4.1 Definitions of Fossil Fuel Subsidies

There is no agreement on how to define energy subsidies (Reference GerasimchukGerasimchuk, 2014; Reference Koplow, Skovgaard and van AsseltKoplow, 2018; OECD Secretariat, 2010b). This disagreement has far-reaching consequences for the measurement of the global and national levels of fossil fuel energy subsidies and the countries that are considered as having fossil fuel subsidies. Few observers dispute that policies that lower the price paid by consumers below the market price, for example, fixing the price of petrol at USD 0.30 per litre as it has been the case in Iran (Reference KojimaKojima, 2016), constitute an energy subsidy. Yet, several other types of policies may be defined as fossil fuel subsidies depending on the definition. Few if any policies are defined as fossil fuel subsidies by the policymakers that adopt them, but they may subsequently be defined as fossil fuel subsidies by other actors.

An important distinction is the one between attempts to identify (and often also measure) fossil fuel subsidies that rely on an inventory approach and those that rely on a price-gap approach. These two approaches depend implicitly or explicitly on different definitions of fossil fuel subsidies, for example, the price-gap approach relies on definitions of fossil fuel subsidies that define such subsidies in terms of prices being below a given benchmark.

The inventory approach focuses on government policies and defines as fossil fuel subsidies those policies that confer benefits to particular fossil fuel producing or consuming activities. On the consumption side, the inventory approach identifies as subsidies policies including direct spending on the lowering of fossil fuel prices, reduced tax or VAT rates on fossil fuels, and so forth. On the production side, it identifies a broader range of policies as subsidies (although this varies somewhat between different kinds of inventory approaches), including the public provision of infrastructure for fossil fuels (e.g. pipelines, railroads); tax reductions; insurances, loans and guarantees provided with more favourable conditions than what the market offers; research and development; as well as government ownership of fossil fuel extraction enterprises (e.g. loss-making coalmines). The focus on policies means that the inventory approach often leads to debates regarding whether a given policy actually confers such benefits. The inventory approach requires extensive data gathering to identify the subsidies within a given country, and inventories sometimes do not include all subsidies within a country due to data limitations (Reference Kojima and KoplowKojima and Koplow, 2015; Reference Koplow, Skovgaard and van AsseltKoplow, 2018). Importantly, inventory approaches rely on different definitions of fossil fuel subsidies, all of them characterised by defining fossil fuel subsidies in terms of policies conferring benefits on the consumption and/or production of fossil fuels. One prominent example of such a definition is the World Trade Organization (WTO)’s definition of subsidies (of all kinds not just those concerning fossil fuels) as a financial contribution by a government that confers a benefit to the recipient (World Trade Organization, 1994, Article 1). Yet, it is also possible to include non-financial contributions, for example, policies reducing risk, under the definition of subsidies (Reference Koplow, Skovgaard and van AsseltKoplow, 2018).

The price-gap approach focuses on the consumer price of fossil fuels rather than the policies influencing such prices. Specifically, it identifies whether the consumer prices are below a given benchmark price and estimates the combined value of the difference between the two prices. The benchmark price is generally based on the international market price of a given fossil fuel, often with the transport and distribution costs and/or VAT added, and in some cases also taxes corresponding to the externalities (e.g. air pollution, climate change, traffic accidents) of using the fuel (Reference Clements, Coady, Fabrizio, Gupta, Alleyne and SdralevichClements et al., 2013; Reference Coady, Parry, Sears and ShangCoady et al., 2015; Reference GerasimchukGerasimchuk, 2014; Reference KoplowKoplow, 2009; Reference SteenblikSteenblik and OECD, 2003). The level of the benchmark price is crucial for estimates of the size of total fossil fuel subsidies, as a high benchmark price will lead to high estimates of total fossil fuel subsidies at the global and national level. The price-gap approach only identifies the effects of fossil fuel subsidies that influence consumer prices, and hence producer subsidies are included in such studies only to the degree that they have an effect on consumer prices, which they rarely do, as most fossil fuels (e.g. gas or oil) are sold in global markets.

Definitional aspects are also important as regards determining which policies should be reformed or phased out. Both the G20 and the Asia-Pacific Economic Cooperation (APEC) made the commitment ‘to rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption’ (APEC, 2009; G20 Heads of State and Government, 2009b). This wording raises questions regarding the exact interpretation of the terms ‘rationalize’, ‘medium term’ and most importantly for the issue of defining fossil fuel subsidies, ‘inefficient’Footnote ¹ and ‘encourage wasteful consumption’. As is discussed in Chapters 5–8, much of the discussion has focused on whether a country’s fossil fuel subsidies are indeed inefficient and encourage wasteful consumption.

4.2 The Size and Scope of Fossil Fuel Subsidies

The size and scope of global fossil fuel subsidies depend on which of the aforementioned definitions is being used. Subsidies for the consumption and production of coal, natural gas, oil and products derived from these fuels (e.g. diesel, regular petrol, kerosene, liquid petroleum gas) are considered fossil fuel subsidies, as are subsidies for electricity and heat production based on fossil fuels (Reference Kojima and KoplowKojima and Koplow, 2015). Subsidies for biofuels are generally not considered fossil fuel subsidies. In terms of geographical scope, most or virtually all countries (depending on the definition used) have some kind of fossil fuel subsidies in place. Policies subsidising the consumption of fossil fuels are more substantial in developing countries, whereas policies subsidising their production are common in both developed and developing countries. Price-gap estimates differ in their estimates of fossil fuel subsidies in developed and developing countries. Those which use benchmark prices without externalities, such as the International Energy Agency (IEA, 2018), find that fossil fuel subsidies are much smaller in developing countries than in developed ones, whereas those that include externalities, most notably the IMF (2019), find that developed countries account for more than a quarter of global subsidies. All estimates find that fossil fuel exporting countries have larger subsidies (compared to the size of their populations and GDP) than fossil fuel importing ones.

Studies of fossil fuel subsidies focus mainly on national policies, excluding development finance from multilateral development banks, multilateral and bilateral development institutions for fossil fuel production and consumption, which have been estimated at tens of billions of dollars (Reference Kim and UrpelainenKim and Urpelainen, 2013; Oil Change International et al., 2017). Political debates among policymakers, including the institutions studied in this book, have focused on national level subsidies, and consequently this book will mainly focus on how they have addressed this issue.

As mentioned previously, the different definitions translate into diverging estimates of the global economic costs or size of fossil fuel subsidies (not including support through development finance). The IEA uses a price-gap approach with a benchmark price including distribution, transportation and VAT but not externalities, and its estimate is not global but covers forty of the largest developing and emerging countries. This widely used estimate puts global consumption subsidies in 2017 at just over USD 300 billion, and generally fluctuating between USD 250 and 600 billion (IEA, 2015, 2016, 2017, 2018), depending mainly on the oil price. All told, the IEA estimate is at the low end of the range. The OECD has provided an estimate combining a price-gap and inventory approach (discussed in detail in Chapter 6) and covering the thirty-five OECD countries plus eight partner countries (Argentina, Brazil, China, Colombia, India, Indonesia, Russia and South Africa). The OECD estimates fossil fuel support in these countries studied in 2016 at USD 151 billion, and fluctuating between USD 150 and 250 billion in the years 2010–16 (OECD, 2018b). The OECD and the IEA have more recently started combining their estimates, and arrive at an estimate of USD 340 billion, fluctuating between USD 300 and 600 billion in the period 2010–17 for the countries covered by their combined estimate (OECD and IEA, 2019). The IMF’s estimate (discussed in detail in Chapter 7) covers 153 countries and includes both producerFootnote ² and consumer subsidies, the latter calculated on the basis of a benchmark price including various externalities to arrive at its estimate of USD 5.2 trillion estimate for 2017 (Reference Coady, Parry, Le and ShangCoady et al., 2019). The IMF’s estimate is about ten times higher than the IEA’s mainly due to the inclusion of non-priced externalities, but also due to its global scope. Importantly, these estimates do not tell us about who bears the costs of the subsidies. The estimates differ implicitly in this respect, as the IEA and OECD estimates concern the fiscal costs to public budgets of providing the subsidies, while the IMF estimates mainly concern the costs to society of using fossil fuels.

In terms of environmental consequences, fossil fuel subsidies are distinguished from other subsidies in targeting fossil fuels, which implies that they by definition have a negative impact on climate change. Different estimates exist of the direct effects of fossil fuel subsidies in terms of encouraging the use of fossil fuels and hence causing CO₂ emissions (Reference Skovgaard and van AsseltSkovgaard and Van Asselt, 2019). These estimates differ in terms of their scope, in terms of the countries and subsidies covered (production subsidies and a range of consumption subsidies are often not included), as well as the methodology used and the time horizon. The estimates find that the emissions reductions alone from phasing out fossil fuel subsidies range from 1 to 23 per cent of the emissions in the countries covered (Reference Burniaux and ChâteauBurniaux and Château, 2011; Reference Coady, Parry, Sears and ShangCoady et al., 2015, Reference Coady, Parry, Le and Shang2019; Reference Jewell, McCollum and EmmerlingJewell et al., 2018). According to the conservative estimate of Reference Jewell, McCollum and EmmerlingJewell et al. (2018), reforming fossil fuel subsidies could deliver a quarter of the emissions reductions pledged under the Paris Agreement. These figures would be higher if the savings from reforms were redirected towards renewable energy (Reference Jakob and HilaireJakob and Hilaire, 2015; Reference Schmidt, Matsuo and MichaelowaSchmidt et al., 2017). Perhaps most importantly, these estimates cannot capture the political economic effects of breaking the lock-in of fossil fuel subsides in terms of fossil fuel infrastructure as well as the political power of fossil fuel corporate actors locking societies into fossil fuel-based modes of production and consumption (Reference Erickson, van Asselt, Koplow, Lazarus, Newell, Oreskes and SupranErickson et al., 2020; Reference Newell, Johnstone, Skovgaard and van AsseltNewell and Johnstone, 2018). Beyond climate change, fossil fuel subsidies lead to local air pollution, inter alia through the burning of coal and diesel, with effects on health that accounts for close to half of the global externalities of fossil fuel use according to the IMF (Reference Coady, Parry, Sears and ShangCoady et al., 2015, Reference Coady, Parry, Le and Shang2019; Reference Parry, Heine, Lis and LiParry et al., 2014).

