Energy is under-priced and in many countries the production and use of fossil fuels is encouraged through large subsidies. These subsidies contribute to local air pollution and congestion, are a drain on national budgets, often do not reach the poorest households, crowd-out investment in clean energy, and encourage excessive energy consumption. Reforming such subsidies can help reduce pollution and improve human health, free up public revenues, which can be used to implement green economy policies and support other priorities. In recent years, several reform commitments and monitoring efforts have been adopted including SDG12c which sets a target to ‘rationalize inefficient fossil fuel subsidies that encourage wasteful consumption’.
UN Environment has been supporting efforts to reform fossil fuel subsidies through targeted policy advice to countries. In 2014-2016, UN Environment carried out a series of country studies in Ghana, Kenya, Mauritius, and Mozambique which provide policy advice to governments on how to reform fiscal policies including fossil fuel subsidies, energy and fuel taxes, to mobilize public revenues and create fiscal space for green investment, while addressing environmental externalities and social equity issues. UN Environment is responsible for monitoring countries progress in reforming fossil fuel subsidies under the SDG framework. We have been working with country partners, international organisations and NGOs to develop an internationally agreed methodology to measure fossil fuel subsidies and based on this approach we will start to collect data on fossil fuel subsidies from UN member countries from 2020.
Creating fiscal space for green investment through energy tax reform in Kenya
A 2016 UN Environment study in Kenya examines how future revenues from oil and gas exploitation and reforming taxes on energy products can create fiscal space to finance green investments. The study finds that reforming gasoline and diesel taxes to reflect global and local damages and reforming kerosene taxes to internalize environmental and health damages would increase tax revenues, while shifting behaviour to more sustainable patterns. These additional revenues could be used for green investments such as the switch to cleaner, more efficient lighting and cooking devices, and to support renewable energy programmes. Some of the revenues could finance compensation measures to absorb the impact of price increases on poor households.
