious about fossil fuel subsidy reform," said Della Maggiore.

Colombia is currently the only country that is both part of COFFIS and participating in the negotiations towards a Fossil Fuel Treaty. 

Governments and public institutions also invest in fossil fuel projects in other countries – something the Glasgow Statement, signed at COP26 in 2021, sought to change. Around three quarters of these subsidies have since been eliminated, bringing them down to 6.1 billion US dollars annually, Tucker from Oil Change International said. 

"Most of the signatories and crucially, really big ones have kept their promise," she told Clean Energy Wire, calling it a success story that is missing in the rest of the global fossil fuel subsidy phase-out.

Thirty-nine countries signed the statement at the time. Countries and institutions including France, the United Kingdom, and the European Investment Bank kept to the pledge. Countries like Italy and the United States have not kept their promise with the latter withdrawing in 2024, and policies in Germany and the Netherlands still contain major loopholes, said research by Oil Change International. 

The current energy crisis represents another big hurdle for meaningful fossil fuel subsidy reforms. Following record energy prices driven by the impacts of Russia’s war against Ukraine starting in 2022, gas and oil prices across the globe have skyrocketed yet again as a result of the United States and Israel attacking Iran, and the closing of the Strait of Hormuz, a bottleneck for a large proportion of global oil and gas shipments.

Many governments have adopted different fiscal policy measures in response, including incentives for fossil fuel use. “We have seen various governments that have increased their fossil fuel subsidies in recent weeks and months,” Jones from IISD said. 

In Europe, governments have so far committed to almost 12 billion euros in fiscal measures intended to cushion the impacts on energy bills. Most of these funds, amounting to 86 percent, will increase incentives to consume fossil fuels.

"The largest hurdle is high prices and the associated risk that ordinary people who feel the pinch cannot purchase fuel, get to work, or heat their homes – a very real concern," said Jones, but “there are alternative ways for governments to protect the most vulnerable.” 

Measures need to be targeted if they are to benefit the poorest rather than the richest, she explained. "When governments are putting measures in place now, they need to be really targeted, ideally to support the people, rather than the fuels.”

The IISD has found that when subsidising fuel prices in middle-income countries, the top-earning 20 percent of the population receives 11 times as much in subsidies as the lowest 20 percent.

Europe has seen targeted responses to the current energy crisis. Belgium allocated support to social energy funds for vulnerable households; Bulgaria provided income-targeted fuel subsidies for car owners; Ireland extended energy support to pensioners, carers and people with disabilities; and France introduced a long-awaited electrification plan that included an extension of the social leasing of electric vehicles to 50,000 low-income households.

However, about three quarters of Europe’s fiscal response is non-targeted. An example of non-targeted support is the German government which introduced tax cuts for petrol and diesel fuel for two months. Critics warned the support for combustion engine car users is poorly targeted and does little to reduce the country's fossil fuel dependence. 

The energy crisis also creates momentum for phasing out fossil fuels and subsequently their subsidies, said Jones. "Any crisis is also an opportunity, and this crisis is no exception," she said. "It is a turning point where governments realise that continued reliance on fossil fuels is very bad for energy security." 

Whether this means that fossil fuel subsidy reform will move from transparency to action remains to be seen. Dutch climate minister Van Veldhoven has said that she will send a letter to parliament about the Netherlands' concrete phase-out plans later this year. "Step by step, we can continue to disentangle these fossil fuels from our entire economic system," she told Clean Energy Wire at the Colombia conference.