A REPORT by the International Institute for Sustainable Development (IISD) has found that just 10–30% of fossil fuel subsidies could pay for a global green energy transition.
In 2009, G20 nations pledged to phase out fossil fuel subsidies but so far, little progress has been made. Subsidies are generally defined as government financial support for those buying fuel or the companies producing it, and can also take the form of reduced tax rates. Subsidies can comprise a large proportion of government budgets, particularly if oil prices are high. Globally, around US$372bn is spent on subsidising fossil fuels, compared to US$100bn for renewables. The UK has the highest fossil fuel subsidies in Europe, spending US$13.5bn/y on fossil fuels compared to US$9.3bn/y on renewables.
The IISD report, Fossil Fuel to Clean Energy Subsidy Swaps: How to Pay for an Energy Revolution, outlines the importance of a “subsidy swap”, which would reallocate funds from fossil fuels to renewables. This would lead to emissions reductions, boost the economies, and improve public health. Phasing out global fossil fuel subsidies is estimated to decrease CO2 emissions by 2.32–10% by 2030, and the International Monetary Fund (IMF) found that subsidy reform could result in an average revenue of 2.6% of GDP globally.
The cost of renewables has been steadily decreasing, and annual investment in renewables has been greater than fossil fuels since 2008. However, more ambitious policy reforms are urgently needed to accelerate the clean energy transition.
Fossil fuel subsidies have fallen overall since 2012, but this isn’t a steady decline as subsidies increased following the rebound in crude oil in 2017. Swaps are already taking place on a global level but the pace isn’t accelerating quickly enough. The report outlines four case studies – India, Indonesia, Zambia, and Morocco – where successful subsidy swaps are already taking place.
The study highlights the importance of not just removing the fossil fuel subsidies, but also swapping to clean energy. “The reform of subsidies alone is not enough to meet global emissions targets, but it is a good first step,” said Richard Bridle, IISD Senior Policy Advisor. “Ultimately, the cost of each energy source should reflect its social and environmental impacts. That means increasing taxes on dirty energy and redirecting subsidies to align with government priorities.”
A recent report by CDP, a non-profit organisation that runs a global environmental disclosure system, found that in the next five years over 200 of the world’s biggest companies would have to write off US$250bn in stranded fossil fuel assets. However, it also highlighted the opportunities that green investments would bring which would offset potential losses.
The IISD report notes that a subsidy swap will cause asset stranding in the short term. This will result from the falling cost of renewables causing economic stranding, and policy changes regarding emissions reductions causing regulatory stranding. However, it also highlights two positives in the long term, in that swaps will prevent the deployment of uneconomical fossil fuel assets that would become stranded later, and that swaps could redirect resources to policies that would support workers affected by asset stranding.
It outlines a range of measures that would be essential to offset or mitigate employment losses, including clearly communicated timelines, skill development and retraining, policies for job creation, and support for community renewal.
The report also looks at the political reasons behind why subsidy swaps haven’t happened on a major scale yet. It explains that while there is political will to take action at the highest levels, such as the G20’s 2009 commitment, these commitments become more complicated at the national level. For example, subsidy reform could trigger tariff increases, and badly-designed reforms could result in price shocks for consumers. This can lead to opposition parties adopting a stance against subsidy reform. The report says that it is important to change the political dynamic through targeted communication activities, and develop policies that address the concerns of those opposed to change.
“Often fossil fuel subsidies are inefficient, costly to governments and undermine clean alternatives,” said Bridle. “All countries should be looking to identify where swaps can kickstart their clean energy transitions.”
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