TODAY’S STUDY: The Big Benefits From Swapping Old Energy For New Energy

Fossil Fuel to Clean Energy Subsidy Swaps: How to pay for an energy revolution

Richard Bridle, Shruti Sharma, Mostafa Mostafa, Anna Geddes, June 2019 (International Institute for Sustainable Development)

Executive Summary

When governments reform fossil fuel subsidies, there are many competing demands for how to reallocate resources, including spending on public health, education and social protection. This report makes the case for placing the promotion of clean energy1 alongside these other priorities and describes the economic, social and environmental benefits that such a move would bring, through a “subsidy swap.” The report sets out the international context of subsidy swaps; summarizes notable country experiences with swaps in India, Indonesia, Zambia and Morocco; and calls for policy-makers to include swaps as part of their fossil fuel subsidy reform implementation strategies.

Key Findings

1. Fossil fuel subsidies are a key barrier to a transition to a clean energy system. Although linked to a reduction in emissions, their reform alone will be unlikely to deliver the permanent emission reductions necessary to meet climate change targets. A “swap”— reallocating some of the savings from subsidy reform to fund the clean energy transition—could magnify the contributions to long-term, permanent emission reductions, the economy, jobs, public health and gender equality.

2. Swaps are already taking place—at a global level, fossil fuel subsidies have declined while renewable investments are now greater than investments in fossil fuel-based energy generation. But the pace of change needs to accelerate considerably—almost 70 per cent of total energy demand growth in 2018 was still met through fossil fuels.

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3. There are still significant political barriers to reform, however, that are country specific. For reformers, the challenge is to change the political dynamic by increasing the engagement of already supportive, influential actors and developing policies that address the concerns of actors that are neutral or moderately opposed to change.

4. Sharing experience between countries is a key tool to show how swaps can be implemented and that a clean energy transition funded by subsidy reforms is a feasible and possible option for other countries.

5. Going forward, there are opportunities for governments to focus on higher-impact swaps by supporting large-scale on-grid renewables and implementing mechanisms that mobilize private finance into clean energy projects. 6. Following subsidy reforms, governments can increase taxes on fossil fuels to continue to generate fiscal resources for clean energy while simultaneously reducing carbon dioxide emissions.

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Introduction

The term “subsidy swap” is a shorthand term for a wide range of policies that redirect government support in the form of subsidies, from fossil fuels to clean energy.2 The goal of the subsidy swap is to bring subsidy policy in line with social, economic and environmental priorities and promote a transition to clean energy systems. A definition of the concept is provided in Box 1.

Box 1. The definition of subsidy swap

The swap concept is simple: it refers to redirecting government support from fossil fuels to clean energy. This does not need to involve explicit earmarking (or “hypothecation”) of funds: savings from fossil fuel subsidy reform and spending on clean energy could happen independently in the government budget. There is also no expectation that all reform savings be reallocated to clean energy; governments have many priorities. However, sufficient reallocation should take place to make an appreciable difference to the rate of clean energy deployment.

The core concept of a clean energy swap is that it accelerates the replacement of fossil fuel-based energy systems with sustainable energy through a shift in government priorities as expressed through funding or fiscal policy changes.

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The two key elements are that: 1) fossil fuel subsidies are reduced and that 2) this happens alongside measures that increase the deployment of sustainable energy.

The Global Subsidies Initiative (GSI) uses a definition of the term “subsidy” based on the World Trade Organization’s Agreement on Subsidies and Countervailing Measures. The agreement determines that subsidies exist where governments:

• Provide a transfer of funds or liabilities

• Forego or fail to collect revenue

• Provide goods or services below market rates

• Provide income or price support.

Source: Beaton et al., 2013.

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This report summarizes the International Institute for Sustainable Development’s experience of developing and documenting subsidy swaps over several years, sets out the international context of subsidy swaps, and makes the case for policy-makers to include subsidy swaps as part of their fiscal and energy policies.

Figure 1 shows how swaps fit into the broader subsidy reform debate. Some subsidies just do not make sense: they support fossil fuel-based energy, they are costly to governments and they undermine clean alternatives. They may also fail to achieve their objectives or have perverse, unintended consequences. In such cases, the policies can be removed. In other cases—largely, consumer subsidies for electricity and liquefied petroleum gas (LPG)—the policies may have important linkages with energy access, poverty reduction and health. Here, targeting is an important consideration of the subsidy reform process. Finally, it may be possible to continue to support energy access by swapping from a fossil fuel subsidy to a clean energy subsidy. Regardless of whether subsidies are removed or better targeted, reform can create savings to fund the clean energy transition. This is a subsidy swap: shifting government resources away from fossil fuels and toward a clean energy transition.

In practical terms the vision of the swaps concept means moving from where we are today, where fossil fuels receive huge subsidies in much of the world, to an end point where most of our energy is derived from unsubsidized clean energy. Globally there are still more subsidies directed toward fossil fuel consumers and producers than toward renewable energy: currently around USD 372 billion is spent on producer and consumer fossil fuel subsidies, overshadowing the USD 100 billion in support to renewable energy (Best et al., 2015; International Energy Agency [IEA], 2018b; Merrill et al., 2017).

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However, at a macro level, we can already see a swap in financial flows beginning to take place: fossil fuel subsidies are down and investment in renewable energy is up, as illustrated in Figure 2 and Figure 3. Figure 2 shows that fossil fuel subsidies have fallen overall since 2012, but progress has not been linear: following the rebound in crude oil prices in 2017, fossil fuel consumer subsidies started rising again. Figure 3 shows that renewable investments have exceeded fossil fuel investments every year since 2008, a key inflection point. The falling cost of renewables over recent years and increasing investment implies that the same dollars can now fund more renewable-powered generation: every year since 2014 the world has installed a greater capacity of renewables than fossil fuel-based generators (Figure 4), a second inflection point. Figure 5 shows that the overall share of electricity production from renewable energy is growing, but there is still a long way to go to reach a third inflection point where renewable energy starts to generate most electricity. In 2016, 57 per cent of the gross electricity production was from fossil fuels in Organisation for Economic Development and Cooperation countries. Outside the electricity sector, the situation was less positive: 70 per cent of total energy demand growth in 2018 was met through fossil fuels (IEA, 2019a). Despite the progress made, in absolute terms, government subsidies and investments in fossil fuels still far outweigh clean energy…

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Conclusion

Fossil fuel to clean energy subsidy swaps are already taking place—at a global level, fossil fuel subsidies have declined while renewable investments are now greater than investments in fossil fuel-based generation. But the pace of change needs to accelerate considerably. Although fossil fuel subsidies are linked to emission reductions, their reform alone will be unlikely to deliver the permanent emission reductions necessary to meet climate change targets. A swap, reallocating some of the savings from subsidy reform to fund the clean energy transition, could magnify the contributions to long-term, permanent emission reductions while bringing additional economic and social benefits, in particular in relation to jobs, public health and gender equality.

Four countries—India, Indonesia, Zambia and Morocco—have already been taking concrete action and leading the way by implementing fossil fuel to clean energy swaps. Sharing their experiences is a key tool to show how swaps can be implemented and that a clean energy transition funded by subsidy reforms is a feasible option for other countries. Going forward, governments have an opportunity to focus on higher-impact swaps by redirecting support to large-scale on-grid renewables and implementing mechanisms to leverage private finance for clean energy projects.

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