151. In most countries, incomplete pricing of externalities is exacerbated by the tendency of Governments to subsidize sectors of the economy which create negative externalities. Three of the most heavily subsidized sectors in the world are agriculture, energy and fisheries. In 2009, Governments around the world spent an estimated $312 billion subsidizing fossil fuel consumption and an additional $100 billion subsidizing fossil fuel production. In the same year, OECD countries alone spent $384 billion subsidizing agricultural production and consumption.

152. These subsidies are not merely expensive; they also distort trade markets, harm the environment, increase greenhouse gas emissions and slow poverty alleviation. According to the International Energy Agency, only 8 per cent of fossil fuel consumption subsidies in 2010 reached the poorest 20 per cent of the population.

153. While G-20 Governments have made some progress in acknowledging the cost of such subsidies, much more could be achieved with farther-reaching action. Reductions of fossil fuel subsidies would substantially reduce the price difference between renewable energy and more carbon-intensive energy sources. The International Energy Agency estimates that the effects of phasing out fossil fuel subsidies by 2020 would include:

(a) A 5 per cent decline in global primary energy demand by 2020 — equivalent to the current energy consumption of Australia, Japan, New Zealand and the Republic of Korea combined;
(b)    A decline in global demand for oil of 6.5 million barrels per day by 2020, predominant in the transport sector — equivalent to approximately one third of current United States oil demand;
(c)    A carbon dioxide emissions reduction of 6.9 per cent (2.4 gigatonnes) by 2020 — equivalent to the current emissions of France, Germany, Italy, Spain and the United Kingdom of Great Britain and Northern Ireland combined.

154. With Governments everywhere under increased pressure to reduce public expenditure, an unprecedented political opportunity exists to reduce or eliminate perverse subsidies that fail to reflect the economic value of natural and social resources.

155. This needs to be done in a manner that does not penalize the poor, especially when the products or services concerned are basic essentials. Careful thought needs to be given to the sequencing of subsidy reduction: subsidies that the poor rely on least should be reduced first, accompanied by targeted support for the poorest and most vulnerable people where needed.

Recommendation 27
161. Governments should establish price signals that value sustainability to guide the consumption and investment decisions of households, businesses and the public sector. In particular, Governments could:

(a) Establish natural resource and externality pricing instruments, including carbon pricing, through mechanisms such as taxation, regulation or emissions trading systems, by 2020;
(b)    Ensure that policy development reflects the positive benefits of the inclusion of women, youth and the poor through their full participation in and contribution to the economy, and also account for the economic, environmental and social costs;
(c) Reform national fiscal and credit systems to provide long-term incentives for sustainable practices, as well as disincentives for unsustainable behaviour;
(d) Develop and expand national and international schemes for payments for ecosystem services in such areas as water use, farming, fisheries and forestry systems;
(e)    Address price signals that distort the consumption and investment decisions of households, businesses and the public sector and undermine sustainability values. Governments should move towards the transparent disclosure of all subsidies, and should identify and remove those subsidies which cause the greatest detriment to natural, environmental and social resources;
(f)    Phase out fossil fuel subsidies and reduce other perverse or trade- distorting subsidies by 2020. The reduction of subsidies must be accomplished in a manner that protects the poor and eases the transition for affected groups when the products or services concerned are essential.