In practice, introducing fossil-fuel subsidy reform as a climate policy faces multiple challenges, including complications in quantifying the emissions reductions that would result, as well as political hurdles linked to the reality of higher energy prices. At the same time, many countries are drafting renewable-energy policies aimed at attracting support from international finance.

"Our proposal is to 'hybridize' these two policies and package support for renewable-energy deployment with fossil-fuel subsidy reform," Tyeler Matsuo of ETH Zurich told environmentalresearchweb. "This combination would leverage the advantages of renewable-energy policy – such as the ability to account emissions reductions and political acceptability – with additional structural reforms or transformations that have been difficult to implement using climate finance."

Matsuo and colleague Tobias Schmidt suggest that international finance could support a portion of renewable-energy development and deployment through a payment mechanism contingent on a fossil-fuel subsidy-reduction schedule.

"Reducing fossil-fuel dependency automatically reduces the impact of a fuel price shock on the economy, and the subsequent risk of backsliding on fossil-fuel subsidy reforms," said Matsuo.

The researchers believe that pursuing an interlinked approach will make fossil-fuel reform more sustainable and foster a low-carbon transition. And diversifying the energy mix away from subsidized fossil fuels erodes the necessity for subsidies and the impact of their removal. Matsuo and Schmidt's conclusions stem from a techno-economic model that incorporates country- and technology-specific data to quantify the costs and abatement potential of a two-pronged policy encompassing the introduction of renewable sources and the removal of fossil-fuel subsidies.

The researchers explore a scenario providing support over a period of 20 years for a 10 year phase-in of wind and solar photovoltaic generation, to a point where renewables represent 20% of the energy mix. They estimate the effect of fossil-fuel subsidy phase-out on average electricity generation costs in 2025 – with and without renewable-energy deployment – in different fuel-price scenarios.

The results highlight the extent to which fossil-fuel subsidies can undermine the financial viability of low-carbon energy technologies. The model also illustrates how cost (fuel-price) uncertainties can be buffered by combining fossil-fuel subsidy reform with renewable-energy deployment.

Full details can be found at ERL.

Related links

Related stories