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Published in Nature

Cut fossil subsidies to reduce CO2? It depends!

A study published in Nature conducted by a team led by Jessica Jewell found that the effect of subsidy removal varies strongly across regions.

Jessica Jewell
Jessica Jewell
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Image credit: CEU / Zoltan Adrian, via Creative Commons BY-NC-ND

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Fossil fuel subsidies amount to hundreds of billions of dollars worldwide, and removing them has been held up as a key answer to climate change mitigation.

Jessica Jewell is Adjunct Associate Professor at UiB, the Centre for Climate and Energy Transformation (CET), and Research Scholar at IIASA. She recently secured funding for a project called CONTRACTIONS through the Research Council of Norway.

Globally, subsidy removal itself will not provide the silver bullet to climate change many may have hoped. Removing fossil subsidies would slow the growth of COemissions with the result that by 2030 they would be 1-5% lower than if subsidies had been maintained. This is regardless of whether oil prices are low or high.

Largest impact in oil and gas exporting regions

"The reason for this small overall effect is twofold," says Jessica Jewell. 

"First, these subsidies generally apply only to oil, gas, and electricity. That means that in some cases the removal of subsidies causes a switch to more emissions-intensive coal. Second, while these subsidies add up to substantial sums of money, the rate per unit of energy is not high enough to have a big effect on global energy demand, which would decrease by only 1-7% after subsidies are removed."

Although the global effect on emissions is low, the impact varies between regions. The largest emissions savings would be in oil and gas exporting regions, such as such as Russia, Latin America, the Middle East and North Africa. In these regions, emissions savings caused by subsidy removal would either equal or exceed their climate pledges.

"This provides a unique political opportunity to remove subsidies in countries where it will have the largest effect on emissions and the smallest impact on the poor. The governments of oil and gas producing countries are already under pressure to reduce spending on subsidies as government revenues shrink due to low oil prices," says Jewell.

Developing economies which are not major oil and gas exporters would generally experience much smaller effects of removing the subsidies. Some of the models used even suggested a rise in emissions for some regions, such as Africa and India, as a result of switching from unsubsidized oil and gas to coal.

Impact on the poor

The regional differences highlight one very important aspect of subsidy removal: the impacts on the poor. Many fossil fuel subsidies were put in place to help those with lower income, and despite the fact that most of the money goes to the rich, the poorer you are, the more of your household budget comes from these subsidies, so their removal would have a much larger impact on daily life.

For instance, removing subsidies means that the switch to modern fuels may become out of reach for many poor people, the results show. As a consequence they are stuck using firewood or charcoal, which both emit more greenhouse gases and are damaging to health.

The highest numbers of poor people are concentrated in the regions where removal of subsidies will have the weakest effect on COemissions. Removing subsidies in richer oil and gas exporting regions would therefore provide significantly greater emissions savings and have a less detrimental effect. 

"We’re not saying: don’t get rid of subsidies. We’re saying that we need to be aware that it might have less of an effect than hoped, and it could have a disproportionally large effect on the poor," says Keywan Riahi, study co-author and IIASA Energy Program director.

"But well-designed policies can achieve subsidy removal without affecting the poor. A scheme being trialed in India, for example, removed subsidies on cooking gas in general but continues to support the poorest households through rebates."