Redirecting fossil fuel subsidies could unlock half a trillion dollars, World Bank says

Agriculture subsidies are responsible for the loss of 2.2 million hectares of forest per year, lender says

Gas being flared at an oil complex in Anzoategui State, Venezuela. AP

Redirecting fossil fuel subsidies could unlock at least half a trillion dollars to be put to more productive and sustainable uses, according to the World Bank.

Governments provided subsidies worth $577 billion in 2021 to lower the prices of fossil fuels such as crude oil, natural gas, and coal, the Washington-based lender said in a report on Thursday.

“People say that there isn’t money for climate but there is – it’s just in the wrong places,” said Axel van Trotsenburg, senior managing director of the World Bank.

“If we could repurpose the trillions of dollars being spent on wasteful subsidies and put these to better, greener uses, we could together address many of the planet's most pressing challenges.”

The World Bank report found that subsidies for fossil fuels, agriculture and fisheries exceed $7 trillion each year in explicit and implicit subsidies, representing about 8 per cent of the world’s gross domestic product.

Explicit subsidies – direct government expenditure – in those sectors equal $1.25 trillion, which is the size of Mexico's economy.

Meanwhile, implicit subsidies, where governments do not charge enough for the environmental damage caused by the industries, exceed $6 trillion annually.

“Governments are spending trillions on inefficient subsidies that are making climate change worse – money that could be tapped to help solve the problem,” the World Bank said.

Agriculture subsidies are responsible for the loss of 2.2 million hectares of forest per year or 14 per cent of global deforestation, the report said.

At the same time, fossil fuel use, backed by subsidies, is a “key driver” of seven million premature deaths each year due to air pollution.

Fisheries subsidies, which exceed $35 billion each year, are a main reason for dwindling fish stocks, oversized fishing fleets, and falling profitability.

“Repurposing these wasteful subsidies will help ensure a green and just transition that can provide jobs and opportunities for all,” the World Bank said.

“Annually, countries spend six times more on subsidising fossil fuel consumption than their commitments made under the Paris Agreement to tackle climate change. Redirecting these subsidies can unlock significant funds for sustainable purposes,” the lender said.

Meanwhile, global oil demand growth is set to slow significantly by 2028 as high prices and supply concerns hasten the shift to cleaner energy, according to the International Energy Agency.

Based on current policies and market trends, crude demand will rise by 6 per cent between 2022 and 2028 to reach 105.7 million barrels per day, the Paris-based agency said in its medium-term oil market report on Wednesday.

Global carbon dioxide emissions rose by less than 1 per cent in 2022 as the growth of renewable energy and electric vehicles helped offset a surge in crude oil and coal consumption, the IEA has said.

The World Bank said that government should prioritise “comprehensive” subsidy reforms that build public acceptance and protect the vulnerable amid growing public debt, increasing inequality and worsening environmental degradation.

“The consequences of inaction are costly. We are running out of time to deal with the climate crisis.”

The report recommended direct cash transfers as a means of compensating vulnerable groups who may be disproportionately affected by subsidy reforms.

Cash transfers and in-kind assistance were successful in mitigating the impact of energy subsidy overhauls in some countries in the Middle East and North Africa, the World Bank said.

The notion that subsidy reforms affect the poor is not always supported by data, the lender added.