Subsidies Examples: Reduction of Fossil Fuel Subsidies

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Subsidies to promote fossil fuels and renewables may need redirection to achieve decarbonization of the energy supply. Government subsidies to energy are $250 to $300 billion per year, with only two to three percent of that amount going to renewable energies. Although subsidies to coal have declined in the last ten years in many OECD countries and some developing countries, direct and indirect subsidies for fossil fuels remain common. Removing support mechanisms to fossil fuels would reduce global carbon dioxide emissions by six percent.

 

Subsidies are difficult to remove, and a careful and gradual phase out is necessary. Resistance by vested interests may make fossil fuel subsidy reduction difficult to implement. In many developing countries, fossil fuel subsidies are intended to benefit the poor by lowering domestic energy prices. However, high users of fossil fuels also reap this benefit, often resulting in delayed investments in energy efficient technologies. Reducing fossil fuel subsidies may also create problems in countries like India, where may rural households use kerosene and liquefied petroleum gas for lighting. Policies aimed at addressing equitable concerns may be successfully deployed along with fossil fuel subsidy reduction. In India, some fossil fuel subsidies are diverted into an Energy Empowerment fund that pays for infrastructure development.