Ending financial assistance for fossil fuel companies has long been discussed as a tactic to reduce greenhouse gas emissions and encourage investment in renewables. Oil, natural gas and coal companies worldwide receive hundreds of billions of dollars each year in tax breaks or other subsidies—and some experts argue that cutting them off would drive prices up and consumption down.
It's a simple idea, but one that's been sparsely investigated by scientists. Now, new research suggests that removing fossil fuel subsidies might not have the global effect that some climate advocates were hoping for.
The study, published yesterday in the journal Nature, used an ensemble of five models to investigate the impact of ending fossil fuel subsidies worldwide by the year 2030, assuming both high and low oil prices in the future. Doing so would have a modest impact on global greenhouse gas emissions, the research finds, cutting carbon dioxide emissions by a half-billion to 2 billion metric tons annually.
Currently, global carbon dioxide emissions come to about 40 billion tons each year. In the meantime, the national pledges submitted under the Paris climate agreement would add up to an annual decrease of about 4 billion to 8 billion tons.
In other words, the effect of removing fossil fuel subsidies would fall far short of the reductions promised in the Paris Agreement—which many experts calculate are still not enough to stay within the desired 1.5- or 2-degree-Celsius temperature target.
"I think this will be surprising news to some people, because folks had just imagined that if you did subsidy reform, that would be beneficial to climate," said David Victor, co-director of the Laboratory on International Law and Regulation at the University of California, San Diego, who was not a part of the new study. "But nobody had actually worked out the analysis, and that's the contribution of this paper."
It's not to say that getting rid of subsidies would have no effect anywhere in the world. On the contrary, the research suggests that impacts would vary substantially by region, even if the total global effect is small. Oil and gas exporting regions, such as the Middle East, Russia and Latin America, could see substantial emissions reductions, perhaps equal to or greater than their Paris pledges. That makes sense, because these are the regions where subsidies are the largest.
In places like North America and Europe, on the other hand, fossil fuel subsidies are much lower, and getting rid of them would have a relatively small impact on the market. Subsidies also tend to be lower in many developing nations. But the researchers also caution that in these emerging economies, removing the subsidies that do exist could disproportionately affect low-income citizens, who benefit from lower energy prices.
"The effect is really limited regionally," said lead study author Jessica Jewell, a research scholar at the International Institute for Applied Systems Analysis. "In the future, when we talk about subsidy removal, we really need to focus our efforts on oil and gas exporting regions."
And if subsidy reform is broached in developing regions, she added, it should be discussed alongside "supportive policies to support those lower-income folks."
Subsidy reform has been seriously discussed for at least a decade. In 2009, the Group of 20 nations proposed phasing out inefficient fossil fuel subsidies, and in the past couple of years, numerous investors and organizations have called on the G-20 economies to remove the subsidies by the year 2020. But addressing climate change isn't the only reason for these discussions, according to Victor, the UC San Diego energy expert.
"There are a lot of important reasons for subsidy reform: distortion effects on the market, pollution—including climate change, not only climate change—the fiscal effects on government budgets," he said. "Those are the main reasons why the G-20 focused on subsidy reform going back to 2009."
So while many climate activists have said that removing fossil fuel subsidies would likely encourage reductions in carbon emissions, subsidy reform is still not directly climate policy, he cautioned. The climate consequences would be indirect—and, as the new study suggests, highly regional.
The findings help reaffirm the idea that effectively tackling climate change "requires an incentive directly focused on the problem, which is emissions," Victor said. More targeted approaches to reducing greenhouse gases include carbon pricing—not just removing financial incentives for fossil fuels, but actually taxing them—or stringent emissions caps.
Fiscal policy expert Ian Parry, of the International Monetary Fund, made a similar point in a commentary on the new research, also published yesterday in Nature.
"I think that reform of fossil-fuel prices needs to go well beyond aligning them with production costs," he wrote. "Fuel prices should also reflect the consequences of their use for global warming and other environmental considerations, such as the costs of deaths resulting from air pollution and, in the case of road fuels, traffic congestion and accidents."
Jewell cautioned that the new research doesn't indicate that subsidy reform should be abandoned, or that it makes no difference from a climate perspective. Rather, the new study helps illuminate the areas where its effects will be most helpful.
"We're not saying that subsidies should live forever, or should not be removed," Jewell said. "We're really pointing to where it's super important to remove them, and where it would have the biggest effect and where there's the biggest political opportunity."
Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.
