The subsidies conundrum amid emission reductions, renewable boost and social impacts

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Would phasing out fossil fuel subsidies help the growth of renewable energy sources? Would it drastically reduce CO2 emissions in the atmosphere? The answer is not straightforward and should not be taken for granted, especially due to the implications for major oil and gas exporting countries, as well as for policy measures needed in support of low-income households. A brand new study published in the journal Nature examines fully the issues at stake. CMCC researchers Massimo Tavoni and Johannes Emmerling are among the authors of this research.

There is no one silver bullet. If the goal is to chart a path away from fossil fuel use, subsidizing these energy sources loses much of its sense. However, the phase out of fossil fuel subsidies will not provide a solution to global CO2 emissions by itself, Massimo Tavoni explained. CMCC researchers Massimo Tavoni and Johannes Emmerling are among the authors of a study just published in the journal Nature. “The study shows that in some countries, such as in major fossil fuel exporters, the removal of subsidies leads to significant results both on the use of renewables and on emission reductions. However, at the global level it would have a small impact, so we should bear in mind that other measures are needed, such as carbon pricing and investments in innovation.”
In order to improve the robustness of the results with respect to other similar studies, the international research team used for the first time a comparison of five different Integrated Assessment Models (IAMs), including one developed in part by CMCC. According to the research, the removal of fossil fuel subsidies will result in a global CO2 emissions reduction of 1-5% by 2030, corresponding to 0.5-2 billion tons of CO2. This figure is lower than the level of reduction required to meet the goals of the Paris Agreement (4-8 billion tons of CO2) and would not keep the global temperature increase below 2°C.

However, distinctions among different geographical areas needs to be taken into account, with a closer look at those regions where the majority of fossil fuel exports come from. In 2015, Russia, Latin America, and the Middle East and North Africa region (an area commonly known as MENA in energy markets analysis) featured two thirds of global fossil fuel subsidies. Phasing out those subsidies would lead to emissions cuts equal to or greater than those required by the Paris commitments. The outcomes are different in other countries, such as India and other African states, where subsidy removal would have an immediate impact on household bills and budgets, firstly affecting lower-income groups. Under such conditions, and in the absence of compensatory measures, subsidy removal could lead to cuts in energy consumption and to a shift towards cheaper sources of energy such as coal.

Does it mean that eliminating subsidies is a wrong choice to achieve the Paris goals?
“No, it does rather mean that subsidy removal alone is not sufficient – Tavoni explained. But we do know that in some regions it would deliver emission reduction effects, not to mention the air quality improvement resulting from the decreased use of fossil fuels, with benefits for public health.”
By contrast it may lead to negative outcomes in some other regions. In these cases attention must be paid to the systemic effects of a single policy reform and integrate it with measures that counterbalance social and economic impacts. Considering for instance a carbon tax, which is a key tool. Lower-income groups can be safeguarded against the resulting increase in energy prices by implementing supportive policies such as exemptions or compensations, funded with revenues from the carbon tax.
But still it would not be enough, because we also need to innovate, develop new technologies and lower the costs of those we already have at hand. At the same time, individual behaviour changes should be fostered through interventions such as ‘nudges’, which are particularly interesting especially when linked to the increasing digitization [of most aspects of today’s societies].

The paper on Nature
“Limited emission reductions from fuel subsidy removal except in energy-exporting regions” – Jessica Jewell, David McCollum, Johannes Emmerling, Christoph Bertram, David E. H. J. Gernaat, Volker Krey, Leonidas Paroussos, Loïc Berger, Kostas Fragkiadakis, Ilkka Keppo, Nawfal Saadi, Massimo Tavoni, Detlef van Vuuren, Vadim Vinichenko & Keywan Riahi – Nature volume554, pages229–233 – doi:10.1038/nature25467


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