Stalemate on G20 climate talks as fossil fuel subsidies surge

Climate change was meant to be a key item at the upcoming G20 summit in New Delhi this weekend. But amid rising geopolitical tensions, it seems to have dropped of the agenda, with potentially far-reaching investment implications.

World leaders are due to meet in New Delhi for the G20 summit this weekend, but the event was off to a poor start as Chinese leader Xi Jinping confirmed that he would not be attending the event.

While international commitments to reduce carbon emissions were meant to be a key theme at the summit, held on the theme ‘One Earth, One Family, One Future’, climate talks prior to the event failed to reach an agreement on setting greenhouse gas reduction targets and reducing fossil fuel production.

At a meeting of environment ministers in July; China, backed by Saudi Arabia, refused to set hard targets for reducing fossil fuel production, as the Financial Times reports. A 31 page policy document addressed issues such as biodiversity the marine environment and the transition to a circular economy but did not once mention the thorny issue of hard targets on cutting back on fossil fuel production.

To meet the 1.5° target set out in the Paris Agreement, G20 nations will have to half their emissions by the end of the decade, according to the Intergovernmental Panel on Climate Chance.

A consensus among G20 leaders could have vital implications for climate investment, with the 20 nations accounting for 80% of the world’s carbon emissions.

Broken promises

The failure to reach an agreement comes despite G20 nations already having committed to net zero targets.

But IMF figures released earlier this month show that global fossil fuel subsidies have surged to $7 trillion in 2022, a $2 trillion increase compared to 2020, as governments across the world have attempted to shield consumers from rising energy prices.

In absolute terms, China is now by far the largest backer of fossil fuels, having committed more than $2.2 trillion in subsidies in 2020. East Asia and the Pacific account for almost half of global fossil fuel backing.

But developed markets are also very much part of the trend. Last year, the US also paid a record $1 trillion in subsidies to oil and gas, in that same year, the US sector booked $4 trillion in income.

Impact on transition funding

For investors looking to support the transition to net zero assets, a key problem with fossil subsidies is that it leads to mispricing the true risk of fossil fuel investment whilst making investments in renewable energy relatively less competitive.

Over the next decade, the profitability of US oil and gas fields will be boosted by more than 50% due to government subsidies with most of the money being spent on excess profits, a 2021 study published in Environmental Research revealed.

But current energy prices to not fully factor in externalities such as local air pollution costs and climate damages, impacts on transport and congestion as well as foregone tax revenues, the IMF highlights.

Both the International Energy Agency and the IMF have called for the removal of fossil fuel subsidies and have identified them as a market distortion.

But the story could also be turned on its head. If fossil fuel subsidies were to be scrapped, and fossil fuel energy prices were raised to their “fully efficient levels” in IMF jargon, carbon emissions could be reduced by 43% by the end of the decade, the Bretton Woods body predicts.

Moreover, a fuel price reform which cuts back on price subsidies for the fossil fuel sector could raise more than $4 trillion in 2030, money which could be deployed into making investments into renewable energy more competitive the IMF predicts.

For the G20 nations, a key challenge going forward will be how to implement these changes without a drastic surge in fuel prices, particularly among the poorest nations.