The International Energy Agency (IEA) has released a special report, Energy and Climate Change, as an input to ongoing climate negotiations, highlighting the pivotal role that fossil-fuel subsidy reform can play in reducing greenhouse gases (GHGs).

The report has been published as preparations are gathering pace for the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC), with 39 countries having submitted their Intended Nationally Determined Contributions (INDCs) by early June 2015. It takes into account existing INDC commitments and identifies additional policies in the energy sector that would allow countries to constrain the mean global temperature increase to 2°C.

How fossil-fuel subsidies contribute to GHG emissions

According to the IEA, subsidies for fossil-fuel consumption in 2014 were worth an estimated US$ 510 billion. Subsidies make fossil-based energy cheaper, encouraging people to use more fossil-based energy and discouraging investments in low-carbon energy, driving up emissions. The IEA estimates that there are subsidies in countries that produce 13% of all energy-related CO2 emissions, giving consumers in those countries an average benefit of US$ 115 per tonne of CO2 emitted. By contrast, only 11% of global energy-related CO2 emissions are from countries with carbon pricing, which on average enforces a cost of only US$ 7 per tonne of CO2.

What happens if subsidies are taken away?

The IEA estimates that subsidy reform could contribute around 10% of the emissions reductions required to constrain climate change to no more than an average mean temperature increase of no more than 2°C.

Analysis conducted by the GSI through its Global Subsidies Initiative-Integrated Fiscal model (GSI-IF model) estimates that emissions reductions from fossil fuel subsidy reform could reduce emissions by between 6-13% by 2050. This reduction could be increased to 17% if a share of subsidy savings are reinvested into renewable energy technologies and energy efficiency.

Bridging the gap to a 2°C mean average temperature rise

Based on the above principles, the IEA proposes that subsidy reform is one of five key measures that can be used to help countries “bridge” the gap between their current commitments and the emissions reductions needed to ensure an average global temperature rise of no more than 2°C. It encourages countries to reform fossil-fuel subsidies for consumers by 2030.

The other recommended measures are to increase energy efficiency, reduce the use of least-efficient coal-fired power plants, increase investments in renewables and reduce methane emissions in oil and gas production.

Making it happen

The IEA recommends that successful reform should involve at least four key elements, as described within the GSI Guidebook to Fossil Fuel Subsidy Reform:

• Getting the prices right: Changing the pricing system to ensure that energy prices reflect energy costs, without unreasonable levels of political intervention.
• Phasing in reforms: Reforming energy pricing systems is complicated. Introducing change in gradual, considered steps is likely to allow for smoother implementation and lower levels of political opposition.
• Managing impacts: The poor and vulnerable may need to be protected through alternative social assistance measures if subsidies are removed.
• Consultation and communication: Energy prices affect everyone, so it is usually necessary to engage with a broad range of stakeholders about the reasons for reform and how social justice will be ensured for the poor and vulnerable.

Striking while the iron is hot

The IEA study builds on a growing number of international commitments to reform fuel subsidies, including the G-20 and the Asia-Pacific Economic Cooperation (APEC) in 2009, as well as a number of unilateral commitments to remove subsidies since that time. It also comes as world oil prices have plummeted from previous highs. This makes 2015 a year of opportunity for governments to commit to ambitious, sustainable reforms and to implement changes before energy prices rise again.