Governments around the world spend vast amounts of money to subsidize the consumption of fossil fuels: oil, natural gas, and coal. In 2014, for example, consumption subsidies for fossil fuels amounted to $493 billion. These subsidies are both a waste of money and an environmental disaster, as they encourage people to burn fuels that release pollution into the atmosphere.
If fuel subsidies are really bad idea, why don’t governments simply eliminate them and use the money more productively? Political economy studies of fuel subsidies suggest three reasons: popular backlash, opposition by vested interests, and low institutional capacity for better social policies, such as cash transfers to the poor.
In a recent study, Joel E. Smith and I ask whether international organizations (IOs) could help governments remove fuel subsidies. We begin with the idea that IOs are mostly too weak to force governments do anything. If a sovereign government feels the need to hand out fuel subsidies, the typical IO cannot stop the waste.
But IOs can play a different role. If governments interested in reducing their fuel subsidies cooperate under an IO, they can make public commitments to eliminating their subsidies.
The IO can support these public commitments through mechanisms like regular peer reviews by the member states. Such peer reviews both facilitate learning and raise the reputational costs of reneging on one’s commitments to reduce fuel subsidies.
So while an IO cannot force governments to act, it can support their own efforts by making their promises more credible. The appropriate role for IOs in fuel subsidy reforms is to support governments interested in dismantling their bad policies but face political difficulty in doing so. With the help of the IO, these governments can improve their odds of weathering the political storm that fuel subsidy reductions produce.
For empirical evidence, we examine the role of two quite different IOs — Group of 20 (G20) and Asia-Pacific Economic Cooperation (APEC) — in fuel subsidy reforms. The key lesson from these studies is that the G20 has faced difficulties in committing to fuel subsidy removal largely because its membership is too diverse and fragmented to agree on policy priorities and commit to them.
Last month, I wrote in The Hill about the G20’s failure to make a clear public commitment on fuel subsidies at this year’s summit. Here, again, we saw the difficulties that the G20 faces: it is very, very hard to get 20 major powers to agree on what to do about fuel subsidies.
As countries develop their national plans to mitigate climate change under the bottom-up Paris agreement, eliminating fuel subsidies is increasingly urgent. Different IOs should be prepared to support interested governments in developing and implementing reputational commitments for fuel subsidy reform — without forgetting that fuel subsidy reforms are national and cannot be forced on reluctant leaders.