In terms of redistributive consequences, proponents of fossil fuel consumption subsidies often justify them by framing them as a tool for poverty reduction, especially in developing countries (Reference Rentschler and BazilianRentschler and Bazilian, 2017a; Reference Rentschler and BazilianRentschler and Bazilian, 2017b). Yet, studies of the allocation of fossil fuel subsidies find that most of them are captured by the higher income segments of society. For instance, Reference Arze del Granado and GillinghamArze del Granado, Coady and Gillingham (2012, p. 2241) in their study of twenty developing countries found that ‘the richest 20% of households capture on average six times more in fuel subsidies than the poorest 20%’. Fossil fuel subsidies are regressive because they tend to be universal while subsidising goods that people with a higher income have more opportunities to enjoy, for example, fuel for cars.

4.3 The Domestic Politics of Fossil Fuel Subsidies and Their Reform

Irrespective of the definition of fossil fuel subsidies that is used, such subsidies have proven difficult to reform (Reference Skovgaard and van AsseltSkovgaard and van Asselt, 2018b, Reference Skovgaard and van Asselt2019). While the world has arguably witnessed an increase in the number of fossil fuel subsidy reforms since the Pittsburgh commitment in 2009 (Reference Rentschler and BazilianRentschler and Bazilian, 2017b; Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018), fossil fuel subsidies still persist globally, and the decline in the IEA’s estimates of global subsidies seem more driven by lower oil prices than by reform. Furthermore, it is far from certain to what degree fossil fuel subsidy reforms have been driven by the G20 commitment and the increasing international attention to fossil fuel subsidies. The reforms seem driven mainly by economic concerns, particularly fiscal deficits and the desire to provide more targeted social assistance to the poor (Reference Rentschler and BazilianRentschler and Bazilian, 2017b; Reference Skovgaard, van Asselt, Skovgaard and van AsseltSkovgaard and van Asselt, 2018a). The subsidies that have been reformed consist mainly of consumption subsidies in middle-income developing countries such as Egypt, India, Indonesia, Iran and the Philippines (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018), as well as coal production subsidies in developed countries, especially EU member states such as Germany and Spain (Reference Gençsü, McLynn and RunkelGençsü et al., 2017). The former group have increased and liberalised fuel prices and targeted subsidies at the poor, whereas the latter group have phased out coal subsidies gradually while providing support to communities dependent on coal mining (e.g. retraining of workers; see Reference Zinecker, Gass and GerasimchukZinecker et al., 2018).

An important aspect of the persistence of fossil fuel subsidies is that successful reform has often been followed by the reversal to old levels of subsidies After all, domestic actors have tried to reform fossil fuel subsidies as long as these subsidies have been in existence. Several attempts at fossil fuel subsidy reform have also failed, some before the adoption of the reform and some after implementation, inter alia due to public protests (e.g. in Ecuador and Sudan).

The literature on the politics of fossil fuel subsidies and their reform has identified several factors driving fossil fuel subsidies and the possibilities of reforming them. Here, I draw on the three kinds of factors identified in Reference Skovgaard, van Asselt, Skovgaard and van AsseltSkovgaard and van Asselt (2018c). First, the interests, strategies and organisation of actors – including both individuals and collective actors – that promote reform or try to keep subsidies in place. Their strategies include putting fossil fuel subsidies on the national political agenda or trying to block such efforts; framing fossil fuel subsidies in particular ways, building coalitions to promote or counter reform; and communicating the benefits of subsidies or their reform to policymakers and the public. Fossil fuel subsidies have been framed, on the one hand, in terms of their economic or environmental cost and on the other, as important tools for reducing poverty or improving national development and competitiveness. Beyond the strategies of actors, their degree of organisation also matters, particularly as regards actors benefitting from subsidies (Reference VictorVictor, 2009). Actors opposed to fossil fuel subsidies tend to be less organised in interest groups than those supporting subsidies, yet both form alliances cutting across different political parties, ministries, and non-governmental organisations (Reference Skovgaard and van AsseltSkovgaard and van Asselt, 2019). One reason for the higher degree of organisation of the proponents of subsidies is that the benefits of fossil fuel subsidies are tangible and concentrated in specific groups (e.g. fossil fuel producers, beneficiaries of consumer subsidies), whereas the benefits of fossil fuel subsidy reform are less tangible and more diffuse across time and space (e.g. improved public budgets and environment; see Reference Inchauste and VictorInchauste and Victor, 2017).

Second, ideational factors, including the aforementioned definitional issues as well as knowledge about fossil fuel subsidies and their environmental and socio-economic effects, also influence the politics of fossil fuel subsidies. Established discourses regarding issues such as development, competitiveness and environmental protection constitute important ideational contexts that may shape whether a particular framing is successful or not, e.g. may the framing of fossil fuel subsidies as environmentally harmful fail in countries in which environmental protection is not defined as important (Reference Skovgaard, van Asselt, Skovgaard and van AsseltSkovgaard and van Asselt, 2018c). Importantly, the existence of fossil fuel subsidies is a sensitive issue in several (especially developed) countries, and governments are often reluctant to acknowledge that a given policy constitutes a fossil fuel subsidy.

The third group of factors is more structural and includes macroeconomic developments and the socio-political characteristics of a country. In terms of macroeconomic factors, both fossil fuel reserves (Reference OverlandOverland, 2010) and high fossil fuel prices (Reference Benes, Cheon, Urpelainen and YangBenes et al., 2015; Reference Rentschler and BazilianRentschler and Bazilian, 2017b) are associated with higher subsidies, whereas rapid changes to fossil fuel prices have offered windows of opportunity for reform (Reference Benes, Cheon, Urpelainen and YangBenes et al., 2015). Furthermore, states with weak institutional capacity and authoritarian rule are more likely to subsidise fossil fuels, inter alia because they lack the capacity to implement more complex welfare policy instruments such as cash transfers (Reference Cheon, Urpelainen and LacknerCheon et al., 2013; Reference LockwoodLockwood, 2015; Reference VictorVictor, 2009). Finally, there is an element of path dependency to fossil fuel subsidies, which means that once in place they are difficult to remove. The path dependency may be due to fossil fuel subsidies empowering actors benefitting from them – particularly fossil fuel extraction companies – and thus contributing to carbon lock-in (Reference Newell, Johnstone, Skovgaard and van AsseltNewell and Johnstone, 2018) or becoming part of the social contract between the state and its citizens (Reference Moerenhout, Skovgaard and van AsseltMoerenhout, 2018).

4.4 Other International Efforts to Promote Fossil Fuel Subsidy Reform

Beyond the institutions studied in this book, a range of other institutions have been important to the efforts to reform fossil fuel subsidies. In general, their involvement with fossil fuel subsidies has increased since 2009. First, the IEA stands out on the basis of its extensive work on defining and measuring fossil fuel subsidies. These efforts date back to before 2009, most notably the 1999 issue of the IEA’s World Energy Outlook, which included fossil fuel subsidies among its key foci (IEA, 2000). The most important part of the IEA’s work on fossil fuel subsidies has been its estimates of the total size of fossil fuel subsidies in major non-OECD economies, which was first published in 2006 and has since provided a crucial knowledge base for addressing fossil fuel subsidies. This estimate is probably the most widely used estimate of the size of global fossil fuel subsidies. As mentioned earlier, it covers only forty of the largest emerging and developing countries, and it is thus somewhat misleading to refer to it as an estimate of global subsidies, although it covers a very sizeable share of global subsidies. Importantly, the IEA employs a price-gap approach to measuring fossil fuel subsidies based on a benchmark price corresponding to ‘the full cost of supply or, where appropriate, the international market price, adjusted for the costs of transportation and distribution, and value-added tax’ (IEA, 2016, p. 97, fn. 8). The IEA was one of the four institutions (together with the World Bank, the OECD and Organization for Petroleum Exporting Countries [OPEC]) that was requested by the G20 to measure the magnitude and the consequences of such subsidies (G20 Heads of State and Government, 2009b).

Of the other institutions requested by the G20 to study fossil fuel subsidies, the World Bank also has a long-running track record. World Bank studies on energy subsidies in general date back to the 1980s (World Bank, 1983), and studies on fossil fuel subsidies specifically to the 1990s (Reference Larsen and ShahLarsen and Shah, 1992). In terms of policy, the World Bank’s programmes induced developing countries to reform their energy subsidies (which almost always went to fossil fuels) as part of wider reform packages (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018). However, the World Bank’s attention to fossil fuel subsidies waxed and waned until around 2009, when its focus on fossil fuel subsidies reached a consistent level. The World Bank published numerous publications on fossil fuel subsidies in developing countries, particularly on the best way to phase out such subsidies (Reference KojimaKojima, 2016; World Bank, 2013b; World Bank with contributions from International Monetary Fund (IMF), 2014).

In terms of concrete efforts to induce countries to reform their fossil fuel subsidies, the Bank has focused explicitly on fossil fuel subsidies (rather than just subsidies in general). It has done so in terms of country specific recommendations (see e.g. Reference DiopDiop, 2014; Reference Peszko, Black, Platonova-Oquab, Heine and TimilsinaPeszko et al., 2019) and assistance to such reform, for example, in the shape of expertise; workshops for learning from other countries; and financial support for policy dialogue, communication and the targeting of subsidies, and so forth. (Reference McCullochMcCulloch, 2017; Reference Skovgaard, Skovgaard and van AsseltSkovgaard, 2018). Notable in this respect is the Bank’s Energy Sector Management Assistance Program (ESMAP), which has developed both an ‘Energy Subsidy Reform Technical Assistance Facility’ providing knowledge in the shape of an analysis of the environmental, fiscal, economic, political and social impacts of fossil fuel subsidy reform, as well as support for policy dialogue and the design of reform (World Bank, 2015). ESMAP has also developed the ‘Energy Subsidy Reform Assessment Framework’ (ESRAF), a guide to analysing energy subsidies, the impact of subsidy reform and the political context for subsidy reform (Reference Flochel and GooptuFlochel and Gooptu, 2016). However, the World Bank has also previously been criticised for providing billions of dollars in funding for fossil fuel production, inter alia coal- and gas-fired power plants, pipelines as well as oil and gas exploration, in spite of commitments to phase out such lending (The Big Shift Global, 2019).

