Unlocking supply and locking in carbon: The paradox of determining which fossil fuel subsidies are the worst for the climate

Ivetta Gerasimchuk and Andrea Bassi

This paper focuses on the impact of subsidies on fossil fuel supply. We seek to answer the questions that many experts and policy-makers are asking: a) Which subsidies to fossil fuels are the worst in terms of climate change impacts? b) Are these the same subsidies that should be phased out first under the commitment of G20 and APEC leaders to “phase out inefficient fossil fuel subsidies that encourage wasteful consumption”? We find that it is possible to identify those subsidies to fossil fuels that are likely to have the greatest climate impacts, through supporting lock-in of high carbon assets. The paradox is that, even leaving aside political economy challenges, prioritizing certain “heavy climate impact” subsidies for phase-out is not an effective solution from the viewpoint of keeping unburnable carbon in the ground. Because of fossil fuel substitution effects and transboundary leakage of capital and emissions, an incomplete subsidy phase-out will result in the continued unlocking of emissions elsewhere. The only effective policy consistent with the Paris Agreement is the phase-out of all types of subsidies to all fuels, by all countries, provided that complimentary policies are put in place to protect the vulnerable.     Download full paper PDF »

Explaining variation in fossil fuel subsidy reforms between countries

Kennedy Mbeva

Fossil fuel subsidy reform is emerging as an important policy instrument for tackling climate change, mainly by reflecting the true price of fossil fuels through removal of the subsidies and investing them into renewable energies. This is especially important for countries in meeting their commitments under the historic Paris Agreement. Emerging literature on fossil fuel subsidy reform has mainly focused on single case studies or a limited number of countries, with limited comparative analysis. Furthermore, conditions under which fossil fuel subsidy reform has been undertaken have been put forth, but have not been empirically tested in a broad comparative study. This study addresses that gap by empirically analysing the conditions under which fossil fuel subsidy reforms happen across a range of developed, emerging and developing countries, through a political-economy analytical lens. It draws on theories and factors identified in existing literature, then assigns proxy independent variables to those factors with data from different sources, such as the latest International Energy Agency and International Monetary Fund datasets on fossil fuel subsidies, complemented with other relevant datasets. The dependent variable in this case is the implementation (or lack thereof) of fossil fuel subsidy reform. These variables were then tested using appropriate statistical regression techniques. This analysis focused on supply-side fossil fuel subsidy reform. This study seeks to contribute in three significant ways: 1) understanding the variations between countries/country categories in implementation of fossil fuel subsidy reforms (or lack thereof); 2) understanding political-economy, equity and justice issues in the transition away from fossil fuel production; and 3) understanding how fossil fuel subsidy reforms can be utilised effectively as a policy instrument to address climate change.

Measuring the impacts of eliminating subsidies and assigning taxes to energy products in Mexico through a general equilibrium model

Zuelclady Araujo Gutiérrez, Arturo Pérez Mendoza, Katya Pérez Guzmán

This paper develops several general equilibrium models, in their static and dynamic versions, as a first approximation to find out the effects of eliminating subsidies on the production of gas, electricity and oil, as well as the effects of taxes on these fuels’ total values of production. The methodology used allows a comparison between these various scenarios to answer the question: Which of these combinations has the best result in terms of the three main dependent variables – emission reductions, consumer welfare and government income? The results show, first, that higher tax rates achieve the best outcomes for government income and emissions reductions, along with high consumer welfare and economic production at the general level. Second, the simulations of the elimination of subsidies on production show low impacts on emission reductions and government income. This is explained by the fact that production subsidies are much lower than consumer subsidies. Lastly, this paper shows that the removal of fuel production subsidies has a more negative impact on welfare for the lowest deciles of the population, when compared with the highest deciles. This is consistent with the regressive effects of subsidies on consumption. The article gives several insights into the implications of such policies – namely, environmental tax policies should be accompanied by other types of mitigation tools in order to achieve Mexico’s goals of emission reductions. One of the future lines of research stemming from this work is to complement these findings with sector analysis and more detailed models.

Fossil fuel subsidy reform in the United States: Impediments and opportunities

Doug Koplow

Fossil fuel subsidies have been part of the U.S. political system for more than a century. The methods have been diverse, including grants, tax subsidies, favourable leasing terms, liability caps, and below-market provision of services to the sector. Despite repeated efforts at reform, the beneficiary industries have proven highly skilled at protecting their subsidies, even in the face of broad-based policy changes that successfully removed them from most other economic sectors. This presentation will provide an overview of the subsidy picture in the United States; the importance of accurate and timely data in making reform possible; and opportunities for successful reform in the near future. It will discuss recent case studies examining the impact of fossil fuel subsidies at the project level in expanding otherwise uneconomic extraction activities and their associated carbon emissions.