1 December, 2015 - This week, Paris will attract global attention once again: this time, not as a city of freedom and culture after the recent tragic terror attack, but as a city of hope for the future of the planet’s climate change. The city will host a massive gathering of the climate community and expectations are high. While still cautious, many remain optimistic about the Paris climate summit.
The most promising feature of this round of climate talks is, among others, the Intended Nationally Determined Contribution (INDCs), in which governments set out planned actions to reduce GHG emissions prior to the Paris summit. Unlike the Kyoto Protocol which covered only 14% of global GHG emissions, 90% of global emissions are covered by the INDCs put forward by 150 countries. INDCs are particularly meaningful as they will be implemented through domestic laws and regulations in each country. What remains to be discussed is a system to report and monitor progress with the INDCs, and to periodically review and revise goals under the INDCs .
If you look across the INDCs, it becomes clear that countries recognize the role of fiscal instruments in supporting national goals to reduce GHG emissions.1 Among others, carbon pricing is galvanizing momentum globally as well as nationally. The Carbon Pricing Leadership Coalition is one such example that brings leaders from across governments, the private sector and civil society together to ensure effective carbon pricing systems and policies.
At the national level, a growing number of countries and regions are adopting carbon pricing mechanisms in the form of carbon taxes or emissions trading systems (ETS). Not surprisingly, carbon pricing and supporting countries to mobilize domestic resources are among the issues included in the initial draft text of the Paris agreement.
Despite having a clear impact on global emissions, let alone fiscal and economic benefits, fossil fuel subsidy reform has not been fully taken on board in the INDCs2 . While around 30 countries around the world undertook some form of fossil fuel subsidy reform in 2013-2014, 3 only a handful of countries such as India, Ethiopia, Morocco and Viet Nam, include specific reference to fossil fuel subsidy reform within their INDC.4
Yet, the impacts of fossil fuel subsidies cannot be ignored and there is still much to be done. A recent IMF report5 reveals that the scale of global fossil fuel subsidies in 2015 amounted to a staggering USD 5.3 trillion when negative (social and environmental) externalities are taken into account. Not surprisingly, the fiscal burden of such subsidies also places significant pressure on many countries’ budget deficits, diverting government resources from pro-poor spending. This spending compares to USD53 trillion of cumulative investment needs in energy supply and energy efficiency by 2035 to meet the 2°C target according to the IEA6 . Furthermore, according to the IMF, fossil fuel subsidy reform would raise government revenue by USD 2.9 trillion, which in turn, can contribute to much needed climate financing and other priorities.
The direct impact on carbon emissions is also significant: eliminating fossil fuel subsidies would reduce global CO2 emissions by more than 20 per cent, and reduce premature air pollution related deaths by 55 per cent according to the IMF. Perverse incentives through subsidies also undermine action to address climate change in sectors such as forestry and agriculture, encourage excessive energy consumption, contribute to local pollution and congestion and crowd out investment in clean energy.
Beyond the climate talks, the call for fossil fuel reform is being heightened globally. Commitments on fossil fuel subsidy reform adopted by the G20 and the Asia-Pacific Economic Cooperation (APEC) forum were reiterated by both the Addis Ababa Action Agenda at the Financing for Development Conference and the Sustainable Development Goals adopted in September. There is still ample room for countries to seriously consider reforming fossil fuel subsidies to support efforts on climate change. The time for action is now.
1. For more detailed information, see the GFPN Issue Note on fiscal policies and climate change: http://www.greenfiscalpolicy.org/wp-
2. A side-event organized by the Green Fiscal Policy Network, a partnership between UNEP, IMF and GIZ/BMUB at the Paris summit will focus on the issue of fossil fuel subsidy reforms in the context of the INDCs. http://www.greenfiscalpolicy.org/wp-content/uploads/2015/11/Updated-flye...
3. GSI (2015), http://www.iisd.org/gsi/Eliminating_Fossil_Fuel_Subsidies_Still_on_the_A...
4. Others like the UAE, China and Mexico refer to energy tariff and pricing reform
5. Coady, D., Parry, I., Sears, L. and Shang, B. (2015), “How Large Are Global Energy Subsidies?” Working Paper15/105, International Monetary Fund, Washington, DC, https://www.imf.org/external/pubs/ft/wp/2015/wp15105.pdf
6. IEA (2014), World Energy Investment Outlook, Special Report, International Energy Agency, Paris, https://www.iea.org/publications/freepublications/publication/WEIO2014.pdf