The third of the four institutions requested to study fossil fuel subsidies by the G20, OPEC, had not previously addressed fossil fuel subsidies. OPEC was included among the four institutions due to the insistence of Saudi Arabia (interview with senior OECD officials, 29 April 2015) and has been less active than the other three institutions (Reference LangLang, 2011), and has been involved in fewer reports to the G20 than the other institutions. The lower level of involvement is evident in in that OPEC has contributed to fewer of the reports to the G20 than the other institutions (IEA, OECD, et al., 2010; OECD and IEA, 2019). The OPEC member states are among those countries with the highest fossil fuel subsidies total and per capita, and benefit from the fossil fuel subsidies in other countries in terms of increased exports (Reference Jewell, McCollum and EmmerlingJewell et al., 2018).

The institutions discussed in the preceding text cover energy and development. Other international energy and development institutions, such as the International Renewable Energy Agency (IRENA) and the UN Development Programme (UNDP), have been much less vocal concerning fossil fuel subsidies. As regards institutions addressing other issues than economic, development and energy issues, the picture is also rather mixed. Concerning environmental institutions, the United Nations Framework Convention on Climate Change (UNFCCC) is mainly notable due to its lack of attention to fossil fuel subsidies (Reference van Asselt, Merrill, Kulovesi, van Asselt and Skovgaardvan Asselt et al., 2018). The Kyoto Protocol contained a brief reference to the reduction or phasing out of subsidies in greenhouse gas emitting sectors (UNFCCC, 1997), but both the United Nations Framework Convention on Climate Change and the Paris Agreement remain silent on the issue. Opposition from oil-exporting countries as well as the general reluctance within the UNFCCC regarding addressing energy issues have meant that the attempts of some countries to place fossil fuel subsidies within the UNFCCC have been unsuccessful (Reference van Asselt and Kulovesivan Asselt and Kulovesi, 2017; Reference van Asselt, Merrill, Kulovesi, van Asselt and Skovgaardvan Asselt et al., 2018). Yet, thirteen countries have chosen to mention fossil fuel subsidy reform in the Intended Nationally Determined Contributions (INDCs) they have submitted in the context of the Paris Agreement, several of them committing to such reform (Reference Terton, Gass, Merrill, Wagner and MeyerTerton et al., 2015). More implicitly, Article 2.1.c of the Paris Agreement specifies that the objectives of the Agreement shall be met inter alia by making ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’ (UNFCCC, 2015). Although fossil fuel subsidies are not specifically mentioned, they are generally not consistent with a pathway to low greenhouse gas emissions. Yet, the provision does not place any obligations on states to reform fossil fuel subsidies.

Perhaps due to their broader scope covering sustainability and development, the Sustainable Development Goals (SDGs) include more specific commitments to the reform of fossil fuel subsidies in their Target 12.c, which commits all countries to undertaking efforts to rationalise inefficient fossil fuel subsidies that encourage wasteful consumption. The wording of Target 12.c is rather similar to the G20 commitment in its emphasis on inefficient fossil fuel subsidies encouraging wasteful consumption, but leaves even more freedom to states, especially as they commit only to rationalising and not to phasing out such subsidies. Furthermore, the Goal does not include a reference to when such subsidies should be rationalised the way the G20 commitment refers to as the medium term. The effects of the SDG commitment as well as the Nationally Determined Contributions commitments under the Paris Agreement remain to be studied but constitute a move towards more attention to fossil fuel subsidies among environmental institutions.

The UN Environment Programme (UNEP) has been active in promoting fossil fuel subsidy reform through the production of knowledge in terms of reports on fossil fuel subsidies and most importantly an internationally agreed approach to measuring fossil fuel subsidies in the context of the SDGs (developed together with the OECD and the International Institute for Sustainable Development [IISD]; UNEP, OECD and IISD, 2019). It has also promoted the norm of fossil fuel subsidy reform and linked it to the SDGs (UNEP, 2019).

Also trade institutions are more notable in terms of what they have not done than what they have done. In spite of persistent calls for the WTO to adopt measures disciplining fossil fuel subsidies the way that they discipline several other subsidies, it has not done so, and other trade institutions have generally not addressed the issue (Reference Bièvre, Espa and PolettiBièvre et al., 2017; Reference Steenblik, Sauvage, Timiliotis, Skovgaard and van AsseltSteenblik et al., 2018). In 2017, twelve WTO member states called for the WTO to adopt measures disciplining fossil fuel subsidies, thus utilising one of the most effective incentive-based instruments in international governance, namely retaliatory trade measures sanctioned by the WTO dispute settlement mechanism. However, this proposal has not found sufficient support from the rest of the WTO member states. One reason for the inaction is that most fossil fuel subsidies are not clearly trade distorting in the way that, for instance, several agricultural and renewable energy subsidies are (Reference Steenblik, Sauvage, Timiliotis, Skovgaard and van AsseltSteenblik et al., 2018). Countries could in principle (within the WTO or another trade institution) agree to sanction subsidies not because they are trade distorting but because of their environmental effects, as indeed was the case with draft versions of the currently abandoned Trans-Pacific Partnership Agreement (Reference Steenblik, Sauvage, Timiliotis, Skovgaard and van AsseltSteenblik et al., 2018). Yet, at the time of writing support for exploring this option within the WTO has come from only a few countries. The negotiations on an Agreement on Climate Change, Trade and Sustainability launched in 2019 by New Zealand, Costa Rica, Fiji and Iceland to use trade rules to tackle climate change and other environmental issues, specifically address fossil fuel subsidies (Costa Rica et al., 2019). Yet, it is too early to assess the eventual role of such an agreement in promoting fossil fuel subsidies.

Forums of smaller groups of states have been more successful in addressing fossil fuel subsidies, particularly promoting the norm of fossil fuel subsidy reform. Besides the G20, APEC adopted a commitment similar to the G20’s just a few weeks later, and has also adopted voluntary reporting and peer-review processes, in which member states can report their fossil fuel subsidies and some of them even undergo peer reviews (Reference Verkuijl, van Asselt, Zelli, Bäckstrand, Nasiritousi, Skovgaard and WiderbergVerkuijl and van Asselt, 2020). In 2016, both the North American Leaders’ Forum – the heads of state of Canada, Mexico and the United States – and the G7 adopted commitments similar to the G20’s but with 2025 as the phase-out date (unlike the G20 commitment which does not include a phase-out date). Furthermore, the Friends of Fossil Fuel Subsidy Reform was established in 2010 on the initiative of New Zealand (Reference Rive, Skovgaard and van AsseltRive, 2018). The Friends is an informal group of – at the time of writing – nine non-G20 countries (Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland and Uruguay) working to promote the norm of fossil fuel subsidy reform. Its activities include the 2015 Communiqué on fossil fuel subsidies inviting states and non-state actors to support accelerated action to eliminate inefficient fossil fuel subsidies (Friends of Fossil Fuel Subsidy Reform, 2015), voluntary peer review and agenda-setting, including the aforementioned call for WTO to address fossil fuel subsidies.

Finally, among the civil society actors promoting fossil fuel subsidy reform, the International Institute for Sustainable Development (IISD) and its Global Subsidies Initiative GSI stand out (Reference Lemphers, Bernstein, Hoffmann, Skovgaard and van AsseltLemphers et al., 2018). The IISD established the GSI in 2005 to provide knowledge about (initially mainly biofuel, since 2009 mainly fossil fuel) subsidies and promote their reform. It has been involved in international analyses of fossil fuel subsidies and concrete reforms of subsidies.

4.5 Summary

This chapter demonstrates the intricacies of the politics of fossil fuel subsidies. In spite of the widespread international commitments to reforming fossil fuel subsidies and their economic and environmental benefits, these subsidies persist globally. Domestic factors, inter alia the efforts of actors benefitting from the subsidies, lack of awareness of the subsidies, fossil fuel reserves and (weak) governance capacity, have been the main obstacles to fossil fuel subsidy reform. Surprisingly, international environmental institutions have been quiet as regards addressing such subsidies, which puts the activities of the economic institutions into perspective and underscores why it is relevant to study these activities.

5.1 Output: The Pittsburgh Commitment And The Subsequent Reviews

The G20 output has predominantly been formal and regulatory, most importantly in the shape of the 2009 commitment. The commitment reads as follows:

This commitment is most important in normative terms, as it defined and elevated the norm of fossil fuel subsidy reform to a new level (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018). While the commitment referred to the OECD and IEA estimates that phasing out fossil fuel subsidies could reduce emissions by 10 per cent by 2050 (OECD, 2009), it did not provide a definition of fossil fuel subsidies, or specify what the terms ‘rationalize’, ‘medium term’ and ‘inefficient’ meant. In this way, the norm was left vague, especially as regards the policies that would fall under the category of inefficient fossil fuel subsidies and thence be targeted by the norm. Importantly, fossil fuel subsidies were primarily framed in terms of their impact on climate change, while the importance of maintaining support for poverty reduction was also stressed. Fossil fuel subsidies were also framed in terms of macroeconomic consequences (e.g. ‘inefficient fossil fuel subsidies encourage wasteful consumption, distort markets, impede investment in clean energy sources’) while the fiscal impact was not mentioned.

The 2009 statement also contained two important clauses regarding future efforts to promote fossil fuel subsidy reform. First, the IEA, the OECD, OPEC and the World Bank were tasked with measuring the magnitude and the consequences of such subsidies (discussed in detail in Section 5.3). Second, member states committed themselves to submitting strategies and timetables for phasing out their fossil fuel subsidies while taking into account the needs of the poorest citizens (G20 Heads of State and Government, 2009b), leading to various kinds of output that are most important in normative terms. The commitment to submitting strategies and timetables led to tasking member state experts under the authority of their finance and energy ministers with coordinating and overseeing the implementation of the commitment (Reference Kim and ChungKim and Chung, 2012). The experts have been meeting in the context of a broader working group on energy, the G20 Energy Transitions Working Group (previously the Energy Sustainability Working Group), which focuses on the transition to sustainable energy systems. The expert output on fossil fuel subsidies has generally been reported to the finance ministers, and the largest group of experts also came from finance ministries (interview with senior OECD official, 3 February 2020).

