Fuel subsidies: They have to go if COP28′s call for a transition away from fossil fuels is to gain momentum

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Holding a UN climate conference headed by an oil boss in a petrostate was never going to end with a binding breakthrough for the health of the planet, even though 2023 was the hottest year on record.

To be sure, the final text of the COP28 summit, which closed in Dubai on Wednesday, was unprecedented: it marked the first time that the future of all fossil fuels, not just coal, entered the resolution final edit. It called on countries to “contribute to … transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner.”

The agreement, signed by almost 200 countries, was broadly interpreted as the start of the end of the oil era. Perhaps, but not any time soon. The agreement was entirely voluntary, came with insignificant amounts of transition financing and handed oil and natural gas companies plenty of flexibility. Adnoc, the United Arab Emirates’ national oil company, whose CEO, Sultan Al Jaber, was president of COP28, has no plans to downgrade its strategy of making record investments in oil and natural gas production, The Guardian reported Friday.

So let’s call COP28, at best, an incremental win for our sorry, warming planet. As always, pressure will mount on the next climate jamboree to produce a breakthrough (Azerbaijan, another petrostate, is to host COP29). What might that be? There is no way the fossil-fuels industry will set its own suicide date. But there is a relatively easy win: a quick phase-down of fuel subsidies.

The subsidies, globally, are obscenely expensive and at odds with the climate summits’ very essence, which is to bring down emissions to prevent runaway global warming.

The International Monetary Fund’s latest biennial update on fossil-fuel subsidies reported that direct, or “explicit,” subsidies in 2022 came to US$1.3-trillion, more than double the US$500-million in handouts in 2020. The sharp rise in oil, gas and coal prices after Russia’s invasion of Ukraine in February, 2022, explains the generosity of governments. The subsidies should come down this year and next, since energy prices have retreated a bit, but maybe not by much.

But the “implicit” costs of the subsidies – undercharging for environmental damage and forgone consumption taxes – in effect raised the total price of those subsidies to US$7-trillion, the IMF calculated, equivalent to an astounding 7 per cent of global GDP.

Almost every country – rich, poor and in the middle – subsidizes fossil-fuel consumption in some way, and it is wrong on so many levels. The subsidies are a cost to taxpayers; they boost oil, gas and coal consumption through artificially low prices; they increase the output of greenhouse gases and boost potentially fatal air-pollution levels; and their expense diverts funds that could pay for clean-energy infrastructure and production.

For the sake of the planet and government budgets, they should come down, of course, and ultimately disappear. But how? The answer is not easy. Fuel subsidies are part of the social contract in many countries, especially low-income ones. They buy votes, and their absence could trigger social unrest or worse.

Even financially stressed countries can’t seem to muster the courage to yank them. Heavily indebted Egypt, for instance, spends US$2-billion to US$3-billion a year on diesel subsidies alone. They are coming down, but slowly, as if President Abdel Fattah el-Sisi doesn’t want anyone to notice. In France in 2018, President Emmanuel Macron killed off a fuel-tax increase after gilets jaunes protesters filled the streets, crippling Paris on some days.

There are signs that all is not lost. In mid-2023, Nigeria ended fuel subsidies that had been in place for almost 50 years. There was no revolt, though mass strikes were threatened. The government defused the potential unrest partly by promising to invest the savings in transportation, education, health care and electrical infrastructure. Nigeria’s experience shows that governments can wean their economies off fuel subsidies if there is an offset to ease the pain.

COP28 did not outright ignore subsidies. About a dozen countries, including Canada, Denmark and Ireland, signed a letter calling for the “urgency of phasing out fossil fuel subsidies given the current climate crisis.” In COP28′s final text, which ran for 21 pages, fuel “subsidies” were mentioned just once, as if they were a footnote. There is no binding agreement to end them. There should be, and it must be done in ways that are just and fair. Over to COP29 for this effort.