Ending G7 fossil fuel subsidies could generate $101bn to offset climate damages in the Global South by 2026

The organisations argue that G7 countries can make significant strides in funding to tackle loss and damage by accelerating reductions in fossil fuel subsidies and redirecting support from polluting industries into a new ‘Climate Damages Fund’.

The new analysis comes as the UN and UK co-host today’s online Climate Ambition Summit on the fifth anniversary of the Paris Agreement.

G7 countries can provide $101billion by 2026 to tackle loss and damage by fulfilling their commitment, made in 2016, to end inefficient fossil fuel subsidies by 2025 and redirect the savings to create the fund.

The analysis is based on accelerating current levels of subsidy reductions (to meet the 2025 commitment to end inefficient fossil fuel subsidies) and a rate of return of 5% on the fund*.

The Climate Damages Fund, a new financing facility for loss and damages for countries in the Global South, would, however, only go some way towards covering the $290-$580 billion projected cost of loss and damage by 2030, according to the latest research.

The climate crisis is already having a devastating impact on communities in the Global South, particularly for women and girls who are hardest hit by climate disasters. The Fund would be managed by an international body such as the UN Framework Convention on Climate Change (UNFCCC) and used to support the developing countries least responsible for climate change.

The analysis comes as two countries in the G7 – France and Canada – have actually increased fossil fuel subsidies since signing the Paris Agreement in 2015, highlighting the economic block’s inertia.

Harjeet Singh, ActionAid International’s Global Lead on Climate Change, says:  

“Fossil fuel subsidies are betraying the real action needed to tackle the climate crisis and meet the globally agreed goals of the Paris Agreement to limit warming to below 1.5C.  

“Communities in the Global South are least responsible for climate change but are already facing its devastating impacts. Diverting existing funds away from inefficient and destructive fossil fuel subsidies to support people living on the frontlines of the climate emergency, enables the world’s richest economies to go some way to meeting their responsibility to protect the poorest.” 

Commenting on the role of the UK COP26 Presidency, David Hillman, Director of the Robin Hood Tax Campaign, says:   

“If the UK is to lead by example on climate change in the run up to COP26, it must step up action to reduce fossil fuel subsidies. The billions being spent on tax breaks for polluting industries should be redirected to support communities facing devastation from the climate crisis”.   

Colin McQuistan, Head of Climate and Resilience at Practical Action, who advised on the analysis, says:

“Ambitious targets to cut emissions and adapt to the impacts of climate change are crucial. 

“But governments can no longer ignore the urgent need to cover the mounting costs that the crisis is already inflicting in the Global South. After years of negotiations, UN climate talks have failed to deliver on a new funding mechanism to compensate developing countries for the loss and damage caused by the climate crisis. 

“If the Ambition Summit is to live up to its name, loss and damage finance must be on the table.”  

The necessary reductions would require governments to match their rhetoric on the climate emergency with deeds, in what would be an unprecedented shift in the acceleration of subsidy reductions to the fossil fuel industry.  

In addition to the new Climate Damages Fund, the organisations argue that other policy measures would be required to meet the commitments made in Article 8 of the Paris Agreement, including by:

• Expanding the adoption and ambition of Financial Transactions Tax,
• Initiating Special Drawing Rights; and
• Expanding the Climate Damages Tax – or ‘the Robin Hood Tax on polluters’.   

The Warsaw International Mechanism for Loss and Damage (WIM) was established in 2013, under UNFCCC, to meet the costs of climate damages but it has remained an empty shell, failing to deliver on any financing mechanism.  

Ends. 

For more information contact Jenna.Pudelek@actionaid.org or call +447795642990. 

Notes to editors:  

1. ActionAid International is a global movement for the rights of women and young people – united in our fight against inequality and our pursuit of international social justice. www.actionaid.org
    
2. The Robin Hood Tax Campaign is a UK-based network fighting to fund communities in crisis as a result of inequality and climate breakdown. We advocate for the adoption of the Robin Hood Taxes on financial trading and fossil fuel extraction. www.robinhoodtax.org.uk
    
3. *Modelling of G7 fossil fuel subsidy reductions. Source: Geddes et al. 2020, International Institute for Sustainable Development, Overseas Development Institute, Oil Change International study data, November 2020. Access data here.
    
4. The G7 made a commitment to bring down its fossil fuel subsidies to zero by 2025. Assuming each G7 member sticks to this pledge, and reduces its fossil fuel subsidy to zero by the end of 2025, this becomes a G7-wide fossil fuel subsidy reduction of $17.2 billion per year over 2021 to 2025. This reduction has been used to calculate the projected annual contribution to Climate Damages Fund, assuming all reductions in subsidy are switched into the Fund, and also applying a 5% rate of interest annually as in the table below:

5. Article 8 of the Paris Agreement states that ‘Parties recognize the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage.’
    
6. The $290 and $580bn projected cost for loss and damage is contained within this study: Markandya, Gonzalez-Egundio (2019): “Integrated Assessment for Identifying Climate Finance Needs for Loss and Damage: A Critical Review” in R. Mechler et al. (eds.), Loss and Damage from Climate Change, Climate Risk Management, Policy and Governance, https://doi.org/10.1007/978-3-319-72026-5_14
    
7. In 2019, ActionAid found that the market mechanisms to fund the cost of repairing the harmful impacts of climate change fail to protect the rights of communities already suffering the most from increasingly severe weather events such as flooding, droughts and cyclones.
    
8. The G7 committed, in 2016, to the “elimination of inefficient fossil fuel subsidies” by 2025 G7 Ise-Shima Leaders’ Declaration, G7 Ise-Shima Summit, 26-27 May 2016, p.28. At: https://www.mofa.go.jp/files/000160266.pdf
    
9. Other policy measures to tackle the financing of loss and damage:

Financial Transactions Tax

Over the last ten years, the FTT has been introduced in a number of states, including France, Italy, Spain, Tanzania and Kenya. The nature of these FTTs, whilst robust in respect of tax capture, has been unambitious in terms of scope, limited for the most part to transactions in the shares of large companies. The scope and ambition should be scaled up to help tackle the costs of loss and damage.

Special Drawing Rights

Special Drawing Rights (SDRs) are foreign exchange reserve assets, units of account rather than a currency, which are maintained by the IMF. SDRs are the potential to claim on the currency of IMF members and can be exchanged for these currencies to create liquidity.

There is a precedent for the use of SDRs in times of crisis. Most recently they played a role in responding to the global financial crisis in 2009 when 250 billion USD in SDRs were issued in a special allocation (Ellmers, 2020).

Climate Damages Tax

The Climate Damages Tax (CDT), also known as the Robin Hood tax on polluters, is a proposal for a charge for each tonne of coal, barrel of oil or cubic litre of gas extracted based on how much CO2e is embedded in each fossil fuel (Richards et al., 2018). The proposal recommends that the CDT is introduced in 2021, beginning at 5 USD per tonne of CO2e and would increase by 5 USD per year until 2030 when it would be raised to 50 USD per tonne of CO2e, increasing by 10 USD each year. The revenue from the CDT would raise an estimated 210 billion USD in the first year, increasing thereafter and would also incentivise the eventual phasing out of fossil fuels (Richards et al., 2018).