Discussions of how to define fossil fuel subsidies (including whether to include production subsidies), as well as of how to define ‘inefficient’ and ‘wasteful consumption’ did not result in an agreement on common definitions. Rather it was agreed to leave these issues to the reporting countries (Reference LangLang, 2011). Starting in 2010, the G20 member states reported on an annual basis whether they had any inefficient fossil fuel subsidies and the progress on reforming or phasing out these subsidies, constituting regulatory output (Reference AldyAldy, 2017). Seven countries (Australia, Brazil, France, Japan, Saudi Arabia, South Africa and the United Kingdom) have reported that they have no fossil fuel subsidies, whereas other countries have submitted plans of varying ambition for phasing out their subsidies (Reference Kirton, Larionova and BrachtKirton et al., 2013). The progress reports have focused mainly on measures taken to reform the subsidies identified in the 2010 country reports (Reference AsmelashAsmelash, 2017). The G20’s bottom-up approach leaving it to the member states to define which fossil fuel subsidies they have and how to phase them out has been criticised for only inducing countries to act to a limited degree (Reference Van de Graaf and WestphalVan de Graaf and Westphal, 2011). Nonetheless, the reporting requirement constitutes important ideational output in terms of forcing G20 member states to acknowledge the salience of the norm of fossil fuel subsidy reform and argue whether it applies to them, as well as in terms of promoting the framing of policies as fossil fuel subsidies. The working group has also served as the forum for officials for discussions and the exchange of knowledge about fossil fuel subsidies on the basis of their own experience and the reports provided by the IEA, OECD, OPEC and World Bank. There are very few forums in which finance (and economics) ministry officials can discuss climate change, and the working group served as a useful forum for such discussions focusing on fossil fuel subsidies (Interview with former senior US Treasury official, 6 May 2014). In the first few years, fossil fuel subsidies were still a new issue where there existed only limited knowledge, and the working group expanded the knowledge about the issue among the participants, and – via the reports from the four International Organisations (IOs) – also among a wider public.

A subsequent development was the 2012 decision by G20 state leaders to request their finance ministers to explore the options for voluntary peer reviews of member states’ fossil fuel subsidies and their efforts to reform or phase them out (G20 Heads of State and Government, 2012). The peer review replaced self-reporting as the most important G20 (regulatory) output on fossil fuel subsidies (Reference RiveRive, 2019). Currently, some member states (mainly those having undergone peer reviews) provide updates on their reform efforts at the meetings of experts, but no agreement has been reached regarding a proposal to reintroduce the mandatory self-reporting process with an IO review of the reports (interview with senior OECD official, 3 February 2020).

In 2016, the two largest economies and emitters, the United States and China, volunteered to be the first countries to undergo a pairwise peer review. In this review, they each first provided a self-report on their fossil fuel subsidies and the efforts to reform them; this was subsequently reviewed by the other country as well as the OECD, the IMF (in the case of China), Germany, Indonesia (in the case of China) and Mexico (in the case of the United States) (G20, 2016a, 2016b). In 2017, Germany and Mexico, and in 2019 Indonesia and Italy, underwent similar peer reviews, whereas at the time of writing Argentina and Canada have planned such reviews. The later reviews have been carried out by China, Germany, Italy, Indonesia, Mexico, New Zealand, the OECD (acting as chair for all the reviews), and in the case of the 2019 reviews also the IEA, the International Institute for Sustainable Development (IISD) and the World Bank. The peer reviews follow a logic in which a developed and an emerging economy undergo a review together to avoid criticism of double standards. So far, the countries undergoing a peer review are all countries that have acknowledged having inefficient fossil fuel subsidies in their reports to the G20. The peer reviews have been criticised for not including all fossil fuel subsidies in the reviewed countries (see e.g. the criticism of Germany’s peer review, Reference HansenHansen, 2017). They are best understood as providing opportunities for learning (Reference Verkuijl, van Asselt, Zelli, Bäckstrand, Nasiritousi, Skovgaard and WiderbergVerkuijl and van Asselt, 2020), getting states to accept the framing of particular policies as fossil fuel subsidies and acknowledging that the norm of fossil fuel subsidy reform is salient in regard to these policies. Importantly, although fossil fuel subsidies were addressed by officials from finance (and economics) ministries, and to a lesser degree also energy ministries, they were framed mainly as a climate change issue which also involved economic inefficiencies such as market distortions and the inefficient use of fiscal resources.

5.2 Causes

Regarding the factors influencing the adoption of the 2009 commitment (and hence the first aspect of economisation), entrepreneurship and relations with member states stand out. Before the Pittsburgh Summit, G20 member states including the United States had attempted to put fossil fuel subsidies on the G20 agenda for five years without success (interview with former senior US White House official, 17 February 2015). The difficulty of addressing fossil fuel subsidy reform in any international forum, particularly forums which include Saudi Arabia, meant that the commitment took spectators by surprise (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018). Several G20 members, particularly Saudi Arabia, had blocked the previous attempts, underscoring the importance of which states are members of the institution and how the member states arrive at decisions (in this case consensus allowing one state to block proposals). The entrepreneurship of the US government (the G20 president) played a key role in placing the commitment on the agenda and also in terms of the US government drafting the commitment text (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018). This draft text went fairly unchanged through the working groups of officials from the member states. One important change was the change in the timeframe for the phase-out/rationalisation from five years to ‘medium term’, a change which was at the insistence of the Chinese (interview with former senior US White House official, 17 February 2015). The notion of a deadline for reforming or phasing out inefficient fossil fuel subsidies has proven controversial in all forums debating these subsidies, and has only been possible to adopt in the G7 and the North American Leaders’ Forum, two smaller forums that do not include the largest emerging economies or oil producers, notably China, India and Saudi Arabia. This difference between the G20 and the two smaller forums regarding a deadline underscores the importance of which states are the members of the institution. Another important change to the draft commitment, was the BRICs (Brazil, Russia, India and China) successful insistence on adding ‘rationalize’ to the commitment to ‘phase out and rationalize over the medium term inefficient fossil fuel subsidies’ (Reference Kirton and KokotsisKirton and Kokotsis, 2015). Thus, the norm became less specific, since a more specific definition would have made it unpalatable to several G20 member states (Reference Van de Graaf, Blondeel, Skovgaard and van AsseltVan de Graaf and Blondeel, 2018). The broad membership circle of the G20 (covering developed and emerging economies as well as fossil fuel exporters and importers) meant that the wording of the commitment was somewhat vague, but also increased its relevance to a broader set of countries and arguably also its legitimacy beyond the G20.

Within the US government, the initiative came from the White House (more specifically the Council of Economic Advisors). Owing to previous failed attempts to address fossil fuel subsidies in the G20, several officials doubted that the attempt would be successful, but still deemed it worthwhile (interview with former senior US Treasury official, 8 April 2014). The US government chose to act as a policy entrepreneur due to the perceived stalemate in the United Nations Framework Convention on Climate Change (UNFCCC) negotiations which led the government to look for issues which ‘were good economic politics’ as well as climate politics (interview with former senior US White House official and current IMF senior official, 17 February 2015). Previously, when the G20 member states had sought to address fossil fuel subsidies, the G20 meetings had been meetings of finance ministers (and central bank governors), but the G20 state leaders took over the issue in 2009 when they started to meet due to the economic and financial crisis. The transfer of fossil fuel subsidies from finance ministers to state leaders meant the issue was addressed by a set of actors with more power to adopt far-reaching decisions. Thus, it was a combination of external factors (the UNFCCC stalemate in the run-up to the fifteenth Conference of the Parties to the United Nations Framework Convention on Climate Change [COP15] and the crisis) and policy entrepreneurship which drove the adoption of the commitment. Arguably, had climate change not been as high on the international agenda in 2009, the Council of Economic Advisors would not have addressed fossil fuel subsidies in the first place. Furthermore, the resources and institutional set-up facing policy entrepreneurs mattered. Had the initiative not come from the United States and the Council of Economic Advisors (recognised as one of the most powerful entities within the US government) and had it not been addressed by state leaders, other member states would have had better prospects of blocking the initiative.

In terms of how fossil fuel subsidies were addressed (the second aspect of economisation), it was the entrepreneurship of the Obama administration that framed fossil fuel subsidies as a climate issue (as well as an economic one), something which was controversial among some countries including India (see Section 5.3. The perceived stalemate during the UNFCCC negotiations as well as in the recently published OECD–IEA report (2009) on the climate consequences of fossil fuel subsidy reform influenced the framing of fossil fuel subsidies as a climate issue. While the UNFCCC stalemate, as previously mentioned, led the United States (and other G20 states) to promote fossil fuel subsidy reform as a climate instrument, the OECD–IEA report provided important knowledge regarding the climate impact of fossil fuel subsidy reform, specifically that ‘eliminating fossil fuel subsidies by 2020 would reduce global greenhouse gas emissions in 2050 by ten percent’ (G20 Heads of State and Government, 2009b, item 29). In other words, institutional interaction with the UNFCCC, the OECD and the IEA influenced the G20.

The (macro)economic worldview inherent to the G20 is evident in the framing in terms of ‘inefficient fossil fuel subsidies encourage wasteful consumption, distort markets, impede investment in clean energy sources’ [author’s emphasis]. Although the main purpose of reforming fossil fuel subsidies according to the G20 is to fight climate change, the causal chain through which this impact takes place is economic, i.e. through impeding investment and encouraging wasteful consumption. Furthermore, distorting markets is framed as constituting a problematic consequence in itself. In other words, the worldview of the G20 shaped the framing of fossil fuel subsidies (the second dimension or aspect of the economisation of fossil fuel subsidies), yet was less influential regarding the G20’s decision to address fossil fuel subsidies (the first aspect of economisation), which was rather driven by climate concerns. This worldview was rooted in the G20’s origins as a forum for dealing with economic issues and the economic officials drafting the commitment.

The 2009 commitment set the tone for much of the subsequent G20 output on fossil fuel subsidies. The G20 state leaders reaffirmed the commitment at every summit until the 2017 Summit in Hamburg, when opposition from the United States meant that joint references to the commitment were removed (Asmelash, 2017, G20 Heads of State and Government, 2017). Only the G20 ‘Hamburg Climate and Energy Action Plan for Growth’, adopted by the remaining 19 G20 members referred to fossil fuel subsidy reform (G20, 2017a). The US decision to withdraw from the Paris Agreement caused major contention at the summit. Consequently, references to climate related issues including fossil fuel subsidies at subsequent summits were adopted by the other G20 members without the United States, although the 2019 Osaka Summit reintroduced the fossil fuel subsidy commitment in a joint G20 declaration (G20 Heads of State and Government, 2018, 2019). While factors such as the membership circle and worldview inherent to the G20 remained unchanged, other factors changed after 2009. The US presidency already under Obama did not engage in the same level of entrepreneurship as in 2009, although the United States and China were important in volunteering to be subject to the first pair of peer reviews. Post-2009 presidencies were a great deal less entrepreneurial than the US one, although some presidencies promoted the issue to a larger degree than others, e.g. the Mexican presidency that managed to convince the members to agree on the conditions for the voluntary peer reviews. Once fossil fuel subsidies were placed on the G20 agenda and a process set in motion, it remained there until the Trump administration took over. In this way, the Trump administration acted as an ‘antipreneur’ resisting and rolling back normative change (Reference BloomfieldBloomfield, 2016). Some of the countries that lowered the precision of the commitment (e.g. China) ended up being rather active in the process, whereas others (e.g. Saudi Arabia) argued that the commitment did not apply to them as they did not have any inefficient subsidies (Reference Kirton, Larionova and BrachtKirton et al., 2013). Interaction within other institutions mattered most in the cases of the four institutions tasked with providing an analysis of fossil fuel subsidies. They have continuously provided material to the G20 that has shaped the knowledge of participants in G20 meetings as well as the broader public. This knowledge concerned the nature, scope and consequences of fossil fuel subsidies (economic, environmental and distributive) as well as how to reform them (IEA and OECD, 2018; IEA, OECD, et al., 2010; IEA, OPEC, et al., 2010; IEA et al., 2011; OECD and IEA, 2019; OECD Secretariat, 2010a; World Bank with contributions from International Monetary Fund (IMF), 2014).

