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On Friday afternoon, President Barack Obama formally announced that the world’s 20 major developed and developing nations had agreed to gradually eliminate fossil-fuel subsidies.

It was the only climate-specific policy directive to come out of the Group of 20 (G20) Summit in Pittsburgh, and it fell far short in the view of climate activists, who were hoping for a firm proposal on “climate finance” — G20 aid to poor nations for help in adapting to and mitigating climate change.

“Removing fossil-fuel subsidies could be an important step towards cutting CO2 emissions,” said Oxfam climate advisor David Waskow in a statement. “But it should not be allowed to distract from the failure of rich countries to offer poor countries the help they need. Poor people should not be asked to pay the price of cutting emissions” that rich countries have created.

Greenpeace climate finance advisor Steve Herz agreed. “We think it’s an important step forward,” said Herz, “but it’s no substitute for the work we expected them to be doing here, which was putting together a fair and ambitious financing package to help the world’s poorest nations.”

Despite the disappointment of activists, the commitment on the part of G20 leaders to cut fossil-fuel subsidies is an important step, assuming they follow through on their pledge. Fossil-fuel subsidies add up to around $300 billion across the G20 major world economies. Developing nations tend to use these subsidies to artificially lower fuel prices for consumers, while developed nations like the United States use them in the form of economic and tax sweeteners for fossil-fuel producers.

According to estimates from the International Energy Agency and the Organization for Economic Cooperation and Development, eliminating the subsidies would reduce global greenhouse-gas pollution 10 to 12 percent by 2050.

“We already know that the prices [for fossil fuels] are too low because they don’t reflect the cost of climate change … the true scarcity value and opportunity cost of using this resource,” said Columbia University’s Scott Barrett, who studies natural resource economics. “These subsidies are sending the wrong signal about value and scarcity of fossil fuels in the marketplace.”

Fossil-fuel subsides are also a drag on the ecomony. “If you’re selling kerosene at a lower price than the world price … it will come out of the public purse in some other way,” said Barrett, who co-authored a survey of economic policy strategies for combating climate change — including the elimination of fossil-fuel subsidies — for the Intergovernmental Panel on Climate Change’s Second Assessment report, published in 1995 [PDF].

Removing artificial price supports will help cool demand for dirty fuels while simultaneously making cleaner energy more competitive. But it has to be done with care. if subsidies are cut off thoughtlessly, warned Barrett, a head of state could end up with riots in the streets.

This is one reason fossil-fuel subsidies have not played a bigger role in climate negotiations. Another, according to Barrett, is that many climate negotiators “were pushing for targets and timelines,” to the exclusion of all other options.

“The biggest problem with targets and timetables is that they’re not being met, they don’t work,” said Barrett. “So why not supplement discussions about targets and timetables with discussions about actions that are actually going to be taken” — like retiring fossil fuel subsidies, which looks like it may actually happen.

At the end of the Pittsburgh Summit, G20 heads of state directed their finance czars to begin developing a more detailed phaseout plan at a November meeting in Scotland. The G20 will revisit the issue at its next meeting, in Toronto in June 2010.