Reforming fossil fuel subsidies: drivers, barriers and the state of progress

This article outlines the current state of affairs in fossil fuel subsidy reform, and highlights its contribution at the nexus of climate policy, fiscal stability and sustainable development. It discusses common definitions, provides quantitative estimates, and presents the evidence for key arguments in favour of subsidy reform. The main drivers and barriers for reform are also discussed, including the role of (low) oil prices and political economy challenges. Commitments to subsidy reform by the international community are reviewed, as well as the progress at the country level. Although fossil fuel subsidy reform indeed plays a critical role in climate policy, experience shows that the rationale for such reforms is determined in a complex environment of political economy challenges, macro-economic, fiscal and social factors, as well as external drivers such as energy prices. The article synthesizes the key principles for designing effective reforms and emphasizes that subsidy reforms cannot only yield fiscal relief, but should also contribute to long-term sustainable development objectives. Areas for future research are also identified.Policy relevanceThere is an increasingly strong international consensus that fossil fuel subsidies are detrimental in terms of economic, social and environmental sustainability. Organizations including the Intergovernmental Panel on Climate Change and the International Energy Agency consider fossil fuel subsidy reform a critical measure for achieving any ambitious emissions mitigation target. The reason is that these subsidies not only incentivize overconsumption of carbon-intensive energy, but directly undermine any effort to impose a price on carbon (e.g. through carbon taxes). While subsidy reform is crucial from a climate change perspective, the wide range of externalities associated with fuel subsidies also underscores the fact that reform is a vital contribution to sustainable development objectives more generally. This article emphasizes that fossil fuel subsidy reform can make a substantial contribution to climate policy, but also discusses how strongly environmental objectives are intertwined with fiscal, macro-economic, political and social factors. Although the momentum for subsidy reform is building, reforms are often designed to deliver fiscal rather than environmental benefits.