5.3 Consequences

5.4 Summary

The G20’s 2009 commitment was a catalyst for action on fossil fuel subsidies. It constitutes an important normative output, since it elevated the norm of fossil fuel subsidy reform from relative obscurity to a level of salience in which several institutions and most countries – also beyond the G20 – had to address it. Beyond the normative impact, the commitment has also had an important cognitive (and agenda-setting) impact in terms of raising awareness of fossil fuel subsidies on the international and domestic levels, and in terms of the knowledge about such subsidies produced by the four IOs requested to do so by the G20. The G20 output has not altered incentive structures. Subsequent output from the G20 has been more low-key and to some degree hindered by the lack of precision concerning the norm of fossil fuel subsidy reform as formulated in the commitment. Yet, the self-reporting and especially the peer reviews have forced G20 member states to address the salience of the norm to their domestic policies (especially in the case of the United Kingdom) and in the case of the peer reviews, have led to new knowledge about the subsidies of the countries reviewed (in the United States and Indonesia). All things considered, the consequences of the G20 output have been significant at the international level (especially in leading to similar international commitments), whereas the domestic consequences have been more limited but still relevant. The commitment has not in itself brought about any major fossil fuel subsidy reform.

The G20 commitment was triggered by US entrepreneurship utilising a conducive moment and reacting inter alia to the inaction within the UNFCCC (a reaction which amounts to institutional interaction). The commitment was shaped by this entrepreneurship, the membership circle (including insistence from some emerging economies on avoiding the norm being too precise) and the G20’s economic worldview. Subsequent G20 output has been less shaped by entrepreneurship (except for the peer reviews) and more by the membership circle, the G20 economic worldview and interaction with the IEA, OECD, OPEC and the World Bank. The pro-fossil fuel stance of the Trump administration has played a small but still significant role in limiting G20 efforts on fossil fuel subsidies, although the other nineteen G20 members have moved forward without the United States.

6.1 Output: Knowledge Reigns Supreme

The OECD output on fossil fuel subsidies is knowledge oriented, either in the shape of formal publications or providing informal venues for learning about such subsidies and being socialised into the norm of fossil fuel subsidy reform. The OECD addressed fossil fuel subsidies before the G20 commitment as part of the regular environmental performance reviews of individual member states, studies of pricing policies and more general studies. Already in 1999, the OECD discussed fossil fuel subsidy reform as an instrument to achieve the Kyoto Protocol targets (OECD, 1999). The OECD Secretariat organised three workshops on environmentally damaging subsidies in 2002, 2003 and 2005 (OECD, 2002, 2003, 2005b), focusing mainly on finding a common definition for a subsidy and on methods for measuring subsidies and their environmental impact (Reference PotierPotier, 2002), that is, providing a forum for producing cognitive output in terms of learning and new knowledge. Most of the workshop presentations focused on subsidies in general or agricultural and fisheries subsidies, but a few addressed subsidies for coal, energy or transport (e.g. Reference FranzFranz, 2005). This was arguably a reflection of the fact that the OECD Directorate of Food, Agriculture and Fisheries was the main Directorate leading both workshops and publications, albeit in close cooperation with the Directorates of Environment, Trade as well as the IEA. The subsidies were framed in terms of their impact on sustainable development (OECD Secretariat, 2005; Reference PearcePearce, 2002a). The Economics Department (the most influential OECD directorate) and the Environment Directorate have also – both before and after the 2009 G20 Pittsburgh commitment – focused on fossil fuel support in their ‘Economic Surveys’ and ‘Environmental Performance Reviews’ respectively, which analyse individual OECD member states. In the summer of 2009 – before the Pittsburgh G20 Summit – the OECD Secretariat published modelling of the climate change (and economic) impact of eliminating the subsidies measured by the IEA in The Economics of Climate Change Mitigation (OECD, 2009). This book was drafted by the Economics and Environment Directorates, and unlike subsequent OECD output framed fossil fuel subsidy reform in the context of adopting global carbon pricing. Their estimate that eliminating these subsidies would reduce emissions by 10 per cent was taken up by the G20 in the Pittsburgh commitment (see also Chapter 5 and Section 6.3).

Following the Pittsburgh commitment, the OECD increased its output on fossil fuel subsidies. This output was mainly drafted by the Trade and Agriculture Department with important input from the Environment Department and the Centre for Tax Policy and Administration. The OECD Secretariat co-authored reports to the G20 (IEA and OECD, 2018; IEA et al., 2011; OECD and IEA, 2019; OECD Secretariat, 2010a), and organised workshops on the topic. Perhaps most importantly, in 2011, the OECD published its first inventory of fossil fuel subsidies or ‘estimated budgetary support and tax expenditures for fossil fuels’ in twenty-four member states (OECD Secretariat, 2011). Given the sensitive nature of defining policies as fossil fuel subsidies in most OECD countries, this was an important cognitive output that reframed several national policies as subsidies, highlighting their negative environmental and economic impact. It also constituted important cognitive output in terms of collecting and producing new knowledge about these subsidies, including about their fiscal costs. The inventory has been updated regularly in the following years (OECD, 2012b, 2015b, 2018b), expanding the countries covered to all thirty-six member states as well as Argentina, Brazil, ColombiaFootnote ¹, China, India, Indonesia, Russia and South Africa). The OECD has also published country briefs about fossil fuel subsidies in the individual countries covered in the inventory since 2015, a potentially controversial output due to the sensitive nature of fossil fuel subsidies (see Section 6.4).

More recently, the OECD Secretariat has chaired the G20 voluntary peer reviews, thus playing an important role in the production of knowledge about the subsidies in the countries reviewed and to some degree also in the institutionalisation of the norm of fossil fuel subsidy reform. The peer reviews are central to the G20’s work on fossil fuel subsidies (see Chapter 5), and with the OECD Secretariat chairing the reviews, the sharing of best practices among countries are facilitated (Interview with senior OECD official, 3 February 2020). Importantly, the OECD Secretariat has significantly more expertise on the issue than the states participating in the review (International Organisations [IOs] such as the World Bank and the IEA also participate in some of them), and is a continuous presence in the peer reviews, unlike the other IOs. Altogether, the OECD Secretariat plays an influential role within the peer reviews. The OECD Secretariat’s expertise is also the background for the OECD Secretariat and the IEA reviewing review Dutch fossil fuel subsidies in a similar way to how they have reviewed fossil fuel subsidies as part of the G20 peer reviews.

In terms of defining fossil fuel subsidies, the OECD has opted for what is referred to as a Total Support Estimate, combining an inventory and a price-gap approach to identify both consumption and production subsidies (Reference Jones and SteenblikJones and Steenblik, 2010; Reference Koplow, Skovgaard and van AsseltKoplow, 2018). Importantly, the Total Support Estimate does not include externalities in its benchmark price. The OECD tends to speak about support rather than subsidies, since the term subsidy is seen as referring to a smaller set of measures than supportFootnote ², and since it may be legally problematic in relation to WTO disputes to define a measure as a subsidy (interview with OECD officials, 29 April 2015). The OECD uses the term fossil fuel support in the way that others use fossil fuel subsidies. Hence, when analysing how the OECD has addressed fossil fuel subsidies, I will focus on its efforts regarding what it itself refers to as fossil fuel support. More recently, the OECD and the IEA have combined their respective estimates to produce joint estimates of global fossil fuel subsidies to the G20 (IEA and OECD, 2018; IEA, OPEC, et al., 2010; OECD and IEA, 2019) and have combined their knowledge outputs within a joint portal (OECD and IEA, 2020).

Importantly, the OECD Secretariat placed a strong emphasis on environmental (particularly climate) and fiscal consequences of fossil fuel subsidies, and rather less on the macroeconomic dimensions (e.g. the costs of subsidies to society and their distortionary nature) and significantly less on distributive consequences. For instance, the OECD Secretary-General Angel Gurría wrote in the foreword to the 2011 Inventory that ‘reforming or eliminating support for the consumption or production of fossil fuels can contribute to achieving economic and fiscal objectives, while also helping tackle environmental problems like climate change’ (OECD, 2011a). The fiscal emphasis is evident in that subsidies are measured in terms of budgetary expenditure and tax expenditure (reductions in tax rates also known as tax rebates), that is their impact on public budgets, an emphasis also present in the OECD’s work on agricultural subsidies. The macroeconomic costs of their climate impact are not measured.

6.2 Causes

The OECD’s output addressing fossil fuel subsidies was particularly shaped by two factors: institutional interaction and the OECD worldview. Institutional interaction constitutes the most important factor increasing OECD interest in fossil fuel subsidies (the first aspect of economisation) with less influence on how the OECD addressed the issue (the second aspect of economisation). The G20 is the most important institution in this respect. Its request to the OECD Secretariat to analyse fossil fuel subsidies and the implementation of the Pittsburgh commitment lifted OECD involvement to a new level (interview with OECD officials, 29 April 2015). In the following years, the OECD Secretariat arranged workshops for representatives of member states and reported (individually and with the IEA, OPEC and the World Bank) to the G20 on fossil fuel subsidies. Furthermore, it was only following the G20 commitment that the member states gave the OECD Secretariat the mandate to scrutinise their national fossil fuel subsidies (interview with OECD officials, 29 April 2015). More recently, the decision by the G20 members that have committed to voluntary peer reviews to invite the OECD Secretariat to chair those peer reviews once again lifted OECD Secretariat involvement to a new level (see also Chapter 5). Interaction with other institutions was more important in shaping how the OECD addressed fossil fuel subsidies. As regards the drafting of the reports, especially country-specific ones, the OECD staff collaborated with the World Bank and the IEA, which in this way influenced the OECD approach to the subject (interview with OECD officials, 29 April 2015).

