Why fossil fuel subsidies matter
Our article, Why Fossil Fuel Subsidies Matter, was published in the journal Nature yesterday. The piece is part of what we hope is a continuing dialog on the importance of valuing and ultimately eliminating fossil fuel subsidies at a granular level; and of more systematically integrating data on fossil fuel subsidies into the modeling of energy systems, climate change, and industrial investment.
The impetus for this piece was a 2018 study in Nature that used the results of integrated assessment models (IAMS) to infer that eliminating subsidies would yield “limited emission reductions…except in energy-exporting regions”, and described the emission reduction benefits as “small”.
This characterization is potentially misleading for reasons we describe. Our article uses a simple, sector-specific model to show how the emission reductions from producer subsidy reform could be more material than the 2018 study suggests. Factors such as concentrating the subsidies earlier in the production life of an asset; setting floors on risks (thereby reducing investment risk and hurdle rates); and localized uplift on particular producers, regions, or resource types can all result in material growth in fossil fuel supplies that would not have occurred absent government support. The importance of these factors can be muted when relying primarily on national estimates of subsidy values.
Earth Track and the Stockholm Environment Institute teamed up for this type of analysis for US oil in 2017, and are currently working on a deep dive on federal and sub-national support to natural gas.
Fossil fuel producer subsidies delay a low-carbon transition in ways both material and political, and they deserve greater attention and transparency in global modelling analyses, as well as in policy-making.