Fossil fuel subsidies are “the world’s dumbest policy,” argued the editorial board of Bloomberg Media last September. They persist, despite relatively low oil prices. And while fuel subsidies can take many forms, there is overwhelming consensus among researchers that the estimated $5.3 trillion in fuel subsidies worldwide each year is bad for people and the planet.
Although many governments acknowledge these facts and seem willing in principle to pursue the necessary reforms, progress is mixed. The growing global push for greater transparency in the extractives sector and the oil and gas sector in particular is probably helpful but not quite sufficient to shift the odds in favor of reform. If the ultimate goal of transparency campaigns is to ensure that ordinary people benefit equitably and sustainably from oil and gas extraction, then more needs to be done to promote reforms in the sector.
Commitments, but little action
Leaders of the world’s industrialized nations consistently express support to reduce fossil fuel subsidies because of the costs to:
- The environment: Subsidies on fossil fuels, which essentially increase profits for oil and gas companies, discourage investments and innovations in renewable alternatives such as solar, wind, and hydro-power. Most countries won’t meet their targets to reduce greenhouse gas emissions without reducing subsidies.
- Public services: Whether it is in the form of tax breaks to producers and suppliers or discounts to consumers, fuel subsidies deprive governments of money that could be spent on public services like education, health, water and sanitation. Juan Pardinas of the Mexican think tank IMCO notes that the Mexican government frequently spends more public resources on fossil fuel subsidies than healthcare.
- Inequality: Fossil fuel subsidies disproportionately benefit the rich while taking money away from public services and anti-poverty programs that benefit the poor.
At the G-20 meeting in Pittsburgh in September 2009, world leaders committed to “phase out … inefficient fossil fuel subsidies while providing targeted support for the poorest.” They repeated this commitment in Toronto (2010), Seoul (2010), and Cannes (2011). But global progress towards fuel subsidy reforms remains sluggish; and the recent executive actions by the new U.S. administration is almost certain to further derail any progress made thus far.
Why is progress so slow?
Political and economic incentives and considerations underlie the slow progress towards reform globally. Pro-reform governments and policymakers often encounter two major obstacles. First, they have to confront powerful corporate interests, including those who bankroll political campaigns and stand to lose if oil and gas prices rise. Second, many governments, especially those in the developing world, face a trust deficit among citizens, which is partly shaped by frequent incidence of corruption scandals and mismanagement of public resources. Paradoxically, corporate lobbyists and anti-corruption crusaders sometimes join forces to resist the removal of fuel subsidies. Consider these examples:
Nigeria: In 2012 when the government attempted to remove fuel subsidies, protesters responded by shutting down gas stations and forming human barriers to block highways. Soon, they rallied under the “Occupy Nigeria” banner, demanding greater accountability from the government on how it spends public funds, and for more investigations into corrupt contracts with oil companies. The protests grew violent and persisted, forcing the government to reverse its reform efforts. Then-president Goodluck Jonathan said “it became clear to government and all well-meaning Nigerians that other interests … have hijacked the protest.”
Mexico: The recent attempt to reform the oil industry in Mexico was also met with violent protests. Mexicans across the country took to the streets to protest the significant rise in gas prices. Protesters were prompted by the increased cost at the pump, but their focus was on government corruption. Aroa de la Fuente, a researcher at the Mexican think tank, Fundar, says the protests are “a display of how fed up Mexicans are with the government’s corruption and waste of public resources.”
When President Peña Nieto took to YouTube to explain to citizens that the increase in fuel prices was necessary to avoid significant cuts to basic services, he concluded by asking citizens “what would you have done?” They took to Twitter to offer their responses: reduce public funding of political parties, reduce the salary of the president, investigate corruption scandals, remove immunity for elected officials, and prosecute corrupt politicians like governor-turned-fugitive Javier Duarte. Yet amid price hikes and protests, senior public officials were given end-of-the-year bonuses, including a perk to help pay for the rising costs of maintaining a vehicle, a move that merely reinforces public mistrust in government.
The two examples show how a combination of weak or poor governance, public mistrust in government, and elite incentives undermine the prospects of reforms in the oil and gas sector. Keeping fuel prices low enables incumbent politicians to keep the wealthy happy, minimizing the chances of violent protests and hence the risk of significant threats to their power.
Does transparency help?
The last few decades have witnessed a rise in international campaigns to promote greater transparency in the extractives sector, improve the governance of extractive resources, and ensure that citizens of countries rich in natural resources get maximum benefit from the extraction of their resources. The Publish What You Pay (PWYP) coalition and the Extractives Industry Transparency Initiative (EITI) are the most notable and probably the most influential initiatives in this sector. Both focus on making government and corporate transactions open and visible.
These global campaigns have made significant contributions to transparency in the extractives sector. For instance, thanks to these efforts data on oil company payments to governments is increasingly available to the public. But the debate on whether or not these initiatives and the associated campaigns have improved extractives governance is inconclusive (Sovacool and Andrews, 2015; David-Barrett and Okamura, 2013; Corrigan, 2013). And whether or not they have helped (or can help) make natural resource wealth work for ordinary people is also less clear. That said, it is worth noting that some of the relatively new advocacy asks, notably the mandatory disclosure laws, which the PWYP Coalition and other civil society groups have been pushing for some time, could change this narrative in the near future.