Environment Audit CommitteeWritten evidence submitted by the Overseas Development Institute

1. Summary and Recommendations

1.1 The Government should include both international and domestic initiatives in its review and measurement of energy subsidies. This should include support provided directly by UK departments (DFID, DECC, DEFRA, CDC, and UKEF), through development finance institutions, and other intermediaries.

1.2 As there is currently no single Government department responsible for reviewing and reporting energy subsidies, the Environmental Audit Committee (EAC) should identify a single department or inter-departmental committee to lead in measurement and reporting of UK domestic and international subsidies.

1.3 As a first step the Government should apply the framework suggested to this inquiry by Alan Simpson1 to all current development finance support to energy projects:

Does it promote innovation and lower energy production costs?

Does it reduce dependency on taxpayer support?

Has it reduced carbon emissions in the energy sector?

Does it produce a more open and competitive energy market?

Is there a consistent approach to environmental “clean up” obligations?

Does it promote innovation and market transformation?

1.4 Under its commitment to supporting low-carbon growth and adaptation in developing countries, the Government should seek to identify and quantify “harmful” subsidies provided in the form of development finance. This includes support to fossil fuel energy projects.

1.5 In the context of G20 commitments on phasing out inefficient subsidies, there have been calls to set up an international body on fossil fuel subsidies2. The UK has the opportunity to lead by example in tracking its own subsidies, and to call for international cooperation in defining, monitoring and tracking inefficient or high carbon subsidies.

1.6 Where “harmful” or inefficient subsidies are identified these should be rationalized, and resources used to promote low carbon energy development both in the UK and internationally. This can include supporting developing countries with subsidy review and reform.3

1.7 As subsidies have a significant impact on private investment in low carbon energy, this inquiry and its resulting actions should inform the Committee’s parallel inquiry on Green Finance.4

1.8 As subsidies are a significant and growing element of UK development cooperation, this inquiry and its resulting actions should be linked to the current inquiry by the International Development Committee on the Future of UK Development Cooperation.5

2. Overseas Development Institute—Background

2.1 The Overseas Development Institute (ODI) is a leading independent think tank on international development and humanitarian issues. Our mission is to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement of sustainable livelihoods. We do this by combining high-quality applied research, practical policy advice and policy-focused dissemination and debate. We work with partners in the public and private sectors, in both developing and developed countries.

(i) Has the Government identified the extent of energy subsidies and measured them?

3. The Government has not considered potential subsidies that may be involved in the energy projects and programs that it supports in developing countries. In turn, these potential subsidies do not appear to have been quantified.

3.1 The International Monetary Fund (IMF)6 uses the following definition for energy subsidies:

Energy subsidies comprise both consumer and producer subsidies. Consumer subsidies arise when the prices paid by consumers, including both firms (intermediate consumption) and households (final consumption), are below a benchmark price, while producer subsidies arise when prices received by suppliers are above this benchmark.

3.2 Development finance and other international support to energy projects in developing countries, impacts both prices paid by consumers and revenues received by suppliers in those countries.

3.3 The submission to this inquiry by HM Treasury and the Department for Energy and Climate Change (DECC)7, did not include any reference to the UK’s support to energy projects in developing countries. I understand that the Department for International Development and UK Export Finance are to provide separate submissions.

3.4 Though not considered explicitly within the inquiry’s questions, or in the report prepared for this inquiry by Oxford Energy Associates8, the role of development finance in energy subsidies was raised:

3.4.1by Zac Goldsmith during the oral evidence9 provided by William Blyth;

3.4.2during the oral evidence10 that I provided along with Peter Wooders of the Global Subsidies Initiative (GSI) and Charles Perry of SecondNature; and

3.4.3by Platform in its written submission11.

(ii) How well does the Government match up to best practice methodologies in how energy subsidies are defined and scoped?

4. As it applies to development finance, the Government does not appear to match up to best practice methodologies in how energy subsidies are defined and scoped.

4.1 As noted, the submission by HM Treasury and the Department for Energy and Climate Change (DECC) to this inquiry12, did not include the UK’s support for energy projects in developing countries.

4.2 However, the Department for International Development (DFID), the Department for Energy and Climate Change (DECC), the Department for Environment, Food and Rural Affairs (DEFRA), UK Export Finance (UKEF), and CDC (the UK’s development finance institution) currently provide financial and technical support for energy sector activities in developing countries.

4.3 These Government departments (and investors of UK tax revenues) provide support to energy projects either directly or through Development Finance Institutions (DFIs). There is a need to strengthen reporting systems, to allow a better understanding of whether this support results in 13 “harmful” or “inefficient” subsidies.

4.4 Estimates of fossil fuel support from International Financial Institutions (IFIs) and National Development Banks (NDBs) range from $15 to $150 billion annually.14

4.5 Export Credit Agencies (ECAs) are bilateral organisations that provide financial services to support the overseas trade and investment activities of private domestic companies. While exact figures on ECA support for fossil-fuel projects are difficult to obtain, ECA financing often dwarfs official development assistance and, historically, a large portion of projects have been fossil-fuel related. International estimates of fossil fuel support from ECA’s ranges from $50 to $100 billion annually.15 As with IFIs, it is unlikely that all of this financing actually qualifies as a subsidy, but again, lack of disclosure prevents a more thorough analysis.16

4.6 An ODI review of Oil Change International’s “Shift the Subsidies” database identified that between 2008 and 2011 the majority of IFI17 energy project support was to fossil fuel projects. Over 75% of energy project support from IFIs to India, South Africa, Saudi Arabia, Indonesia, Brazil, Thailand, Kazakhstan, Egypt, Venezuela, Uzbekistan, Algeria, and Nigeria was to fossil fuel projects. These are 12 of the top developing country emitters.

