|10 October, 2017

Cutting fossil fuel subsidies could finance sustainable development goals twice over

Shaima Hasan is a Research and Bespoke Solutions manager at Thomson Reuters’ Islamic finance division, with nine years of professional experience. She is leading the research team and author of several Thomson Reuters reports, such as Sukuk Perceptions & Forecast Study and Global Islamic Asset Management. Previously, she worked within fixed income portfolio management of both conventional bonds and Sukuk for one of the largest banks in Bahrain.


New research shows indirect subsidies for oil and gas dwarf direct energy subsidies

New research shows indirect subsidies for oil and gas dwarf direct energy subsidies and that combined these could comfortably meet the funding gap for sustainable development worldwide.

The academic study calculated indirect subsidies – in the form of lower taxes on fossil fuels versus other consumer purchases – were 16 times larger than direct subsidies and had a much broader applicability, covering both developing and developed markets.  Combined, the direct and indirect subsidies were worth $5.3 trillion, or 6.5 percent of global GDP.

What could these subsidies payments fund instead? One use could be to finance Sustainable Development Goals (SDG), which include investment in clean energy and other efforts to address climate change.  Estimates for the total investments needed to address SDGs range from $5 trillion to $7 trillion per year

Yet the true cost of meeting SDGs could actually be considerably lower - if the existing rate of investment continues, the size of funding gap is more like $2.5 trillion per year through 2030.

Climate change and investment experts are expected to explore opportunities to reboot subsidy strategies in a special session at the World Green Economy Summit in Dubai in October.  

Direct energy subsidies are prevalent in emerging markets, particularly oil and gas producing countries. As such, these subsidies increase carbon emissions, hamper the development of lower-carbon technologies, deplete government reserves and worsen climate change. 

Another striking feature of the study is that while global efforts to fight climate change are important on their own merits, they are not the sole or even primarily reason for countries to act.  Researchers found that 78% of subsidies were absorbed by the costs of increased air pollution, vehicle crashes and the damage to roads and foregone tax revenue. As the study authors conclude, “Energy pricing reform is therefore largely in countries’ domestic interest and need not await globally coordinated action”.

Any opinions expressed here are the author’s own.

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