Fossil Fuel Subsidy Reform can reduce Greenhouse Gas Emissions Globally by 6-13%

new report from the Nordic Council of Ministers and the Global Subsidies Initiative of IISD finds that the removal of fossil-fuel subsidies to consumers (US$ 543 billion in 2014) and to society could reduce global greenhouse gas (GHG) emissions by between 6-13% by 2050.

The research and a new “GSI – Integrated Fiscal” (GSI-IF) model have been launched in order to support nations in measuring their emissions reductions from fiscal instruments, such as the phase out of subsidies or introduction of taxes to fossil-fuels.

The report and model are timely, being presented in Geneva to policy makers from more than 25 countries working on the UNFCCC negotiations, at a reception lunch hosted by the Friends of Fossil-fuel Subsidy Reform. Negotiators will need to identify and submit their mitigation measures in the coming year as their ‘Intended Nationally Determined Contributions’ in the build up to Paris. In 2014 almost 30 countries, including Egypt, Indonesia and India, delivered some form of fossil-fuel subsidy reform. Low oil prices have reduced the political sensitivity of subsidy reductions or removal, although it remains to be see how pricing systems will respond once world oil prices rise again.

For countries that have fossil-fuel subsidies, reform is one feasible and cost effective option for reducing GHG emissions and staying within a 2°C target of warming. The GSI-IF model enables countries to estimate their emissions reductions from a phased removal. Subsidies can take up a significant portion of government spending (e.g. between 5-30% of government expenditure in a range of Southeast Asian countries) and therefore savings from such reforms can be significant. The GSI-IF model also looks at scenarios for the reallocation of savings―20% into energy efficiency and 10% in renewable energy―and finds that this enables emissions from subsidy reform for particular countries to remain at a reduced level for the long-term, despite growth in GDP and population.

The report recommends that policy makers consider including fossil-fuel subsidy reform within their INDCs, that a technical experts meeting on the issue should be convened under the umbrella of the UNFCCC and that some of the domestic savings unlocked from fossil-fuel subsidy reform should be reinvested into energy efficiency, public transport and renewable energy, to ensure consumers have access to a diverse energy mix. In the midterm, countries could consider conventional taxation of fossil-fuels such as a value-added tax or general sales tax, including a carbon tax. The work updates and extends a previous review by the GSI in 2010 of attempts to model the climate impacts of fossil fuel subsidy reform.

The research finds that models are likely to underestimate savings because they do not include subsidies to producers due to lack of data. Furthermore, a cap on emissions in Organisation for Economic Cooperation and Development (OECD) countries, coupled with multilateral action on reform, would increase the percentage reduction in emissions achieved from phasing out fossil-fuel subsidies (one study finds an increase in reductions from 8 to 10% by 2050).

There are opportunities on the budgetary side as well, as removing fossil fuel subsidies also frees up significant government resources. In addition to social safety nets, finance can be reinvested into public transport, energy efficiency and sustainable energy for all, leading to low-carbon energy pathways. Crucially, in order for countries to gain the greatest emissions reductions from reform and to change a relatively unchanged global energy mix, governments must simultaneously invest in energy and transport infrastructure to enable switching towards a more diverse energy mix with lower-carbon options. Secondary effects from the removal of fossil- fuel subsidies on GHG emission reductions are likely to also be important and could potentially help lift the lid on growth in low-carbon energy systems.

Current fossil-fuel subsidies lock us into a high-carbon energy world. Removing subsidies to fossil fuels is one of the keys to unlocking our dependency on carbon and represents an opportunity to open the door on a low-carbon future.

The report can be downloaded from the Nordic Council of Ministers website here.