US and China ready peer reviews of fossil fuel subsidies

Studies being presented at the G20 could kick-start efforts to remove price supports for oil and coal, write Liu Shuang and Hu Min
<p>Oil refineries, like this one at &quot;Baby Beach&quot; in Aruba, are supported by government payments. (Image&nbsp;by Spencer Thomas)</p>

Oil refineries, like this one at "Baby Beach" in Aruba, are supported by government payments. (Image by Spencer Thomas)

At the G20 summit in September China, the host country, and the US will present a peer review of each other’s fossil fuel subsidies, becoming the first two countries to do so under the G20.

Following years of feet-dragging on the question of subsidy reform, the review hints at progress on the creation of a new shared governance model.

The review, countries hope, will lead to clear actions, taken on a voluntary, bottom-up basis; and to the adoption of a practical and effective model of bilateral cooperation within a multilateral framework.

In China, this is the first time the government has formed a cross-departmental, cross-sector group of experts to systematically examine the state of fossil fuel subsidies, undertaken with the aim of building a long-term domestic energy and subsidy strategy.

For both China and the US, it is also an opportunity to use the international stage to force domestic policy change.

The review

Numerous researchers have analysed the scale of fossil fuel subsidies, how to reform them, and the impact of those reforms. But those outcomes have largely been neglected.  

In the aftermath of the global financial crash in 2008 the benefits of ending fossil fuel subsidies became more apparent.

In economic terms, governments could save spending. In social terms, getting rid of price supports would end a system that tends to benefit those with higher incomes; and environmentally, it would discourage unnecessary consumption of fossil fuels and, as a result, help tackle a range of environmental problems.

The time was right, and at the September 2009 summit in Pittsburgh G20 leaders committed to “phase out and rationalise, over the medium term, inefficient fossil fuel subsidies”. Two months later APEC leaders made a similar promise when they met in Singapore.  

But in the three years since, the G20 has failed to introduce the tangible measures needed to turn high-level political commitments into action. The only mechanism available has been a non-binding, voluntary self-reporting system.

Following Pittsburgh, finance ministers were instructed to develop a voluntary peer review process to push fossil fuel reforms forward. In 2013, a methodology was published by which G20 members could evaluate the policies and policy outcomes of other nations. The results of those evaluations would, in theory, inform future G20 decisions.

China-US cooperation

In 2013, the US made China an offer: for the two nations to complete the G20’s first round of fossil fuel subsidy peer review jointly. China quickly agreed and during US vice-president Joseph Biden’s visit to China, in late 2013, the two sides announced the peer review would go ahead.

This speed was possible due to the two countries’ existing dialogues outside the G20 framework, on the economy, energy and climate issues. The understanding and trust built up through the China-US Strategic and Economic Dialogue was particularly important.

Timeline: China and the US work on fossil fuels

  • July 2014 Terms of reference for the peer review are agreed upon

  • May 2015 Members of the peer review group are confirmed

  • 2014 – 2015 Teams of Chinese and US experts decide on definitions, scope and methodology of the peer review process

  • Early 2016 The Chinese review is completed

  • May 2016 The US review is expected 

  • September 2016 Outcomes to be submitted at the G20 meeting in Hangzhou

The review provides actual experience of how to use the “inventory method” to analyse fossil fuel subsidies, particularly when dealing with cross-subsidies; and of how to use non-G20 cooperative mechanisms, such as the China-US Strategic and Economic Dialogue, to further other processes.

While it is not yet possible to comment on the review’s outcome, pending its completion, G20 members can still learn something from the process.

The outcomes

Bilateral peer reviews of fossil fuel subsidies are not a G20 invention – APEC members New Zealand and Peru have already successfully completed the process. By looking at the outcomes of that review (submitted by Peru in November 2014 and New Zealand in September 2015) we can predict possible outcomes for the China-US review.

First, expenditure on fossil fuel subsidies is not the focus of the process; the key is the identification and reform of subsidies which are inefficient (despite the greater media attention paid to the former).

The review provides actual experience of how to use the “inventory method” to analyse fossil fuel subsidies 

For example, Peru offers tax breaks for fossil fuel producers, and some consumer subsidies, in its Amazon region. The peer review with New Zealand assessed the scale of these subsidies but spent more time analysing the impact these have.

It found that while the aim of the subsidies is to stimulate economic development in the Amazon, 14 separate tax exemptions resulted in the loss of government income equivalent to 0.46% of GDP, while economic growth in the region is still the country’s lowest. The subsidies failed to attract investment or create jobs.

In light of this, it was recommended that these subsidies be cut. However, the report also found that the monthly issuing of vouchers for natural gas to low-income groups – a consumer subsidy – was an effective policy that could be expanded nationwide.

Second, the peer review model accounts for different circumstances of each nation when considering the starting point for reform, and the definition and scope of subsidies.

In Peru, the fuel price stabilisation mechanism was identified as causing wasteful consumption; the peer review process suggested using other economic policies, such as interest rates, instead. While in New Zealand, a wider range of policies were considered, eight in total, including supply-side subsidies and the support given to fossil fuel research and development projects. Such differing scopes are permissible under the existing peer review framework.

The policy and reform suggestions resulting from the process will reflect, to a degree, the trends in ongoing fossil fuel subsidy debates. One aspect of this is that discussions must solicit the opinions of stakeholders and the reform process must be more transparent.

For example, the peer review experts praised public disclosure measures taken through New Zealand’s support for oil industry research and development, and of the natural gas subsidies for lowest-income populations in Peru.

China and the US are at different stages of development, have varying degrees of openness regarding government finances, and a sharply contrasting make-up of their energy structure.

Their reports will reflect these differences and the outcome of the peer review process may well include a “common but differentiated” programme for reform.