My Climate Risk Interdisciplinary Learning Group
13 November 2023
Presenter: Neil McCulloch
Dr. Neil McCulloch, is an economist and a Director of The Policy Practice – a UK-based consultancy focussed on political economy analysis. His main area of focus is on the political economy of fossil fuel subsidy reform. He has worked on subsidy reform in many countries, including: Indonesia, India, Kyrgyzstan, Lebanon, Nigeria, and Zambia. He was previously the Lead Economist for the Australian aid agency in Indonesia, a senior economist in the World Bank and a Fellow at the Institute of Development Studies in the UK.
Paper to be presented
Title: Ending Fossil Fuel Subsidies: the politics of saving the planet
Author: Neil McCulloch
Link to paper: Ending Fossil Fuel Subsidies (practicalactionpublishing.com)
Link to Policy Brief: Fossil fuel subsidy reform – Policy Brief 15 | The Policy Practice
Our second MCRIRG meeting was held on Monday 13th November, with guest presenter Dr Neil McCulloch. His work as Director of The Policy Practice and previously as a political economist with an international aid agency and the World Bank, has provided ample experience in the subtle politics behind fossil fuel subsidies to enable him to write an excellent new Open Access book entitled “Ending Fossil Fuel Subsidies” (a link to the book and Neil’s biography can be found above).
Neil began his presentation by reminding us that fossil fuel subsidies are not just price caps at the point of sale, but can also be hidden in tax allowances and credits for fossil fuel companies and that this artificial suppression of prices leads to overuse and greater pollution. More nuanced is the finding that fuel subsidies, initially meant to curry political favour or less cynically to make fuel affordable to the poor, often have the effect of causing smuggling of cheap fuel to neighbouring countries. Moreover, such subsidies primarily benefit those on high incomes – since they consume more fossil fuel – while draining governments’ budgetary resources. For all of these reasons, the need to reform fuel subsidies should be obvious. Yet successful transitions are still few and far between, and removing subsidies is generally unpopular due to the resulting price increases often prompting protests and sometimes riots.
To date, the international community has responded to the challenge of fossil fuel subsidy reform in a “tiny, technical and timid” way. Very little donor money is spent on the problem, while projects are often limited to technical assistance with no real practical consequences. Instead Dr. McCulloch advocates a “serious, political and brave” way forward, so that mechanisms are created internationally to underwrite reforms, with a domestically driven agenda, thanks to demand being built through proper communication about the problems that subsidies engender and the benefits that their removal could provide.
Our open discussion section began with a query about whether the warming of the climate and the subsequent greater reliance on fuel for cooling technologies might not be at odds with the drive to remove subsidies. Dr. McCulloch noted that removal of fuel subsidies could free up money for adaptation. One person asked how subsidies are calculated in rich countries, given that many rich countries tax fuel heavily. Dr. McCulloch pointed out that the OECD count a subsidy as existing when a country charges a lower tax rate on fossil fuels than on other goods. For example, the UK, like many countries, charges VAT on fuel 15% below that on other good, discrediting the UK’s claim to have no fossil fuel subsidies!
It was mentioned that cash transfers to replace subsidies have been widely considered and are now the standard approach of the World Bank. However, it was also noted that schemes to reform subsidies and replace them with targeted cash transfers are sometimes not implemented by governments for fear of losing the support of the middle classes, who are sometimes worse affected by fuel price rises because they consume more fuel than poorer households. Thus any use of such transfers would need careful planning following detailed research of the effect of current subsidies.
The lack of international co-operation on the question of fuel subsidy removal was also raised and whether reforms in isolated countries can be effective given the current backdrop of war and hostilities. So far the G20 made little progress on fossil fuel subsidy reform, but Dr McCulloch has seen some elements of hope in the actions of Canada, who have just introduced an explicit legal framework at the federal level to remove fuel subsidies. In addition, the Netherlands is in the process of changing the law to become more proactive in removing subsidies. Neil points to these good examples as providing the impetus for more widespread change. For example, a new directive from the EU could provide a signalling benefit for other parts of the world, encouraging others to join such efforts. However, making progress at COP28 on the topic may be difficult given that it is taking place in the major fossil fuel exporter, the United Arab Emirates.
Locally tailored resonant messages were flagged as the best way for change to happen. For example Indonesia provided healthcare and education to ease the loss of subsidies and India pursued a very successful “Give it up” campaign to encourage those who could afford it to relinquish their fuel subsidies. In this way it was shown that mobilising social pride around reform can be a useful tool in increasing the adoption of previously contentious policies.
Furthermore, the financial benefits from subsidy reform go from countries to themselves, so that resources can be reallocated to those who need these resources without generating additional budgetary spending. However, a key challenge is ensuring that subsidies do not return after a reform. If international fuel prices rise, then domestic prices must rise too to ensure that subsidies do not come back. This can be done by pegging domestic fuel prices to international prices using a formula, or by opening up to a free market. Sometimes such measures expose populations to external shocks which can be politically unpopular.
Dr McCulloch’s presentation introduced many of the MCRIRG to the new area of political economics. This subject was brought to life by references to previous and ongoing projects that have met with both success and failure. Dr McCulloch’s ability to explain complex concepts in a clear way allowed members from across all disciplines to develop a comprehensive understanding of the challenges and opportunities afforded by fuel subsidy reforms.