FOSSIL FUEL SUBSIDY REFORM (FFSR)

MEETING HELD ON 28 May 2024

Summary Report[1]

The fifth meeting of the Fossil Fuel Subsidy Reform (FFSR) Initiative was held on 28 May 2024. The meeting was chaired by New Zealand as coordinator of the Initiative. The agenda for the meeting was contained in WTO document _INF/TE/FFSR/CN/5/Rev.1. All WTO Members were invited to attend the meeting.

The objective of the meeting was to discuss ways to advance concrete action steps outlined in the 2024-2025 FFSR Work Plan.

1  Introductory remarks by the Coordinator

1.1.  New Zealand welcomed participants at the first meeting since the adoption of the updated FFSR Ministerial Statement and associated work programme (_WT/MIN(24)/19) at MC13. The updated Ministerial Statement set the work of the FFSR Initiative in the context of a range of international commitments WTO Members had made relevant to fossil fuel subsidy reform. This included the latest understandings reached by Parties to the UNFCCC at COP28 to transition away from fossil fuels in energy systems, in a just, orderly and equitable manner, so as to achieve net zero by 2050.

1.2.  The Ministerial Statement also set out the future work programme under the Initiative, as reflected in the operative paragraphs within the Statement and elaborated in the table of "Next Steps on Concrete Actions" at Annex 1. The action points covered three pillars, namely: (i) use of existing WTO mechanisms to enhance transparency; (ii) experience in the design, review, adjustment and removal of temporary crisis support measures, so these remain transparent, targeted and temporary; and (iii) work to identify and categorize fossil fuel subsidy measures from a trade distorting and environmental harm perspective and to build understanding on appropriate pathways to reform. In addition, Annex 2 set out a non-exhaustive list of sample questions on fossil fuel subsidies and fossil fuel subsidy reform for use in WTO Trade Policy Reviews (TPRs).

1.3.  The meeting would look at the specific action steps identified under each of the three pillars and ways to progress the work of the Initiative to put into operation these actions.

2  Update reports

2.1.  The Organisation for Economic Cooperation and Development (OECD) outlined the key findings from the OECD's Inventory of Support Measures for Fossil Fuels, following its preview presentation at the last FFSR meeting in November 2023.[2] The OECD found that: (i) the fiscal cost of global support for fossil fuels almost doubled to USD 1,481.3 billion in 2022, from USD 769.5 billion in 2021, driven by temporary support measures; (ii) the largest increase in the fiscal cost of support to fossil fuels was for residential use (154%), followed by transportation (127%) and manufacturing and other industries (122%); (iii) direct budgetary transfers increased from USD 80.9 billion in 2021 to USD 183.4 billion in 2022 as a consequence of support for energy suppliers to offset economic losses associated with gas and electricity sale price caps; and (iv) around 75% of emergency measures introduced in 2022 were not targeted to those in particular need, raising fiscal, distributional and environmental concerns. Certain measures did directly aim to help low-income households, such as rebates of taxes on electricity and gas consumption for households and price ceilings for household electricity consumption. However, other measures likely had an effect on firms' competitiveness, including regulated electricity prices for energy-intensive firms and regulated price of gasoline and diesel for companies operating in the freight transport sector. By way of recommendation, the OECD noted that governments could better target their interventions and start by moving away from large-scale support for households and firms, which tended to disproportionately benefit users who do not need it. Governments could also plan to phase out existing support to fossil fuels to free up fiscal resources, accelerate the deployment of non‑fossil technologies and improve energy efficiency.

2.2.  One delegation asked the OECD if there was evidence of measures becoming more targeted over time and whether certain design features that could assist reduction and removal of subsidies could be highlighted. The delegation also asked other international organizations about comparative analyses on the experience during the recent energy crisis of countries that had made significant earlier progress in reducing fossil fuel reliance and ways in which this had contributed to increased resilience against price volatility. The OECD responded that it would consider developing analysis on the targeting and phasing out of fossil fuel subsidies over time. The IEA added that it would be able to give further details once its numbers for 2023 had been published.

2.3.  QUNO made a point about discrepancies in the estimates of the IEA and the IMF which differed significantly from country to country and called for working towards a standardized approach in order to ensure transparency about the actual impact of fossil fuel subsidies. The IEA explained that the differences between the numbers cited by different international organizations could be due to the different approaches and kinds of subsidies captured.

