Removing Fossil Fuel Subsidies=Limited Impact on Global Renewable Energy Demand Growth

02.16.18 | Blog | By:

The authors in this study found that removing all fossil fuel subsidies would have a limited impact on global energy demand by 2030 (a reduction of about 1–4%). In addition, the share of energy from renewable sources would rise by less than 2%, and global CO2 emissions would fall by only 1–4% (under both low and high oil prices).

Many in the biofuels and advanced biofuels industries have cited fossil fuel subsidies as a major hurdle to increasing market uptake for their products and for renewable energy in general. But this study seems to undercut that point. The study notes, moreover, that in most regions, the CO2 reduction from subsidy reform would fall far short of what is needed to meet the Paris climate pledges. The exceptions are regions such as Russia, the Middle East and North Africa, where subsidies are heavily concentrated and pledges are less ambitious.

A comment in Nature from the International Monetary Fund on the issue noted that fossil fuel reform is still worth doing. “Fuel prices should also reflect the consequences of their use for global warming and other environmental considerations, such as the costs of deaths resulting from air pollution and, in the case of road fuels, traffic congestion and accidents. Furthermore, prices for fuels purchased by households should include the general sales or value-added taxes that are applied to other consumer products.”

Meantime, the OECD said in a study this month on energy taxes that they are effective at cutting GHG emissions from energy use, but are simply too low and thus not enough to fight climate change. In Taxing Energy Use 2018, OECD examined taxes on energy use between 2012 and 2015 in 42 OECD and G20 economies, which represent around 80 percent of global energy use and carbon emissions from energy use. The study did not include carbon market prices, such as in the EU’s Emissions Trading System, but the OECD said they do little to change the report’s findings.

“A bird’s eye view of effective taxes per ton of CO2 across all countries reveals that there is hardly any change in the tax rates on emissions outside the road transport sector…Taxes continue to be poorly aligned with environmental and climate costs of energy use, across all countries,” the report noted.

In the road transport sector, 97% of emissions are taxed and rates were above 50 euros/tCO2 for 47% of emissions in 2015, compared to 37% in 2012, according to OECD. In non-road sectors, which collectively account for 95% of carbon emissions from energy use, 81% of emissions were untaxed and rates were below 30 euros/tCO2 for 97% of emissions. Taxes on diesel for transport use are lower than taxes for gasoline in every country except two, although this pattern appears to be changing, the report said.


Tammy Klein is a consultant and strategic advisor providing market and policy intelligence and analysis on transportation fuels to the auto and oil industries, governments, and NGOs. She writes and advises on petroleum fuels, biofuels, alternative fuels, automotive fuels, and fuels policy.