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Why Are Taxpayers Propping Up the Fossil Fuel Industry?

Why Are Taxpayers Propping Up the Fossil Fuel Industry?

Worldwide, government subsidies for oil and gas are at a record high. Global financial institutions have been trying for years to get them phased out.

Here’s a huge climate challenge that you don’t hear much about: Around the world, taxpayers are helping to support fossil fuels through subsidies when their money could be funding green energy transitions instead.

That’s a huge problem for efforts to slow down climate change, and it’ll be on many minds this week when global financial leaders gather for talks in Washington.

Subsidies make the fossil fuels heating the planet more affordable. That, in turn, induces people to use them. The International Monetary Fund, which, with the World Bank, is holding annual meetings starting today, has long pressured countries to ditch these subsidies.

Initially, the idea was that they’re an inefficient way to help the poor. That’s because richer people use more fuel and benefit, too. But the urgency of the problem has grown in recent years as the fund has started focusing more on the climate crisis.

Yet, after years of efforts, taxpayers around the world are still inadvertently helping to prop up the fossil fuel industry. Let’s unpack why it’s so hard for the world to quit fossil fuel subsidies.

The problem is huge

Last year, countries spent $1 trillion subsidizing fossil fuels for consumers, according to the International Energy Agency. That was double what they spent the year before.

The spike has a lot to do with the Russian invasion of Ukraine, which drove up fuel prices around the world. Governments tried to ease the pain for their citizens by adding more subsidies.

But that $1 trillion doesn’t tell the whole story. When I.M.F. researchers counted the indirect costs of fossil fuel subsidies in a study published in 2021, the bill went up to $5.9 trillion.

That includes losses sustained from weather disasters linked to warming and the diseases caused by dirty air. Most countries don’t factor in any of that when they assess the cost of subsidies.

Why change is hard

Subsidies reduce consumer prices, which means phasing them out can cause social unrest.

And it often does.

In Suriname a couple of months ago, protesters invaded Congress to protest cuts to subsidies. Riots and looting followed a similar move in Haiti last year. In 2019, activists in Ecuador led a protest that paralyzed the country after the government tried to impose cuts.

Fossil fuel prices affect life in myriad ways. It’s not just the gasoline in your car, it’s what fuels the trucks that transport food, and the buses that take people to and from work. Many use natural gas to cook their meals. So when fuel prices are higher, a lot of things get more expensive, and the poor suffer the most.

Right now, in most countries, there’s no alternative people can turn to when fossil fuel prices increase.

Kevin Gallagher, who directs Boston University’s Global Development Policy Center, told me measures are often taken hastily, without policies to soften the blow. He called it “green shock therapy.”

You need to address the question of public support, Gallagher said. Poorly designed programs are “creating constituencies that are going to be against climate policies because they were done wrong in the first place,” he told me.

There’s a window to act now

Gallagher and other critics of subsidies say there should be more of an incentive for countries to put the burden on the production side rather than on consumers.

One path that countries like Singapore and Chile are trying is introducing carbon taxes that polluting companies pay according to their carbon dioxide emissions. That’s also a tough pill to swallow, though, considering the oil industry’s political power. Americans have tried and, so far, failed.

That’s where the I.M.F. can have a big role. The fund’s job is to ensure that economies are healthy and to recommend policies to fix what’s wrong. When countries can’t make ends meet, the fund comes in to offer loans in exchange for policy moves that are often tough. This makes the organization quite unpopular in the developing world. But it also means the I.M.F. is hugely influential in changing how one policy or another is viewed by decision makers.

In a statement, the I.M.F. said that “clear communication, gradual phasing out, and mechanisms to compensate vulnerable groups” should be key components of any policy for reducing fossil fuel subsidies to avoid the kind of shocks that Gallagher talked about.

Ian Parry, an expert on fiscal and environmental policy at the fund, told me there is a window of opportunity to make these changes easier to push through now that fossil fuel prices may be coming down.

As prices fall, he told me, countries could start adding carbon taxes without causing a shock for ordinary consumers.

“Prices are still well below where they need to be,” he said. But the number of countries introducing carbon taxes and tackling the issue is growing. “That’s a positive development.”

Related: Discussions at the spring meetings will focus on Ajay Banga, who may soon be named president of the World Bank. Will he steer the bank toward more climate action?

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Claire O’Neill, Chris Plourde and Douglas Alteen contributed to Climate Forward. Read past editions of the newsletter here.

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