There is mounting pressure in the U.S. and internationally to remove or phase out fossil fuel subsidies given by governments to oil, gas, and coal producers and consumers. Fossil fuel subsidies have come under fire lately due to tightening federal budgets and increased calls for policy action on climate change.
The IMF recently released a report explaining why countries across the globe should implement policy solutions to phase out energy subsidies. The report also indicates that fossil fuels are indirectly subsidized when a price is not placed on carbon, which is economically known as an externality. This means that the burning of carbon does produce costs that are not accounted for during the processes of production and combustion – costs in public health, losses in ecosystem services, or road damage and congestion.
In the U.S. alone, the Natural Resources Defense Council and Oil Change International estimated that removing subsidies in 2012 could have saved $775 billion in federal spending and reduced carbon dioxide emissions by 6 percent. Governments would then be able to reallocate that public spending to other initiatives, such as education, healthcare or even subsidizing renewable energy. Shifting subsidies from fossil fuels to renewables and applying a carbon tax could help level the playing field and make clean energy and energy efficiency investments more pervasive.
All of this sounds pretty good, so what’s the holdup? In the U.S., some members of Congress have proposed removing at least a portion of subsidies in recent years but have been unsuccessful in passing any measure of reform; this is not surprising given the significant campaign contributions of the fossil fuel industry to members of Congress and the industry’s desire to continue to receive federal subsidies. According to Forbes, President Obama, in his 2014 Budget, proposed removing over $40 billion in fossil fuel subsidies and, in turn, allocate about $23 billion in subsidies to renewables over the next several years. The president’s proposal to shift these subsidies will undoubtedly be met by staunch opposition.
Perhaps there is a partial remedy that would be attractive to subsidy abolitionists and consumers alike. Rio+20 leaders created this type of middle-ground solution in 2012 by proposing the use of what are known as “sunset credits.”
Despite G20 Summit leaders pledging to phase out subsidies in 2009, governments have found it difficult to follow through on these promises with the amount of fossil fuel aid actually increasing from year to year. Sunset credits could offer a path forward to remove consumer subsidies that may be able to harmonize climate change and fiscal reform goals. Many countries, especially developing countries, experience public uprisings and widespread discontent when governments attempt to remove subsidies, which makes removing the subsidies a political faux pas.
In order to prevent public upheaval over price increases, sunset credits can be targeted toward low-income parts of the population which rely on cheap fuel as well as to consumers willing to invest in energy efficiency and clean energy installments. Presently, only about 8% of subsidies actually reach the poor and marginalized populations around the world while it is the wealthier populations which benefit most from subsidies, according to the IEA.
How do sunset credits work?
- The point of providing sunset credits is to ultimately phase out fossil fuel subsidies; therefore, a timeline has to be agreed upon. Michael Liebreich of Bloomberg New Energy Finance, in his white paper released last year on how to implement sunset credits, suggests there should be a phase-out period of three to 10 years. During this time, sunset credits will replace fossil fuel subsidies. The credits can be made available to consumers as monthly or quarterly credits or vouchers on energy bills or as direct payment “tokens” as Liebreich refers to them.
- Should consumers instead choose to use the credits to fund clean energy or energy efficiency improvements to their homes or transportation means, energy usage will decrease and will, in turn, lower the cost of energy bills and balance out the increased cost of energy without subsidies. Improvements could range from installing underground geothermal pipes for a renewable heating and cooling system to buying a solar cookstove to replace a biomass stove.
- According to Liebreich, consumers who use the credits for improvements will be able to employ retailers and installers which are in agreement with the government to accept the credits. After accepting the consumer credits, retailers and installers will then be reimbursed for the full price of goods and services by the government.
Several obstacles and barriers are also highlighted by Liebreich, such as fraud, problems with providing credits for imported energy goods, lack of clean energy installers and retailers, and insufficient skilled maintenance for new energy equipment. Potential problems may be solved through an experimental implementation phase in frontrunner countries, but enticing governments to take the policy risk will be challenging. The proposal to instate sunset credits in place of fossil fuel subsidies is a pragmatic policy solution that could control for public discontent and aid governments in reigning in excess spending over the near-term. And that will be good news for the climate as well as global economies.
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