FOSSIL-FUEL SUBSIDIES AND ENERGY TRANSITION: THE CASE FOR REFORM
Despite the emergence of alternative energy sources, the world remains dependent on fossil fuels for more than 80 per cent of its energy (IEA 2015a). This heavy dependence on hydrocarbons, however, has become a serious cause for climate change and energy security concerns. The Intergovernmental Panel on Climate Change (IPCC) has concluded that the warming of the climate system is unequivocal (IPCC 2014a). The global average temperature has increased by about 0.85°C during the period 1880-2012 (IPCC 2014b). This is in large part due to the unprecedented increase in the atmospheric concentration of greenhouse gas. Continued greenhouse gas emissions will cause further warming and increase the likelihood of severe, pervasive, and irreversible impacts for people and ecosystems (IPCC 2014b). Mitigating these risks requires substantial and sustained reduction in greenhouse gas emissions. This is, however, unlikely to be achieved unless the world halts its unabated use of fossil fuels. Carbon dioxide emission from fossil-fuel combustion is the single largest contributor to greenhouse gas emissions (IEA 2015b). Meeting the internationally agreed goal of limiting global average temperature increase to no more than 2°C requires the vast majority of proven fossil-fuel reserves to remain buried underground (IEA 2012). The only way this could be achieved is through a massive improvement in energy efficiency and a rapid transition of the global energy system from one that relies heavily on fossil fuels to a system that depends mainly on renewable energy sources such as solar and wind (Barnosky 2015). This much-needed energy transition is already under way, but not at a pace fast enough to avoid catastrophic and irreversible consequences of climate change (IEA 2015a).
FFSs are one of the major obstacles holding back the necessary transition. There are at least three, to some extent overlapping, ways in which FFSs hamper the development of renewable energy sources (Bridle and Kitson 2014; Bridle etal. 2014). First, FFSs undermine the competitiveness of renewables by artificially lowering the cost of fossil fuels. Second, FFSs tend to divert investment away from renewables by enhancing the relative attractiveness of the fossil-fuel industry. Third, given the inherently long-term nature of energy projects, subsidy-induced fossil-fuel investments could ‘lock in’ unsustainable energy infrastructure for decades to come (Unruh 2000). The literature is replete with studies showing the economic and environmental gains from the removal of FFSs. One of the earliest studies on the subject found that removing FFSs would reduce global carbon dioxide emissions by 9 per cent and lead to a global welfare gain of US$33 billion (Larsen and Shah 1992). Subsequent studies have yielded largely similar results. Merrill etal. (2015) recently found that removing fossil-fuel consumption subsidies alone would result in global greenhouse gas emission reduction of up to 13 per cent by 2050.
Why, then, are countries reluctant to harvest this ‘low-hanging fruit’? The answer to this question usually takes two forms. The first response is related to the concern that since FFSs are commonly justified under the guise of protecting poor households against high energy prices, their removal could restrict such households’ access to energy. Studies, however, have shown that untargeted FFSs are costly and inefficient means of making energy affordable to the poor. Rather than helping the poor, such subsidies disproportionately benefit high income households (IEA 2011; del Granado, Coady, and Gillingham 2010). The second explanation is more compelling and popular; eliminating FFSs is complex and politically difficult. Experience from previous subsidy reform efforts suggests that reforming FFSs can face stiff resistance from the public and vested interests (Koplow 2014). Section 18.4 will discuss the nature of these political barriers and whether— and if so how—low oil prices can help in overcoming them.