3  Next steps on conrete actions

3.1  Pillar one: Enhanced transparency

3.1.1  Steps to include information on fossil fuel subsidies and fossil fuel subsidy reform in WTO Trade Policy Reviews, including through questions posed by Members and in the next (8th) appraisal of the TPR Mechanism

3.1.  To encourage further transparency on fossil fuel subsidies and FFSR in the context of WTO Trade Policy Reviews (TPRs), Members discussed ways to operationalize the list of sample questions for use in Trade Policy Reviews developed by co-sponsors in Annex 2 of the MC13 Ministerial Statement. They also explored how to promote inclusion of information on fossil fuel subsidies and fossil fuel subsidy reform as part of the following (8th) appraisal of the TPR Mechanism.

3.2.  The WTO Secretariat (Trade Policy Review Division) presented an overview of the legal foundation of the Trade Policy Review Mechanism (TPRM) in Annex 3 to the Marrakesh Agreement and provided an update on the periodicity of TPRs (based on the share of world trade) and the question-and-answer (Q&A) process. The Secretariat outlined the dates of the 2024 TPR meetings, including deadlines to submit advance written questions, and noted that the timetable for TPRs in 2025 would be published in June 2024. One of the main outcomes of the 7th TPR appraisal was the decision to launch an Information Technology system in the form of a Q&A platform which would keep track of the Q&A process and receive responses in real time. Members would also be able to express support for particular questions asked by other Members. The 8th appraisal would take place no later than 2027, but the possibility remained for Members to engage with the Chairperson of the TPR Committee on issues related to its functioning.

3.3.  Members expressed an interest in learning more about the IT tool functionalities. One delegation also asked if FFSR co-sponsors had already started asking the questions in Annex 2 of the MC13 Ministerial Statement. Several co-sponsors confirmed they had done so and encouraged other Members to make systematic use of this channel to increase transparency, as well as to include a section on fossil fuel subsidies in their own government reports.

3.1.2  Proposal to include fossil fuel subsidy reform as part of a topic for more detailed sharing of experience and analysis during the CTE's next (or subsequent) "thematic session"

3.4.  The Chairperson observed that, in view of the upcoming consultations of the CTE Chair on topics for the forthcoming CTE thematic sessions, the FFSR Initiative could plan to register the interest its co-sponsors had indicated in seeing the topic of fossil fuel subsidy reform included as part of the next or a future CTE thematic session. This could form part of a broader set of topics, for example, as part of exploring the energy transition, or potentially a wider discussion on subsidies in the context of the green transition.

3.1.3  Consideration of how best to encourage use of other WTO mechanisms to increase transparency: drawing on information to be provided by the WTO Secretariat outlining current additional WTO processes where information is being provided or measures are being notified in relation to fossil fuel subsidies or fossil fuel subsidy reform

3.5.  To help advance Members' consideration on how best to encourage use of other WTO mechanisms to increase transparency on fossil fuel subsidies and fossil fuel subsidy reform, the Secretariat had examined other existing WTO sources of related information and compiled a short information note.

3.6.  The WTO Secretariat presented the information note examining other existing WTO sources of information on fossil fuel subsidies and their reform in WTO, such as notifications and discussions in the context of the Committee on Subsidies and Countervailing Measures, the Committee on Agriculture, the Committee on Fisheries Subsidies, the CTE, as well as Members' Accession Protocols (_INF/TE/FFSR/W/4).

3.7.  Several delegations expressed support for further work on transparency and for the inclusion of this topic in the forthcoming CTE thematic sessions, possibly as part of a larger discussion on subsidies related to the energy transition.

3.8.  One delegation reported on its internal transparency efforts which involved the implementation of an integrated national energy and climate plan, including an assessment of progress towards climate neutrality. Several co-sponsors also welcomed the idea of broad-based stakeholder input into the work of the FFSR, including businesses, in particular small and medium sized enterprises.

3.2  Pillar two: Crisis support measures

3.9.  Participants discussed the next steps under the work programme, namely Member experience sharing on the review, refinement and roll-back of support measures implemented during the recent energy crisis; discussion of the development of an information paper documenting the design, review, evolution and removal of crisis support measures; and consideration of the timing and process for periodic review of Members' temporary crisis support measures and efforts to reform, reduce and remove these. They also considered how the information paper could be made as useful as possible in support of this process. An important underpinning to the work agreed under this pillar was the sharing of experience by Members on the approach they had taken to addressing the recent energy crisis, which several co-sponsors had done at previous meetings. Non-co-sponsor WTO Members with an interest in these issues were also encouraged to comment or share their recent experience.