(iii) What is the scale of subsidies in the UK, including comparison with other countries?

5. The UK provides significant support to energy projects in developing countries through IFIs and UKEF. Additional research would be required to compare this support to that provided by other countries.

5.1 A basic analysis by ODI of UK finance18 to energy projects through IFIs19 identified more than USD 3 billion (or GBP 2 billion) in support between 2008 and 2011. Support to fossil fuel projects20 through IFIs was twice as large as support for clean energy projects21.22

5.2 An initial review by ODI of UKEF support indicates a wide range of support to energy projects, and energy intensive industries and sectors in developing countries:

In June 2013—UK Export Finance announced that it will guarantee $700 million of finance for UK exports to a petrochemical facility in Saudi Arabia.23

In November 2011 -UK Export Finance is guaranteeing a $1 billion line of credit for Petroleo Brasileiro Sociedade Anonima (Petrobras) to finance UK exports for Petrobras’ investment programme. The line of credit is to expand Petrobras’ oil exploration and production facilities off the east coast of Brazil.24

2011–12 UKEF25 issued guarantees for civil aerospace business amounting to £1,832 million (out of £2.3 billion), generating premium of £65.6 million and supporting the delivery of 132 aircraft in total. The aircraft were delivered to 32 airlines and operating lessors. Where the aircraft were fitted with aero-engines supplied by Rolls-Royce, ECGD support exceeded 30% of the financing cost of the aircraft.

The most important markets for UKEF were Azerbaijan, Bahrain, Brazil, Dubai, New Zealand, Norway, Russia and Saudi Arabia. The export contracts supported were for a diverse range of sectors including mining, flight simulators, packaging, wall coverings, petrochemical engineering, logistics, automotive supplies, clean air equipment, cardboard packaging plant, buses, natural gas delivery systems, remote operating vehicles, plasma furnaces, air traffic control equipment, construction, automated tolling, telecommunications, defence vehicles, training services, industrial catalysts, water treatment plant, steel manufacture and processing and pipe manufacturing.

5.3 Information on support by CDC26 and other Government departments for energy projects is not disclosed in a transparent manner (even taking into considerations of commercial confidentiality).

(iv) and (v)—Does the Government have any plans or targets to reduce or eliminate “harmful” subsidies; and what has been the progress in reducing such harmful subsidies?

6. The Government currently states that it does not provide “harmful” subsidies. Therefore it is impossible to assess if the Government has plans or targets to reduce or eliminate “harmful” subsidies; nor its progress in reducing such “harmful” subsidies.
However, the Government has a commitment to supporting low-carbon growth and adaptation in developing countries, under which the Government should seek to identify and eliminate “harmful” subsidies provided in the form of development finance. This includes support to fossil fuel energy projects.

6.1 The submission by HM Treasury and the Department for Energy and Climate Change (DECC) to this inquiry27, states that the UK does not have any “harmful” energy policies, but does not address the broader question of “harmful” subsidies:

The Government does not consider that any of its energy policies are “harmful”. Furthermore, energy policy (as with other Government policy) is subject to an initial impact assessment and subsequent monitoring, evaluation and review. This ensures that the Government can provide confidence and certainty while ensuring that the policy advances the Government’s objectives in a coherent way that provides best value for money. It also ensures that detrimental consequences can be quickly and effectively addressed.

6.2 The HM Treasury/DECC submission to this inquiry28 defines fossil fuel subsidies as follows:

For the purposes of G20 work on inefficient fossil fuel subsidies, the UK, along with other EU G20 members, defines a fossil fuel subsidy as any Government measure or programme with the objective or direct consequence of reducing, below world-market prices, including all costs of transport, refining and distribution, the effective cost of fossil fuels paid by final consumers, or of reducing the costs or increasing the revenues of fossil-fuel producing companies.

6.3 The UK’s 2012 submission29 to the G-20 on the Commitment to Rationalize and Phase Out Inefficient Fossil Fuel Subsidies states that the “UK has no inefficient fossil subsidies”.

6.4 However, a basic review by ODI of IMF data30 on energy subsidies in the G20 countries indicated that the UK ranked 14^th (out of 20) in terms of the scale of its support for fossil fuels (including petroleum products, natural gas, and coal). This was equivalent to almost USD 11 billion (GBP 7 billion) in 2011. The IMF does not indicate if these subsidies are inefficient or “harmful”, however, its calculations of UK energy subsidies takes into account inadequate pricing of externalities, including carbon.

6.5 While the Government does not have targets to track or reduce “harmful” subsidies either provided through Official Development Assistance (ODA) or other forms of development finance, international support for high carbon technologies and approaches may not be consistent with the Government’s clear objective to support low carbon climate resilient development.31

From HM Treasury’s Spending Round 2013:

The Government will maintain its effort on urgent action to tackle climate change by supporting low-carbon growth and adaptation in developing countries. The UK’s pool of money for climate change projects in developing countries will be increased to £969 million, funded by DFID, the Department of Energy and Climate Change (DECC) and the Department for Environment, Food and Rural Affairs (DEFRA).

The Government remains committed to supporting those people across the world whose economies are most in need of development. This is in the UK’s national interest. Tackling global issues such as economic development, effective governance, climate change, conflict and fragile states provides good value for money.

13 September 2013