The worldview proved more important regarding the second aspect of economisation, how the OECD addressed fossil fuel subsidies, particularly in cognitive terms. The OECD Secretariat is a bureaucracy characterised by emphasising the economic aspects and consequences of policy issues and instruments, and prioritising economic growth and development (see Chapter 3). Addressing fossil fuel subsidies fit such a worldview that in cognitive terms focuses on the economic impacts of policies and in normative terms prefers free-market policies. Fossil fuel subsidy reform has in many countries meant deregulation and leaving price-setting and investment decisions to the market without government interference. Such reform also agrees with the norm complex of liberal environmentalism, which the OECD Environment Directorate was instrumental in developing and which is prevalent in global environmental policy and predicates international environmental protection on a liberal economic order (Reference BernsteinBernstein, 2001). Furthermore, the OECD Secretariat – consisting predominantly of officials with degrees in Economics – has the production of knowledge and data as its main task and prefers producing data that can be and are analysed econometrically and which highlights the economic consequences (Reference LehtonenLehtonen, 2009; Reference RuffingRuffing, 2010).

In more specific terms, the OECD’s Total Support Estimate is rooted in its work on other subsidies, particularly agricultural subsidies. The Trade and Agriculture Directorate was the most important Directorate because of its agricultural subsidy expertise. Because of this institutional legacy, the OECD definition of fossil fuel subsidies is derived from the OECD definition of agricultural subsidies, again derived from the WTO’s definition of subsidies (of all kinds) as ‘direct transfers, fiscal incentives and provision of goods and services’ (OECD Secretariat, 2005, p. 17). The past experience of working with agricultural subsidies was entrenched in the organisation and hence influenced the definition of fossil fuel subsidies and the general framing of fossil fuel subsidies.

Other factors have also influenced the OECD efforts regarding fossil fuel subsidies to some degree. Policy entrepreneurs in the OECD Secretariat played an important role in seizing the opportunity provided by the increasing attention to the issue. Yet, they played a more important role regarding how the OECD addressed fossil fuel subsidies. Particularly Ronald Steenblik, until his retirement in 2018 the OECD’s chief fossil fuel subsidy expert and perhaps the foremost expert on the topic globally, has shaped the OECD’s approach both through internal discussions and policy and academic publications on fossil fuel subsidies published long before Pittsburgh (Reference Jones and SteenblikJones and Steenblik, 2010; Reference SteenblikSteenblik, 1999, Reference Steenblik2003, Reference Steenblik2016; Reference SteenblikSteenblik and OECD, 2003; Reference Steenblik, Sauvage, Timiliotis, Skovgaard and van AsseltSteenblik et al., 2018). The influence of Steenblik and other policy entrepreneurs within the OECD Secretariat is most pronounced regarding the Total Support Estimate, which they have been committed to, and the fact that they have often been critical of alternative approaches such as the IMF’s (Reference Steenblik, Oosterhuis and BrinkSteenblik, 2014).

The influence of policy entrepreneurs and the institutional worldview of the Secretariat have been circumscribed by the role of another set of factors, namely the relations with member states. Member states have not been directly involved in drafting the most important OECD publications, which were published on behalf of the OECD Secretariat. Yet, member states played an indirect role by limiting how far the OECD staff could go (interview with Swedish Ministry of Foreign Affairs official, 30 April 2015). The consensual nature of OECD policy processes, even as regards OECD Secretariat publications (which are discussed but not approved by member states) means publications that go directly against the preferences of large groups of members states are highly unlikely (Reference Carroll and KellowCarroll and Kellow, 2011). Thus, the relatively low degree of OECD Secretariat autonomy (at least compared to the IMF or the World Bank) acted as a scope condition for the influence of the institutional worldview and policy entrepreneurs, especially before Pittsburgh. If the Secretariat had had more autonomy than is actually the case, the institutional worldview and policy entrepreneurs could have been more influential.

The membership circle of the OECD covers more countries than the G20, but the thirty-seven OECD countries only include developed countries plus a few countries (Colombia Mexico, Chile and South Korea) classified by the World Bank as upper-middle income countries. The OECD addressed the fossil fuel subsidies of its member states as well as a number of other selected states, and addressed their subsidies differently from how the IMF or the IEA did, although the membership circle is very similar to the IEA’s (only Chile, Colombia, Iceland, Israel and Slovenia are members of the OECD but not the IEA). Altogether, there is far from a perfect correlation between the preferences of the member states and the output of the OECD. Rather, the output was shaped predominantly by the institutional worldview and to some degree entrepreneurs within the OECD within the limits of the OECD Secretariat’s autonomy.

6.3 Consequences

6.4 Summary

The OECD, a knowledge producing institution, has unsurprisingly had the greatest impact in terms of cognitive output defining what fossil fuel subsidies are and how we can understand their implications. Thus, the OECD has produced an extensive amount of cognitive knowledge about what is important about fossil fuel subsidies and which policies in individual countries can be understood as fossil fuel subsidies. A crucial aspect of this output has been the framing in terms of economic, particularly fiscal impact. The extensive data gathering endeavour as well as the efforts to promote the OECD’s definition has had a significant impact on how fossil fuel subsidies – until 2009 an extremely marginal issue – have been addressed, especially at the international level. At the domestic level, the influence of the OECD is more difficult to discern, not least because the OECD Secretariat has often been most influential when it has chaired G20 peer reviews, making it rather difficult to precisely distinguish the OECD’s influence from the G20’s. It is worth contemplating how different the international efforts to promote fossil fuel subsidy reform might have been had the OECD adopted a different definition, for example, if it had included the non-pricing of externalities in the way the IMF (Reference Coady, Parry, Sears and ShangCoady et al., 2015, Reference Coady, Parry, Le and Shang2019) has done, or development finance supporting fossil fuel production, the way the NGOs such as Oil Change International have done (Oil Change International et al., 2017). The OECD output has primarily been driven by institutional interaction with the G20, which lifted OECD involvement to a new level, and the institutional worldview inherent to the OECD Secretariat, which emphasises the economic aspects of fossil fuel subsidies. The relatively limited autonomy of the OECD Secretariat has acted as a scope condition for the influence of this worldview.

7.1 Output: Conditionalities and Carbon Pricing

IMF output has addressed fossil fuel subsidies along two strands, both increasing in importance. First, a strand consisting of bilateral interactions with countries experiencing fiscal problems exacerbated by fossil fuel subsidies and including policy recommendations and IMF programmes inter alia promoting subsidy reform to improve fiscal balances (interview with IMF senior official, 17 February 2015). This strand is composed mainly of distributive output in the shape of conditionalities, particularly that the country in question would receive IMF loans only if it embarked on reforms including subsidy reform. Yet, to a lesser degree, the strand also consists of knowledge output in the shape of analyses of the consequences of such reforms and the best ways to undertake them. For decades, the IMF has been opposed to subsidies, especially consumer subsidies fixing the prices of goods, because of their fiscal and macroeconomic impact. The former has been problematic in the eyes of the IMF because subsidies constitute sizeable budget items including at times of fiscal deficits, the latter because subsidies distort the allocation in markets by fixing or supporting prices. At times, subsidies (for fossil fuels as well as other products such as food) have been phased out or cut significantly as a result of IMF insistence, for example, in Egypt (Reference Sherry, Zaid, El-Badrawi and HaberSherry et al., 2014) and Sudan (Reference MichaelMichael, 2013). Over the past ten years, fossil fuel subsidies have been singled out in an increasing number of IMF recommendations to individual countries and have increasingly been treated as distinct from other kinds of subsidies. The IMF has suggested phasing out such subsidies because they are an inefficient, fiscally costly and often economically distorting way of providing welfare benefits (interview with IMF officials, 9 April 2014). The ongoing IMF Extended Credit Facility Arrangement (a kind of IMF programme) for Burkina Faso constitutes an example of this, with detailed recommendations on how Burkina Faso should liberalise the government-fixed fuel prices (IMF, 2015a; interview with senior IMF official, 22 June 2016). This strand mainly emphasises the fiscal consequences of the fossil fuel subsidies, while also stressing the distributional (both positive and negative) and macroeconomic consequences. Environmental consequences (including local externalities) have been accentuated to a lesser extent. In the case of Burkina Faso, the IMF policy was developed by local IMF officials and officials from the Fiscal Affairs Department, and focused on what the IMF refers to as pre-tax subsidies, namely the subsidies lowering consumer prices below the international market price plus distribution costs, not the absence of a full pricing of the externalities (interview with senior IMF official, 22 June 2016). Not including an incomplete pricing of externalities distinguishes the IMF’s approach to fossil fuel subsidies in Burkina Faso from its approach to fossil fuel subsidies globally, which did include such non-pricing (see subsequent discussion of the IMF’s fossil fuel subsidy definition).

The second strand consists of knowledge output and focuses on the lack of a carbon price (and environmental taxes generally) and on solving this problem from the perspective of an economist, that is, getting the price right (interview with IMF senior official, 17 February 2015). Prior to 2008, the IMF only occasionally addressed subsidies including energy (rather than fossil fuel) subsidies in policy reportsFootnote ¹ (Reference Baig, Mati, Coady and NtamatungiroBaig et al., 2007; Reference Gupta, Verhoeven, Gillingham, Schiller, Mansoor and CordobaGupta et al., 2000) and in country-specific policy recommendations (see e.g. IMF 2004). Energy subsidies were framed in terms of fiscal and macroeconomic impact, without referring to the environmental impact. Thus, subsidising fossil fuels was framed as being similar to subsidising any other product. The IMF used price-gap approaches to measure all kinds of subsidies, and did not include externalities in its fuel benchmark prices (e.g. Reference Said and LeighSaid and Leigh, 2006), which meant that getting the price right at this stage did not signify including the costs of externalities in the price.

