How fossil fuel subsidies impede Paris Agreement goals

Fossil fuel subsidies are delaying a low-carbon transition and deserve greater attention in global modelling analyses, according to a new article in Nature from SEI scientists and fellow researchers.

The article – titled Why fossil fuel producer subsidies matter – shows how the removal of subsidies can prevent new fossil fuel projects by rendering them uneconomic. The authors find that removing even a single type of subsidy could reduce global oil consumption by 440 to 770 million barrels in 2030.

The article is a response to a 2018 Nature study, which used integrated assessment models (IAMs) to quantify the emissions benefits of subsidy reform. The study found that subsidy removal could reduce global emissions by 0.5 to 2 gigatonnes of carbon dioxide – an amount it characterized as “unexpectedly small.”

But today’s article argues that the amount is actually significant, representing roughly 25% of the energy-related emission reductions countries have pledged under the Paris Agreement.

The article’s authors – who hail from SEI, the University of Eastern Finland, Earth Track, Centre for Global Political Economy, and Harvard University – also suggest that subsidy removals have an even greater impact, both in emissions reductions and in larger socio-economic effects.

That’s because integrated assessment models – the type used in the 2018 study – have a major blind spot when it comes to fossil fuel supply. In short: they don’t capture the importance of subsidies to fossil fuel investment.

To demonstrate this shortcoming, the article’s authors used a simple oil market model to estimate how the global oil market would respond to the removal of accelerated depreciation subsidies. This type of subsidy allows fossil fuel companies to take larger tax reductions at the start of a capital investment, thus making new projects more economic.

The IAM models in the 2018 study found that this subsidy’s removal would reduce global consumption by about 21 million barrels in 2030. But the analysis in today’s article – which accounts for investment effects – shows that the effect could be far greater, reducing consumption by 440 to 770 million barrels.

The article’s authors suggest that integrating investment into IAM models would better represent the economic effect of subsidies on fossil fuel production and emissions. But they also emphasize that no model yet adequately quantifies the political and symbolic role of subsidies – and the value in removing them.

“Rapid low-carbon transitions consistent with the guardrails of the Paris Agreement require dramatically reduced fossil fuel production,” the authors write. “Subsidies to fossil fuel companies pose formidable financial, institutional and political obstacles to this transition, impeding the efficacy of greenhouse gas emission reduction strategies.”