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A policy dinosaur: fossil fuel subsidies

December 8, 2015

Fossil fuel subsidies, though still prevalent globally, are a policy dinosaur that needs to be made extinct. It is the height of policy incoherence to subsidize fossil fuels while at the same time considering putting a price on carbon. Carbon pricing and fossil fuel subsidies are policy instruments that work in exact opposite directions.

Fossil fuel subsidies map

Removing these subsidies would free up significant revenue in national budgets for use on health, education and other development critical sectors.

A the COP opening, New Zealand Prime Minister John Keyes presented the Fossil-Fuel Subsidy Reform Communiqué to Christiana Figueres, Executive Secretary of the UNFCCC. In this communiqué, the Friends of Fossil Fuel Subsidy Reform called on the international community to address the perverse incentives created by fossil fuel subsidies through:

  • Transparent communication to ensure a bottom-up approach to implementing reforms
  • Ambitious time frames in phasing out these subsides, and
  • Targeted assistance to safeguard vulnerable peoples impacted by these reforms.

Today I attended a side-event on fossil fuel subsidy reform organised by the International Institute for Sustainable Development (IISD). Speakers included Tim Groser NZ’s Trade Minister and Felipe Caldaron, former Mexican President.

Fossil fuels panel

Presently global fossil fuel subsidies total $548 billion in 2013, five times the funding made available to the renewable energy sector.

Global fossil fuel subsidies

Energy consumption has grown rapidly in countries where these subsidies exist, therefore it is important to phase them out to mitigate this trend. IEA research has shown that even a partial phase-out of fossil fuel subsidies would generate 12% of the total abatement needed by 2020 to keep us on a pathway to limiting temperature increases to 2°C.

Fossil fuel subsidies are not only slowing down the transition to renewable energy, they actively discourage investments in efficient resource use. Significant abatement gains can be made through efficiency improvements in the use of fossil fuels, however energy producers have no incentive to pursue these efficiencies while benefiting from subsidies.

It is important that subsidies begin to be phased out as soon as possible, since the cost of action increases over time. There are currently fossil fuel energy infrastructure investments under consideration and incentivised by subsidy regimes. Should these infrastructure investments be completed, they will ‘lock-in’ the energy infrastructure of host countries for the next 50yrs. Transformation costs will then be increased by having to absorb the unused value, decommissioning cost and structural adjustment associated with these stranded assets. In the case of developing countries, these infrastructure investments are likely to be associated with a significant international debt burden – so the country will be paying for both the fossil fuel subsidy and the loan to build the infrastructure.

In a related issue, it is important that international development funding directed to bolstering national budgets is not used on fossil fuel subsidies. Conditionality clauses need to be included in the provision of this funding to ensure it is not directed towards climate negative spending.

The Paris Agreement should include clear direction to nations maintaining these subsidy programmes to phase them out. Thirteen countries have already committed to subsidy reform in their INDC’s, including India, Iran, Indonesia, Morocco and Egypt. The IISD is calling on other countries with these subsidies to include a commitment towards their phase out in their INDC’s.

However we must recognise that the main barrier to removing subsidies is political. Governments are naturally reluctant to reform fossil fuel subsidies as these subsidies are closely linked to their voter base. The international community can help manage this risk by building and communicating the case for subsidy reform. Domestically, governments must link the phase out of fossil fuel subsidies with  targeted assistance to the most vulnerable to shield them from livelihood impacts associated with the removal of subsidies.

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