Table of Contents

  • Consumer subsidies to fossil fuels amount to USD 550 billion annually, four times more than subsidies to renewables. Globally we are still subsidising fossil fuels causing climate change. Competing interests across governments may lead to governments sticking their heads down and dealing with one policy at a time. Too often fossil fuel subsidy reform is tackled like this by governments. But there is a golden opportunity right now. With the low oil prices governments can regroup across their different Ministries to plan on phasing out fossil fuel subsidies, on levelling the energy playing field so that new, low-carbon, energy players: renewables, energy efficiency, and public transport systems, can compete fairly and squarely against the fossil fuel incumbents.

  • Global fossil fuel subsidies to consumers stand at USD 550 billion annually: four times the level of subsidies going into renewables and four times the level of private investment into energy efficiency. This report includes new research on the impact that the reform of these subsidies could have on national greenhouse gas (GHG) emissions, by modelling this policy change in 20 countries between now and 2020. It finds an average of 11% of reductions from the removal of fossil fuel subsidies alone through pre-2020 actions. This could increase to as high as 18% if a small share of savings (30%) is reinvested into energy efficiency and renewables. The cumulative savings from across the 20 countries by 2020 amounts to 2.8Gt of CO2e. This updates earlier global research on this issue, with a range of global and national models having previously projected emissions reductions of between 6%–13% by 2050.

  • Research from the Global Subsidies Initiative (GSI), of the International Institute for Sustainable Development (IISD) supported by the Nordic Council of Ministers (NCM), finds that, on average, across 20 countries the phased removal of fossil fuel subsidies between now and 2020 could lead to average national emissions reductions of 10.92% as against a business-as-usual (BAU) baseline. Emissions reductions would be increased to 18.15% if a small amount of the savings from subsidy reform (30%) are redirected toward renewables and energy efficiency. The cumulative savings from across the 20 countries by 2020 amounts to 2.8 gigatonnes (Gt) of CO2e. Furthermore, because this is a policy tool that saves government resources, it is estimated that for every tonne of CO2e removed through FFSR governments save an average of USD 92.83.

  • Fossil fuel subsidy reform can support climate change policy and goals. It can be recognized as part of a package of measures to implement Intended Nationally Determined Contributions (INDCs), because reform can both reduce emissions and liberate resources to invest in sustainable energy systems.

  • This section describes three different country experiences with FFSR, viewing the reforms from an emissions-reduction perspective. The GSI and others usually focus on evaluating reforms from a fiscal policy or social impact assessment perspective – the most common motivation for countries reforming their subsidies. Rarely are emissions reductions considered, nor how to maximize a shift toward low-carbon energy measures alongside the process of reform. The GSI recommends a threepillared approach to FFSR as outlined below: getting energy prices right, building support for reform and managing the impacts of reform (Beaton et al., 2013). This report makes the case to governments to also evaluate investment in sustainable energy, when undergoing energy sector reforms.

  • The Philippines removed various fossil fuel subsidies between 1996 and 2001 and experienced fuel price increases. As a result, it has been able to invest more in safety nets and renewable sources of energy, and now taxes fuels. Since reform, the Philippines has experienced a decline in the consumption of oil products, stabilized emissions per kWh generated, increased energy efficiency and reduced the energy intensity of the overall fuel mix. This is likely due to a mixture of reasons including subsidy reform, the downturn from the Asian Financial crisis and higher oil prices being passed through to consumers, as well as active government policy to invest in renewables.

  • Subsidies rose in Morocco following the suspension of a mechanism to index domestic prices of food and fuel to international prices – and in 2013 a major subsidy reform program was launched to address the high cost of the subsidies. The reforms began with a reduction in gasoline and diesel subsidies. To manage the impacts of reforms, fuels that place a disproportionate burden on the poorest were originally excluded. The reduction in subsidies to fossil fuels has been coupled with a commitment to increasing the role of renewable energy, particularly solar energy. The experience of Morocco shows the importance a structured approach to subsidy reform and the need for high-level political engagement with reforms.

  • Jordan is a clear example of the link between reforms of consumer fossil fuel subsidies and emissions reductions due to an initial demand decrease. However, it perhaps also represents a missed opportunity to utilize savings from FFSR toward energy efficiency and renewables to maintain emissions reductions for the long term.

  • This report finds that the reform of fossil fuel subsidies is a policy tool that governments have at their disposal that will lead to emissions reductions as well as government savings. Modelling across 20 countries finds that early phase-out by 2020 leads to average national emissions reductions of between 6 and 11%. This national country-level research fits with broader models at a global level that find global reductions of between 6 and 10%. Moreover, FFSR is an efficient policy tool for the removal of GHG emissions: for every tonne of GHGe removed, around USD 93 is saved annually. Wider research also points to the case of FFSR as a “foundation” policy on which to build energy efficiency and renewable energy policies.

  • This research would not have been possible without the consistent support of the Nordic Council of Ministers over the last two years, as well as ongoing and crucial support from donors to the GSI: Denmark, Norway and Sweden. Ongoing support and outreach from the Friends of Fossil Fuel Subsidy Reform for supporting the issue since 2010 and particularly in the context of UNFCCC. With thanks to Morocco and Indonesia for testing the research and also to those economists, researchers and collegues who reviewed the model and paper.