When the leaders of the world’s biggest economies gather this weekend at the G20 summit in Antalya, Turkey, they must recognise the real scale of subsidies for fossil fuels and accelerate their eradication.
In 2009, G20 leaders agreed to “phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest”. They acknowledged that “inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change”.
While that commitment has been restated at many summits since, action to implement it has been unacceptably slow.
An analysis for the G20 in 2010 by the Organisation for Economic Co-operation and Development, the International Energy Agency, the World Bank and Opec, estimated global subsidies for the consumption and production of fossil fuels to be about $700bn a year.
As the IEA pointed out, that figure is several times higher than the subsidies for new renewable energy technologies. But, as the OECD readily acknowledges, these figures provided a very narrow definition of financial support for fossil fuels, and high levels of subsidies continue to be provided by governments around the world.
A study published this year by the International Monetary Fund calculated that post-tax subsidies for fossil fuels will amount to more than $5tn, or about 6 per cent of global gross domestic product, in 2015, with the G20 nations responsible for more than 80 per cent of this sum.
The study included grave externalities, such as local air pollution, which kills and harms millions of people each year, and climate change, which could threaten the lives and livelihoods of hundreds of millions, or even billions, of people if greenhouse gas emissions are not reduced sharply. These are not abstract costs: they are the lives of people now and in the future.
Half the total subsidies in the analysis are due to inadequate pricing of air pollution, while just under a quarter is linked to climate change. Make no mistake: freely allowing an activity that imposes severe costs on others is correctly classified as a subsidy.
Yet, the numbers published by the IMF are conservative. They are based on an estimate by the US government of the economic impacts of climate change that excludes many of the most severe potential consequences, such as accelerated warming as methane is released from gas hydrates in the oceans, a rapid rise in the global sea level due to destabilisation of the land-based ice sheets on Greenland and west Antarctica, or conflict that could arise from large-scale migrations of people triggered by extreme weather events.
The study concludes that if post-tax energy subsidies were eliminated in 2015, revenue for governments would rise by $2.9tn — equivalent to 3.6 per cent of global GDP — global annual emissions of carbon dioxide would fall by more than 20 per cent, and premature deaths from air pollution would be cut by more than half.
Coal receives more than half the post-tax subsidies for energy, as it is responsible for a large part of the deadly air pollution each year. It also produces about twice as much carbon dioxide as natural gas per unit of electricity generated.
This means that when the real costs of using coal are taken into account, its price should be above $200 a tonne, rather than the approximately $50 per tonne it costs to acquire it. Even at a relatively low carbon price of $35 a tonne of carbon dioxide, the costs of greenhouse gas pollution add about $70 to the cost of a tonne of coal.
The relatively low taxes on coal consumption constitute bad economics: they heavily distort energy markets and allocations. They are also unethical because they result in large-scale deaths and damage to others.
With many countries now stepping up their efforts to tackle climate change through carbon taxes, it makes no sense to maintain huge subsidies for fossil fuels. The money would be much better used to improve government finances, investment in low-carbon technology and infrastructure, providing the basis for clean and sustainable economic growth and development over the next few decades, and targeted support for the poorest people.
This is a crucial year in the fight to avoid dangerous climate change, with countries negotiating a new international agreement to be finalised in Paris next month. It also provides a great opportunity to accelerate the movement to a much more attractive, innovative and dynamic form of growth. Delay is dangerous: we risk locking in dirty infrastructure in the course of very rapid urbanisation and energy investment, and losing control of greenhouse gas concentrations that are already dangerously high.
The G20 must show strong leadership in Antalya by publishing a clear plan for delivering over the next decade on the commitment to phase out the large subsidies for oil, coal and gas.
Professor Lord Stern of Brentford is Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and President of the British Academy
Copyright The Financial Times Limited 2016. All rights reserved. Please don't cut articles from FT.com and redistribute by email or post to the web.