3.10.  Co-sponsors had agreed to develop an information paper detailing this experience, including information on the design, review, adjustment, evolution, and phase-out of crisis support measures adopted during the energy crisis. The aim of this compilation was to serve as a foundation for developing a set of guidelines to help ensure future crisis measures remained transparent, targeted and temporary. To assist with this, the Secretariat had put together an initial draft outline of this information paper for discussion.

3.11.  The WTO Secretariat presented the draft outline consisting of some overarching points explaining the context and impacts of certain types of temporary crisis support measures, accompanied by a draft table designed to provide more detail on the nature, design, evolution and phase-out of the measures adopted by Members through the recent energy crisis period.

3.12.  Members considered the outline as a useful starting point for discussions. One delegation instanced the way its own experience with a temporary reduction in the excise tax for fuels, shared at the July 2023 FFSR meeting, could usefully be recorded in the draft outline's table. The measure had been put in place in March 2022, initially for a 3-month period, and accompanied by strict reporting requirements to ensure that the excise tax savings were passed through to consumers and as a means of ensuring that the measure was targeted. It had been reviewed three times in the following 11 months and ended in February 2023. In the meantime, the government had passed two budgets with more targeted assistance to address cost of living issues for vulnerable groups.

3.13.  Another delegation shared its experience with temporary measures during the energy crisis. The crisis had had significant consequences for energy subsidies that could be seen in: (i) the amount of these subsidies; (ii) their distribution across technologies and beneficiaries; and (iii) the instruments used to provide them. Short-term measures to ensure the affordability of energy for vulnerable consumers and industries were required which resulted in increased energy subsidies in 2022. However, most elements of the temporary crisis framework had been phased out by the end of 2023, with some residual elements due to be phased out by the end of 2024. The sections of the Framework covering the transition towards a net-zero economy required to further decarbonise the economy and accelerate becoming more independent from fossil fuels would remain available until 31 December 2025.

3.14.  QUNO pointed out that previous energy crises also provided useful experiences on phasing out fossil fuel subsidies, and gave the example of US regulation of the price of inter-state natural gas in the 1970s.

3.3  Pillar three: Addressing most harmful fossil fuel subsidies

3.15.  Several expert stakeholders presented their work in the areas of: (i) breaking down the categorization of fossil fuel subsidies and examining their particular environmental and trade effects; and (ii) approaches to FFSR, including recent case study experience with the use of cash transfers in the process of energy reform.

3.16.  The Forum on Trade, Environment, & the SDGs (TESS) presented its recently published policy paper on Fossil Fuel Subsidy Reform: Options for Inclusive Collective Action at the WTO. The paper found that 70% of global fossil fuel subsidies by value were granted to three categories: transport consumers, residential consumers and oil and gas producers. Major reduction of fossil fuel subsidies would need to consider reform of these three categories. In this context, it was important to find alternative and cheaper ways of delivering the benefits of the subsidy that would reduce adverse impacts, as well as to better target any remaining support. The challenges for developing countries to reform their fossil fuel subsidies included vulnerability to shocks, lower public and private resources, as well as less developed mechanisms to provide alternatives. The WTO was a natural forum for collective action due to its broad membership, deliberative and rule-making functions on subsidies, existing precedent of designing international disciplines based on sustainability concerns, and coverage of subsidies in a wide range of WTO bodies.

3.17.  The International Institute for Sustainable Development (IISD) presented its 2020 paper on Exploring the Trade Impacts of Fossil Fuel Subsidies. Fossil fuel subsidies could impact not only the environment, but also competition and trade, through direct and pass-through channels, both on domestic and international markets. Primary energy, refined energy and energy-intensive products were the most affected markets, representing almost 20% of global trade – totalling USD 3.5 trillion. In addition, fossil fuel subsidies undermined the competitiveness and slowed down the development of renewable energy and of other alternative sustainable products. Upstream subsidies and subsidies incentivizing new investment and capacity made the impacts deeper and more longer term.

