Back to ResearchInvesting in Reform; A New Bond Could Beat Our Addiction to Fossil Fuel Subsidies
Fossil fuel subsidies are woven into the fabric of many economies, holding back the transition towards clean energy. Tom Hale and Pete Ogden propose a new form of financial instrument – ‘SPARC bonds’ – that could overcome the political and economic barriers to reform.
The International Energy Agency reported this summer that the price of making the global transition to a clean energy economy has risen by some 10 per cent over the past year because we have failed to act decisively on the issue. The cost of this additional investment now stands at US$44 trillion.
Most of this money will come from private investment. However, in order to shift private capital from dirty to clean energy, we must use our limited public resources wisely. Perversely, we currently do the opposite: countries spend some $500 billion annually to subsidise fossil fuels, a sum which exceeds the amount spent on promoting clean energy by more than 6:1. With governments actively tilting the playing field toward dirty fuels, it is difficult to see how we can engineer a transition towards clean energy.
There are other costs as well. In 2011 the government of India, where 400 million people live on less than $1.25 per day, spent $40 billion – 2.2 per cent of GDP – subsidising dirty energy. In some countries, particularly in the Middle East and North Africa, fuel subsidies can account for as much as 20 per cent of GDP. Channelling that money towards more socially beneficial causes would be both a fiscal boon and a development windfall.
So why don’t governments act? Many have tried, but few have succeeded. This is because fossil fuel subsidies are about much more than energy: they are deeply woven into the political economy of some countries. Subsidies benefit certain fossil fuel producers and consumers, whose interests in maintaining the status quo become vested over time.
Moreover, subsidies are often justified by governments as a way to provide for those in need. However, fossil fuel subsidies are actually, on average, highly regressive. According to the IMF, the richest 20 per cent of the population in developing countries capture six times more in fuel subsidies than the poorest 20 per cent.
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