Reforming fossil-fuel subsidies is widely believed to be a “win-win” policy that would benefit energy security, economic growth and the environment, as evidenced by the G-20 commitment to phase out such subsidies. But subsidies are notoriously difficult to reform.

The political logic that keeps subsidies to fossil fuels in place differs according to circumstance. Whereas the main effect of producer subsidies is to boost local production, consumer subsidies are typically broad-based and popular, making them hard to reform without provoking protest.

Demand by politically well-organized groups can therefore perpetuate subsidies. But equally important is the appetite by governments to supply them. Subsidies often exist because they are claimed to be the only reliable mechanism available to governments that are under pressure to provide benefits to citizens, despite their inefficiency and distorting impacts. Many non-democratic countries are among the world’s biggest subsidizers, indicating that governments use subsidies to win favour with the public even when votes are not at stake.

In a study commissioned by the GSI, Director of the Laboratory on International Law and Regulation Dr. David Victor argues that the failures to reform subsidies are mainly due to failures to appreciate the political economy of subsidy policies. Reform is often not viable politically without a strategy to compensate powerful groups. Successful subsidy reforms often require broader reforms and improvement in public administration to create mechanisms that can compensate political losers.

Report available here

Further information

Contact:
Ms. Kerryn Lang
klang at iisd.org or +41.22.917.8920

Web: www.globalsubsidies.org/en/research/political-economy