3.18.  The World Bank introduced its ESMAP Energy Subsidy Reform Facility, which supported governments in designing and implementing sustainable energy subsidy reforms, while safeguarding the welfare of the poor and vulnerable. It also shared insights from its technical report on Cash Transfers in the Context of Energy Subsidy Reform: Insights from Recent Experience. This was the result of a project to establish a global database of energy subsidy reforms that involved cash transfers and country case studies, drawing on expertise in both energy subsidy reform and social protection systems. Subsidies had been the dominant policy response tool, though the mix had changed over time. By May 2023, the subsidy share had decreased to 33% of the policy mix, with 31% of instruments dedicated to social assistance, and 20% to tax measures. A global stocktaking of 18 countries and 24 reform episodes between 2008 and 2012, showed that targeted measures to protect the poor had to be an integral part of energy subsidy reform. Acknowledging the tradeoffs between coverage, "generosity" and fiscal savings, four key considerations for implementation stood out: (i) Targeting, Beneficiary Identification, and Eligibility Criteria; (ii) Payment Mechanisms and Delivery Channels; (iii) Incorporating Feedback and Grievance Handling; and (iv) Aligning Reform Design with the Country Context.

3.19.  A number of Members intervened and voiced their appreciation for the presentations. Several questions were addressed to TESS, including on recent case studies of FFSR in developing countries and how the options for future cooperative arrangements (such as multi-country reform agreements and regulating fuel taxation for international aviation and maritime transport) could be taken forward. TESS noted that a lot of work had been done on the issue of FFSR in developing countries, such as in the case of Nigeria, but that governments often felt isolated and were not aware of other countries' experiences. Useful sources were an IISD publication on options for policy makers on reform in South-East Asia, G20 and G7 peer-review and national reports, as well as the work undertaken by the World Bank and its ESMAP programme. On the topic of cooperative arrangements, TESS noted the lack of international leadership on the issue – a role which it considered the WTO could fill. TESS also highlighted the possibility of unilateral reforms backed up by international coordination. This could include building a joint platform for data and information, as well as sharing experience on national inventories of subsidies. Supporting capacity for reform and enhancing coordination between the various actors working on the topic was essential. One delegation noted the need for differentiation in cases where the measure resulted in low carbon price and when the price remained high.

3.20.  Some participants asked questions regarding the options for cooperation outlined by the IISD, including the pledge-and-review process and clarifying how existing rules apply. The IISD drew attention to the G20 and APEC processes which could provide useful guidance and pointed out the WTO's large membership which was distinct advantage. It also noted that some commentators had suggested that elements around the subsidy definition and its adverse effects under the SCM Agreement could be further explained and clarified.

3.21.  Another delegation observed the common themes emerging from the TESS and IISD papers in relation to the factors that bear on the trade and environment impacts of fossil fuel subsidies, including the stage of the value chain, the product or sector being subsidised, the extent to which such products are traded, as well as the extent and volume of subsidisation provided. These elements could serve as basis for further discussions within the Initiative.

3.22.  A participant also asked how the World Bank's experience with use of cash transfers could be replicated in other countries and what considerations should be taken into account. The World Bank noted that every country had unique circumstances and reforms had to be designed accordingly. However, certain crosscutting guidelines applied, such as looking into whom the subsidies benefit and at what cost, and deciding which potential impacts the government could and wished to mitigate, depending on available resources. The role of energy efficiency should be highlighted as it changed the elasticity of demand to price increases. For cash transfers, one practical take-away for governments was to have the data and a good understanding of where the poorest of the poor were, in terms of income distribution and location, to guide the design of distributional mechanisms. It was also helpful to use digital technologies and improve digital penetration, as well as to simplify eligibility and prioritize communication.

3.23 One delegation drew attention to the newly adopted Global Biodiversity Framework (GBF) which agreed to "identify by 2025, and eliminate, phase out, or reform incentives, including subsidies, harmful for biodiversity". In this regard, it was preparing a methodology for reporting on non-energy subsidies harmful to the environment, which would provide the first attempt to assess energy and, more specifically, fossil fuel subsidies for environmental impact. Fossil fuel subsidies were identified as being harmful if the price or cost reduction that they caused incentivized maintaining or increasing the availability or use of fossil fuel, and the overwhelming majority of fossil fuel subsidies were considered environmentally harmful. Nevertheless, there was value in the work identifying the most harmful types. In this regard, this delegation thought it would be useful to focus on subsidies for fossil fuel production, i.e. the supply side of fossil fuels, and the most polluting fuel: coal.

3.24 In conclusion, the Chair advised that there were at least two further meetings of the FFSR Initiative planned for 2024, including one in July. Plans were also under way for several informal engagements, particularly on the substantive issues under pillar 3, picking up on suggestions that had been made by participants (including stakeholders).

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