In 2008 the first official publicationsFootnote ² to address fuel subsidies as a distinct concept and to include environmental externalities (priced at USD 0.50 per litre petrol and diesel) were published (IMF, 2008a, 2008b). They would provide the blueprint for future IMF output in fossil fuel subsidies. After 2008 the IMF increasingly addressed fossil fuel subsidies and their environmental impact, while maintaining the emphasis on fiscal and macroeconomic consequences. In 2013, they published the report ‘Energy subsidy reform: lessons and implications’ (Reference Clements, Coady, Fabrizio, Gupta, Alleyne and SdralevichClements et al., 2013) which raised the IMF’s engagement with fossil fuel subsidies to a new level. Crucially, the report used a price-gap approach based on a benchmark price including both value-added tax (VAT) and the social cost of externalities, particularly climate change and other environmental externalities such as local air pollution. This approach was adopted on the basis of the IMF’s work on fiscal instruments (in the Fiscal Affairs Department) and the emphasis on – as the title of a key publication on fossil fuel subsidies says – Getting Energy Prices Right (Reference Parry, Heine, Lis and LiParry et al., 2014). The IMF has also offered an online course on Energy Subsidy Reform based on these publications. The notion of ‘getting prices right’ constitutes a framing of fossil fuel subsidies as being problematic in normative terms because they cause prices to be ‘wrong’ in the sense of preventing the optimal allocation in markets. A price is right if it reflects all production-related costs to society as well as all benefits to the buyer, as determined in a market where the only government intervention consists of taxes addressing negative externalities, or subsidies addressing positive externalities. Importantly, the notion of including non-priced externalities in the definition of a subsidy was hardly discussed outside the IMF prior to 2013 (one exception being Reference HodasHodas, 2006).

The cognitive and normative dimensions of this notion are closely intertwined: fossil fuel subsidies are defined (cognitively) in terms of getting the prices wrong, and they are normatively problematic because they get the prices wrong. One can compare this framing of the right price to the proponents of fossil fuel consumption subsidies, who argue that the price is right if it is low enough to allow everybody to buy it, and – in the case of fossil fuel producing countries – allows for people to get ‘their share’ of the fossil fuel resources of that country (Reference Cheon, Urpelainen and LacknerCheon et al., 2013). Regarding distributive consequences, the IMF framed fossil fuel subsidies as a highly ineffective way of supporting low-income households, since most of the subsidies are captured by citizens with above-average incomes (Reference Arze del Granado and GillinghamArze del Granado and Gillingham, 2012).

The framing also closely linked fossil fuel subsidies to another policy issue, namely carbon pricing. The IMF reports explicitly referred to Pigouvian or corrective taxes as the optimal way of correcting externalities, drawing on the works of the economist Arthur Pigou. Reference PigouPigou (1932) invented the concept of an externality defined as the cost or benefit of an activity undertaken by one actor that affects another actor not involved in the activity, thus creating a suboptimal situation since the costs of the activity do not reflect the true costs or benefits to society (see also Chapter 1). Furthermore, Pigou developed the notion that externalities should be corrected by placing taxes (or financial support) on the activity creating the externality that corresponds to the social costs (or benefits). For instance, burning coal incurs costs to other parts of society that are not borne by the polluter, and consequently should be corrected by a Pigouvian tax on coal burning corresponding to the environmental damage. Or a positive externality such as non-patented research should receive support corresponding to the social benefit. The linking of fossil fuel subsidies and carbon pricing is closely related to the IMF increasingly advocating carbon pricing, particularly carbon taxes, as the most important climate mitigation instrument (IMF, 2019c, 2019e; Reference LagardeLagarde, 2015; Reference Mooij, Keen and ParryMooij et al., 2012; Reference ParryParry, 2019; Reference Parry, Heine, Kizzier and SmithParry et al., 2018).

Importantly, the IMF explicitly endorsed environmental taxes over other environmental policy instruments, including not only regulatory standards such as emission standards, which were never popular among neoclassical economists (Reference Lauber and SchennerLauber and Schenner, 2011; Reference Meckling and AllanMeckling and Allan, 2020), but also over emission trading schemes, an alternative carbon pricing instrument. Neoclassical environmental economists have been divided over whether environmental taxes or emissions trading schemes constitute the most optimal instrument. Whereas advocates of taxes draw on Pigou’s arguments for letting the polluter bear the social costs of pollution, advocates of trading schemes draw on economist Reference CoaseRonald Coase (1960), who argued that the right to pollute should be divided between actors, who could then trade these rights and thus create a price on emissions through trading. According to Coase, the social costs of pollution should not necessarily be borne by the polluter. Other actors working with fossil fuel subsidies had not linked it to carbon pricing, and in carbon pricing circles, fossil fuel subsidies had been mentioned only as a detriment to effective carbon pricing without framing the absence of carbon pricing as a subsidy (see OECD, 2009). It is worth comparing the IMF’s endorsement of Pigouvian taxes to that of the World Bank, which has been very active in promoting carbon pricing, but initially promoted emissions trading and only at a later stage promoted carbon taxes on a par with emissions trading (Reference Skovgaard, Canavan, Zelli, Bäckstrand, Nasiritousi, Skovgaard and WiderbergSkovgaard and Canavan, 2020).

The findings of the report were extended and updated in a 2015 IMF working paper (Reference Coady, Parry, Sears and ShangCoady et al., 2015), whose estimate of global subsidies at USD 5 300 billionFootnote ³ in 2015 – compared to estimates of USD 1900 billion in the 2013 report USD (Reference Clements, Coady, Fabrizio, Gupta, Alleyne and SdralevichClements et al., 2013) and USD 550 billion in the IEA’s 2014 World Energy Outlook (IEA, 2014) – received significant attention. This increase was due to a revision upwards of the assessments of externalities – especially air pollution. In 2019, the IMF updated its 2015 analysis with new data and found that very little had changed: global fossil fuel subsidies were estimated at USD 5,200 billion for 2017 (Reference Coady, Parry, Le and ShangCoady et al., 2019).

According to both the 2015 and 2019 analyses, local air pollution accounted for little less than half of the subsidies, climate change for little less than one quarter, with reductions to consumption taxes, direct subsidies and non-air local externalities (congestion, traffic accidents, etc.) for the remaining part (Reference Coady, Parry, Sears and ShangCoady et al., 2015, Reference Coady, Parry, Le and Shang2019). Regarding climate change, the social cost of emitting a ton of CO₂ was in 2015 estimated at USD 35 (based on Reference Parry, Heine, Lis and LiParry et al., 2014) and USD 40 in 2019 (Reference Coady, Parry, Le and ShangCoady et al., 2019), figures originating from the US government’s Interagency Working Group on Social Cost of Carbon (respectively Interagency Working Group on Social Cost of Carbon, 2013, 2016). The USD 35 and 40 per ton social costs are low estimates, based on William D. Nordhaus’ DICE model, which has been criticised for seriously under-estimating the costs of climate change (Reference Howard and SternerHoward and Sterner, 2017). In comparison, Reference TolRichard Tol’s (2011) meta study of different estimates of the social cost of carbon arrives at a mean of USD 177 per ton (although most of the estimates are below this mean), and the High-Level Commission on Carbon Pricing (2017) estimated that carbon prices should be between USD 40 and 80 per ton by 2020 to meet the Paris Agreement’s target of temperature increases ‘well below 2 degrees’ (UNFCCC, 2015). Interestingly, one of the IMF’s reports from 2019 advocating carbon taxes operated with a carbon price of USD 75 per ton being required to meet the 2-degree target (IMF, 2019e).Footnote ⁴ Yet, the USD 35 and USD 40 estimates are high compared to actual levels of carbon taxation. Only about 20 per cent of global emissions are currently covered by such taxes, with about half of these emissions priced at below USD 10 per ton, and only 5 per cent of them above USD 40 per ton (World Bank, 2020b).

According to the IMF’s definition, practically all states subsidise fossil fuels, even countries with carbon taxes that do not fully price externalities. Developed countries account for a quarter of energy subsidies, and emerging and developing Asia for half (Reference Coady, Parry, Sears and ShangCoady et al., 2015). Consequently, the 2013 and 2015 reports break with previous analyses which – using different definitions – identified fossil fuel subsidies as a phenomenon primarily seen in developing countries. The reports also contradicted the claims of influential IMF member states (including the United Kingdom and Japan) that they do not subsidise fossil fuels these (Reference Kirton, Larionova and BrachtKirton et al., 2013), something which made the report unpopular among the governments of those countries but popular among NGOs. In 2020, the IMF planned to integrate climate mitigation issues, including carbon pricing, in its bilateral Article IV consultations (which are carried out with all member states), although these consultations were temporarily postponed because of the coronavirus pandemic (interview with senior IMF official, 19 May 2020).

7.2 Causes

The most important factor influencing the decision to address fossil fuel subsidies (the first aspect of economisation) was policy entrepreneurs within the IMF, who together with the institutional worldview shaped how the IMF addressed the issue. From 2005 onwards, fossil fuel subsidies gained increasing attention, particularly driven by the fiscal impact of high oil prices (2005–8 and 2011–14) and the ‘Poverty and Social Impact Analysis Group’ within the Fiscal Affairs Department. More specifically, IMF officials, including members of this analysis group, provided technical assistance to countries suffering from the costs of subsidising expensive fossil fuels and wanting to reform these subsidies, and this experience increased the awareness of the subsidies and how to address them (interview with IMF official, 25 February 2015). Consequently, the IMF stressed the fiscal impact of fossil fuel subsidies while stressing the importance of mitigating measures to protect the poor (interview with IMF official, 25 February 2015). Thus, the contextual factor of high oil prices provided policy entrepreneurs within the IMF with a window of opportunity. As mentioned in Section 7.1, from 2008 onwards, the IMF has increasingly singled out fossil fuel subsidies from other subsidies and stressed their environmental impact; a development in framing that was due to policy entrepreneurship within the organisation.

