Dan Kammen: Time to Tackle Fossil Fuel Subsidies

November, 2011
Clean Edge, Guest Blog by Dan Kammen
It is sadly no secret that progress has been slow to vanishing on reaching a meaningful deal on climate protection, which many had hoped would emerge from the 2009 Climate Convention in Copenhagen, or the 2010 meeting in Cancun, Mexico. As we approach Durban and the 2011 version there is virtually no talk of a “global deal,” but there is some hopeful talk of significant public sector and private sector funding for meaningful action on specific topics, including energy access for all, and advancing the business environment for clean energy.

For example, there have been a series of business-led discussions and proposals on how to develop energy-efficiency master plans at all levels—company, municipality, and country. An exciting aspect has been the presence of so many innovative industry partners and governments that have not only developed, but started practicing important renewable energy and energy-efficiency solutions.

At the World Bank and in my role as a professor of energy at the University of California, Berkeley, I have been in many exciting meetings where the “enabling environment” of clean energy versus fossil fuel costs comes to the forefront of the conversation.

In almost all of these discussions, not only did the ways to support clean and sustainable energy come through loud and clear, but also calls to be more transparent and balanced in the energy markets. Several private sector companies (even those whose revenues are almost entirely from fossil fuels) and economic leaders from developing nations said that all markets would function better if we reduced the massive subsidies for fossil fuels.

It is in this context that I want to talk about how creating the right climate to start and sustain these innovations depends not only on technological advances, but also on regulations and policy incentives. Many experts made a persuasive case for a price on carbon emissions as a strong incentive for positive change. In fact, most existing climate-related financing mechanisms are designed to mimic the effect that a price for carbon would have, and thereby reflect the true social, economic, and environmental costs of GHG emissions.

Along with creating the right incentives is the challenge of reducing the wrong ones. Among these are many of the existing large subsidies for fossil fuel production and consumption. The World Bank has been involved in carefully documenting these subsidies to support a resolution by the G20 at their 2009 Pittsburgh Summit. Since then, G20 and other countries have moved ahead with reforms. It’s an encouraging start, but the full potential gains will be achieved only if more countries raise their ambition on this issue.

To help them, the Bank has produced A Roadmap for Phasing Out Fossil Fuel Subsidies (see the full report and executive summary here).  This analytical toolkit can help policymakers pose key questions, quickly diagnose problems, and identify the right policy responses. Key questions include: Who benefits from a subsidy? The report found that in many cases the subsidy hurts the poor by targeting wasteful over-consumption by the rich.  In some cases a basic-needs subsidy existed, in which case its removal would hurt the poor.  In those cases, a set of alternate “lifeline” policies are needed.

Some of the lessons from the report have found resonance at Cancun and will likely come up again in Durban. These include alternatives like well-designed rural electrification subsidies, compensation packages for the poorest, and moving towards automatic price adjustments at the country level. A particularly important new approach is to find ways to build up more consistent support structures for feed-in tariffs (FITs) worldwide.

There have been many discussions and debates about the value of FITs  versus renewable energy portfolio standards, but left out of this process until recently has been how to build larger financial support for those policies that are most effective at providing “market pull.” To date FITs have an impressive track-record of accomplishing this goal, according to groups like the Clean Coalition. Given the extent of fossil-fuel subsidies, and the challenges of reducing them, efforts such as that led by Deutsche Bank (see PDF on their Global Energy Transfer Feed-in Tariffs (GET FiT) program) are critical for all those looking to accelerate the deployment of low-carbon energy and economic growth in emerging economies. Such public-private partnerships could be the lynchpin to the future growth of global clean-tech industries.