Hybridizing low-carbon technology deployment policy and fossil fuel subsidy reform: a climate finance perspective

Abstract

The environmental argument behind fossil fuel subsidy reform is strong, particularly among international finance institutions wishing to support 'transformational' low-carbon development. However, supporting reform in practice has often met methodological and political barriers. Instead, a large share of international climate finance has flowed to national policies and measures that incentivize the deployment of low-carbon technologies such as renewable energy technologies. In this paper, we propose that 'hybrid' policies that package fossil fuel subsidy reform with low-carbon technology deployment policy offer an opportunity for donors to support mitigation activities that achieve both concrete environmental impacts as well as longterm structural change. Specifically, we model the abatement cost, fossil fuel subsidy savings, and generation cost resulting from combining wind and solar photovoltaic deployment policy with fossil fuel subsidy phase-out in four country case studies. Our results not only show the extent to which fossil fuel subsidies can undermine the financial viability of low-carbon energy technologies, but also how cost uncertainties can be buffered by combining fossil fuel subsidy reform with renewable energy deployment. Furthermore, we assess the proposed hybrid policy against typical climate finance criteria and thus contribute to debates surrounding donor strategies to support low-carbon development.

Limited emission reductions from fuel subsidy removal except in energy-exporting regions

“…Conversely, in low-income regions, subsidy removal would lead to smaller emission reductions and probably affect more people living below the poverty line. The frequently voiced suggestion of coupling subsidy removal with other emission-reduction policies such as carbon pricing 12,15 or clean energy support schemes 26,27 would not necessarily reduce the impact of subsidy removal on the poor unless such policies are specifically designed to do so.…”

The Politics of Fossil Fuel Subsidies and Their Reform

“…Indeed, analyses abound on the macro-economic effects of fossil fuel subsidies (e.g. Oosterhuis and Umpfenbach 2014;Coady et al 2015bCoady et al , 2017, the distributional consequences of subsidies (Arze del Granado and Coady 2012; Coady et al 2015a) and environmental implications, including subsidies' effects on carbon dioxide emissions (Burniaux and Château 2014;Schwanitz et al 2014;Mundaca 2017) and the possibilities for redirecting the savings from reform to climate change mitigation (Jakob and Hilaire 2015;Matsuo and Schmidt 2017). Moreover, recent scholarship has started to investigate the political dimensions of fossil fuel subsidies.…”

Navigating the Clean Energy Transition in the COVID-19 Crisis

“…In order to prevent rollbacks of these reforms in case of rising future oil prices, subsidy reform should be coupled with policies accelerating the transition toward nonfossil-fuel-based technologies. 9 On the other hand, low oil prices could pose major challenges to the deployment of less mature low-carbon technologies that compete with oil-based solutions. One example is the diffusion of electric vehicles (EVs) that just started in many countries.…”