The notion of including environmental externalities in measures of efficient fuel prices had been floating around for some time among a circle of economists working for the IMF, the World Bank, the US government and various environmental think tanks in Washington DC (interview with senior IMF economist, 24 April 2014). The IMF economists within this group also promoted the notion of including undercharging for environmental costs in a broad definition of fossil fuel subsidies, and such undercharging has received considerable attention from IMF management since 2011 under Christine Lagarde (interview with senior IMF economist, 24 April 2014). Lagarde took a more active interest in climate politics than her predecessors, which opened a window of opportunity for the aforementioned economists. With few exceptions, all publications addressing fossil fuel subsidies since the 1990s have been authored by at least one of the key IMF economists working on fossil fuel subsidies: David Coady, Ian Parry and Benedict Clements. Of these, Parry has a background in environmental energy taxation (with a PhD from the University of Chicago), and has argued the case for carbon taxes in academic and IMF publications (Reference ParryParry, 2015, Reference Parry2019; Reference Parry, Heine, Lis and LiParry et al., 2014, Reference Parry, Heine, Kizzier and Smith2018) as well as being the Fund’s leading expert on such taxes and environmental fiscal policy in general. He arrived at the IMF in 2010, when the Fund’s interest in the under-pricing of externalities from fossil fuel use was increasing. David Coady is the Chief of the Expenditure Policy Division of the Fiscal Affairs Department and has mainly worked and published on the distributional effects of public policies (and earned his PhD from the London School of Economics). Similarly, Benedict Clements (at the time of writing Chief of the Fiscal Policy and Surveillance Division of the Fiscal Affairs Department, holding a PhD from the University of Notre Dame) has worked and published on public and fiscal policy. Both Coady and Clements have been working on subsidies at the IMF since the Fund first started addressing the issue (Reference Baig, Mati, Coady and NtamatungiroBaig et al., 2007; Reference Clements, Rodriguez and SchwartzClements et al., 1998).

In terms of the second aspect of economisation, how fossil fuel subsidies were addressed, the policy entrepreneurs particularly from the Fiscal Affairs Department were important in framing the environmental impact in neoclassical terms (as discussed in Section 7.1). There is nothing surprising about the Fiscal Affairs Department adopting a neoclassical approach, since it – even more than other IMF Departments – has been consistently informed by neoclassical economics even following changes to the Washington Consensus (Reference BanBan, 2015; Reference Park, Vetterlein, Park and VetterleinPark and Vetterlein, 2010b). While the IMF has always framed fossil fuel subsidies as well as other subsidies in terms of their negative fiscal consequences, the framing in terms of macroeconomic and especially environmental consequences increased in salience after 2008 because of the aforementioned entrepreneurship. The framing of subsidies as producing suboptimal societal outcomes has long been present within the IMF (see e.g. Reference Gupta, Verhoeven, Gillingham, Schiller, Mansoor and CordobaGupta et al., 2000), but the focus on the macroeconomic costs of pollution (framing environmental degradation in terms of economic costs) only gained traction after 2008 (Reference Arze del Granado and GillinghamArze del Granado and Gillingham, 2012; Reference Clements, Coady, Fabrizio, Gupta, Alleyne and SdralevichClements et al., 2013; IMF, 2008a, 2008b). Hence, the entrepreneurs successfully defined fossil fuel subsidies in a way that resonated with the organisation’s institutional worldview including the professional background of IMF officials, and leading to a very ideal-typical instance of economisation. This resonance is evident not just in the way in which the Fund has addressed fossil fuel subsidies, but also in how it has addressed climate change in general. Most notably, the 2019 report was part of a broader trend of IMF output addressing the economic aspects of climate change such as fiscal policies to meet the Paris Agreement (IMF, 2019c), the greening of the financial system (Reference CarneyCarney, 2019; Reference Grippa, Schmittmann and SuntheimGrippa et al., 2019), using whales as carbon sinks (Reference Chami, Cosimano, Fullenkamp and OztosunChami et al., 2019) and a bilateral assessment of the climate policies of Belize and Grenada (IMF, 2019b, 2019d). Thus, the economisation of fossil fuel subsidies was part of a larger wave of economisation of climate related issues. While the economisation of fossil fuel subsidies was a frontrunner for the IMF’s economisation of climate issues, arguably the more overarching economisation and inherent attention to climate issues was an environment conducive to continued attention to fossil fuel subsidies.

Other factors were less important. Relations with member states were not particularly important, as is evident in the IMF reports stating that virtually all countries have fossil fuel subsidies, conclusions that ran directly against the claims of influential member states such as the United Kingdom and Japan. The IMF’s de facto call for carbon taxes also goes against the current policy situation in the majority of member states (including the most influential member state the United States), which have not adopted such taxes. These states broadly endorsed the IMF’s 2019 efforts to address mitigation when they were presented as proposals to the Board (interview with senior IMF official, 19 May 2020). Institutional interaction was also limited, beyond the aforementioned group of Washington-based economists at inter alia the IMF and the World Bank, who discussed the notion of including environmental externalities in estimates of efficient fuel prices, and the use of OECD production subsidy data. The IMF was not one of the institutions requested by the G20 to provide reports fossil fuel subsidies in the way that it provided reports on climate finance (see Chapter 12). Although IMF officials have participated in various meetings of fossil fuel experts inter alia in the context of the G20, this interaction has had no significant influence on the decision to address fossil fuel subsidies and how it addressed them.

7.3 Consequences

7.4 Summary

As regards fossil fuel subsidies, the IMF turned out in many ways to be the unexpected environmentalist. The Fund’s output can be divided into two strands. First, the IMF has for decades induced countries to reform their fossil fuel subsidies through the conditionalities of its programmes, but until recently without treating fossil fuel subsidies differently than any other subsidy. Second, since 2008, the IMF has defined the non-pricing of externalities including climate change as constituting a subsidy. This definition constitutes a game changer in IMF policy on the subject, which was driven by policy entrepreneurs among the IMF officials and was shaped by the economic worldview of the IMF in the context of the IMF bureaucracy’s autonomy from its member states. The IMF’s output has had some ideational impact on the international level, where other institutions such as the G20 took the IMF’s definition of fossil fuel subsidies into account but ended up relying on other definitions. The output has had more important consequences for the domestic level. The first strand had decisive incentive-based consequences for countries such as Indonesia under IMF lending arrangements, which required them to reform their fossil fuel subsidies. The IMF’s extensive definition of fossil fuel subsidies, according to which practically all countries in the world subsidise fossil fuels, also had an impact. It was utilised by actors who wanted fossil fuel subsidy reform in countries such as Denmark and the United Kingdom.

8.1 How They Align

8.2 Causes of Alignment

Factors pulling in the direction of convergence and divergence shape the overall pattern of alignment in terms of synergy on fundamental issues and some degree of diverging (although rarely conflicting) ideas concerning definitions, especially between the IMF and the OECD. Regarding convergence, the fundamental elements of the institutional worldviews shaped the basic shared approach to fossil fuel subsidies as an issue that was problematic for environmental and economic reasons. The environmental reasons were mainly conceived of in economic terms as problematic due to their economic costs. Institutional interaction is another important factor for convergence, particularly between the G20 and the OECD, which interacted with other as well as several of the same institutions, particularly the IEA and the World Bank. On a fundamental level, interaction also mattered in terms of the Pittsburgh commitment lifting the topic to a new level internationally, including within the OECD and more indirectly the IMF (see Chapters 6 and 7). Overlap in terms of membership also pulled in the direction of convergence, since several states are members of all three institutions, most notably the largest developed economies. Yet, also institutions that do not overlap to the same extent, most notably the Friends of Fossil Fuel Subsidy Reform, have produced similar output, indicating that convergence can also happen without overlapping membership.

On the other hand, the divergence between the institutions, particularly the IMF and the OECD, has been driven by factors, which influenced the institutions in different ways. The institutional interaction that influenced the OECD did not influence the IMF to the same extent, since there was no request to address fossil fuel subsidies and thus the IMF did not interact in the same way with the G20, the IEA, the World Bank and OPEC. Rather the IMF addressed the issue on the initiative of IMF staff, which more than OECD staff induced their organisation to address fossil fuel subsidies. IMF staff acting as policy entrepreneurs are also the main reason why the IMF to a larger degree than the OECD framed fossil fuel subsidies in terms derived from environmental economics: IMF staff linked the macroeconomic and environmental framing of such subsidies on the basis of the notion of getting the price right.

The differences in how the organisations addressed fossil fuel subsidies was also influenced by more specific differences between their worldviews: the IMF defined the environmental impact in the aforementioned neoclassical way, and the OECD defined fossil fuel subsidies in a fashion reflecting how it had addressed other subsidies. The G20 was much less specific in how it defined fossil fuel subsidies and the applied the norm of fossil fuel subsidy reform, but to a large extent relied on its member states and other institutions, notably the OECD.

The degree of autonomy of the IO bureaucracies proved to be an important scope condition for the influence of the worldview and policy entrepreneurs, and thus also shaping the divergence between the institutions. This is evident in that the IMF, to a greater degree than the OECD, adopted positions running against the preferences of its member states, most notably the claim that developed countries have significant fossil fuel subsidies. The OECD had less autonomy and only received the mandate to scrutinise its members’ subsidies after the G20 commitment. The differences between the two organisations demonstrate that differences in membership and voting rules did not have an impact, as the IMF contradicted member states that are more influential within the IMF than within the OECD, especially the United States. Arguably, if the IMF had the same degree of autonomy as the OECD Secretariat, its position would have been more similar to that of the OECD.

8.3 The Consequences of Alignment

The alignment of the three institutions had important consequences both at the international and the domestic levels.

8.4 Summary

The three institutions have worked to promote the norm of fossil fuel subsidy reform. More specifically, they framed fossil fuel subsidies as undesirable because of their environmental and economic consequences, though the environmental consequences were framed in economic terms. Although the OECD and the IMF diverged regarding the definition of fossil fuel subsidies, the relationship was generally one of co-existence rather than conflict. Particularly the G20 and the OECD had a synergetic relationship, in which the G20 requested the OECD to provide an analysis of fossil fuel subsidies, which lifted the OECD involvement with the topic to a new level. The OECD also influenced the content of the G20 output. The divergence between the OECD and the IMF centred on the IMF’s inclusion of the non-pricing of externalities in its definition of fossil fuel subsidies, a framing rooted in the neoclassical notion of getting prices right. and constituting an even more ideal-typical case of economisation than the OECD’s framing. This divergence had ramifications for both the international and domestic levels in terms of conflicting estimates of fossil fuel subsidies and discussions of which definition to use, for example, in the context of the SDGs. Yet, the synergy between the institutions regarding the overarching framing of fossil fuel subsidies and the more specific synergy between the G20 and the OECD helped draw attention to the issue and promote the norm especially at the international but also the domestic levels. The convergence between the institutions was based on the shared elements of their worldviews as economic institutions, institutional interaction and to some degree also their overlapping membership. The divergence between the IMF and the OECD was driven by the differences in worldview, policy entrepreneurship among IMF officials and the IMF’s greater autonomy from principals, which allowed for the intra-institutional factors to play a greater role in the case of the IMF. In this way, IO autonomy acted as a scope condition for the other factors.