Why fossil fuel producer subsidies matter

Abstract

Around the globe, governments support the fossil fuel economy by providing subsidies that financially benefit consumers and producers of coal, oil, or gas. G20 governments have pledged to remove this support, noting that subsidies can “undermine efforts to deal with climate change” by keeping greenhouse gas emissions higher than they otherwise would be.1 Recently, Jewell et al. used results of integrated assessment models to infer that eliminating subsidies would yield “limited emissions reductions … except in energy-exporting regions.”2 While the article represents an important contribution to the literature, its characterization of the emission reduction benefits of subsidy removal as “small” is potentially misleading. We use a simplified, partial model to reflect how producer subsidies affect the financial incentive and risk calculus for investing in new oil fields resulting in emission reductions from producer subsidy reform could be more material than Jewell et al. suggest..3 We further argue that subsidies – especially those to fossil fuel producers – also lock in institutional and political power, delaying a low-carbon transition.