Large opportunities to reduce CO2 emissions and invest in sustainable energy by ending fossil-fuel subsidies

Large opportunities to reduce CO2 emissions and invest in sustainable energy by ending fossil-fuel subsidies

IISD’s Global Subsidies Initiative, commissioned by the Nordic Council of Ministers, has developed a new tool to calculate CO2 emissions reductions achieved from removing fossil-fuel subsidies. Modelling of 20 selected countries shows that emissions could be reduced by an average of 11% by phasing out fossil-fuel subsidies between 2015 and 2020.

By Páll Tómas Finnsson

Four times more subsidies to fossil fuels than to renewables
While the social and economic impact of subsidies is well documented, limited research has been conducted around the environmental linkages and co-benefits of fossil-fuel subsidy reform. As part of the Nordic Prime Ministers’ Green Growth Initiative, the Nordic Council of Ministers therefore commissioned IISD to look into the impact of subsidies reform on CO2 emissions. Special emphasis was placed on supporting reform in emerging and developing countries.

The results have been published in a report entitled Tackling Fossil Fuel Subsidies and Climate Change: Levelling the energy playing field. According to the report, subsidies to the consumption of fossil fuels were estimated at US$550 billion in 2013 – more than four times the level of subsidies to renewable energy.

Initial studies indicated that global emissions could be reduced by 6-13% from the phased removal of fossil-fuel subsidies by 2050. IISD’s new tool, however, provides a more precise indication of the impact of reform on each country’s national emissions. As a result, the data can be included in the countries’ INDCs – Intended Nationally Determined Contributions – in which they declare what actions they intend to take to reduce greenhouse gas emissions under a new global climate agreement. The INDC declarations are key elements of the international climate negotiations leading up to the the COP21 conference in Paris.

“Countries that are either contemplating or already implementing reform need to know the extent of emissions reductions so that they can include the removal of fossil fuel subsidies in their INDCs,” says Laura Merrill, Senior Researcher at IISD’s Global Subsidies Initiative. “For these countries, the data clarifies how the reform will link in with their energy policies and climate change goals.”

Reinvestment in renewables further reduces emissions
IISD’s tool combines internationally available data, i.e. from the IEA, OECD and the World Bank, with national data on the individual country’s energy profile, including the level of fossil-fuel subsidies. The tool has been applied to model the impact of removing fossil-fuel subsidies in 20 countries, including wealthy nations like Saudi-Arabia, Iran and the United Arab Emirates, as well as less developed countries like Bangladesh, Ghana and Morocco.

“These 20 countries, all of which subsidise fossil fuels, could reduce emissions by a national average of 11% by phasing out their subsidies between now and 2020,” says Merrill. “By re-investing 30% of the subsidy savings in renewable energy or energy efficiency, the emissions could be reduced even further, or by an average of 18%.”

According to the study, the cumulative emissions savings across the 20 countries would reach 2.8Gt by 2020 and 6.3 Gt by 2025.

“Our calculations show that the countries would save an average of US$93 per ton of CO2 removed from the system,” says Merrill. “This makes it quite clear that fossil-fuel subsidies is one policy tool that governments can no longer afford to ignore.”

Policy coherence across energy and climate policies
The report also provides more detailed case studies of subsidy reform in Morocco, the Philippines and Jordan. The case studies further analyse the impact of reform, the change in demand as a result of increased prices of fossil fuels, and the subsequent policies put in place. These include carbon pricing and fuel taxation, as well as investment in social welfare and renewable energy.

“Removing subsidies often results in noticeable price changes, and these changes have an effect on people’s behaviour and consumption,” Merrill says. “In the short term, higher fossil fuel prices lead to a reduction in demand, but we’ve also found that an increase in fuel prices increases the level of innovation in renewable energy and energy efficiency.”

Merrill explains that this research from IISD increases the understanding of fossil fuel subsidy reform as a foundation policy that ensures coherence across energy and climate policies. The Nordic Council of Ministers has promoted a similar agenda within the UNFCCC, notably through the work of the Friends of Fossil Fuel Subsidy Reform, a group of countries concerned with the issue, including Nordics and countries from across the globe. The countries are building momentum behind an international communiqué calling for greater transparency, assistance and action on the issue in the lead-up to COP21.

“The key question is how countries go through the process of reform and where they invest the savings,” Merrill says. “Our aim is to encourage policy makers to take emissions reductions from fossil-fuel subsidies reform into account, and to seriously consider reinvestment of a portion of the savings from reform in renewables or energy efficiency.”

The report is available here: Tackling Fossil Fuel Subsidies and Climate Change: Levelling the energy playing field

Infographic describing the findings available here: Infographic

Read related article on the use of economic instruments in Nordic environmental policies

“These 20 countries, all of which subsidise fossil fuels, could reduce emissions by a national average of 11% by phasing out their subsidies between now and 2020”

Laura Merrill, Senior Researcher at IISD’s Global Subsidies Initiative