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April 22, 2013
Subsidizing Fossil Fuels Hinders Investment in Renewables
    by Robert Kropp

A paper from the Overseas Development Institute calls for an end to fossil fuel subsidies in order to help mobilize private investment in climate-compatible development in developing nations.

The commitment made by developed nations last year to mobilize $100 billion annually to help developing nations address the impacts of climate change can be read as an acknowledgement of their failure to account sufficiently for environmental externalities. Inadequate carbon pricing—or, in the case of the US, none at all—has also had the effect of increasing the risk of private investment in climate-compatible development (CCD).

Another factor obstructing the uptake of a meaningful transition to a low-carbon economy has been the persistence of subsidies for companies in fossil fuel industries. According to the Sustainable Energy Act, introduced by Senators Barbara Boxer and Bernie Sanders earlier this year, such subsidies in the US alone totaled over $72 billion from 2002 to 2008, while subsidies for renewable energy totaled only $12.2 billion.

And according to a recent report by the Overseas Development Institute (ODI), a UK-based think tank, "fossil-fuel subsidies to consumers, at $396 billion in 2011, is 75 times higher than the average annual approved climate finance of $5 billion from 2010-2012."

It has been estimated that 85% of the financing of the low-carbon transition will have to come from private investment, which "is seen to have significant resources and capacity for investment, as well as high levels of efficiency, managerial capability and operational power that can be harnessed to achieve certain goals, including those for CCD," author Shelagh Whitley writes in the ODI paper.

"Though public sector resources are small when compared to those from the private sector, they are acknowledged to play an essential role in catalyzing private sector investment and activity," Whitley continues.

But the impact of the role of the public sector is compromised by the persistence of fossil fuel subsidies. In 2009, the G-20 nations called for an end to such subsidies, stating, "Inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change." On the other hand, as research by the Organization for Economic Co-operation and Development (OECD), ending subsidies could help promote increased investment in renewable energy technologies.

The ODI paper "highlights the implications of the current separation of the discourses on private climate finance (PCF) and on subsidies, and the opportunities that exist to unlock climate-compatible investment by linking these fields." In order to do so, the paper continues, the role of subsidies in the investment climate of countries must be acknowledged. And in order to remove obstacles to private investment in a low-carbon transition, increased transparency "is essential to enable policy-makers to remove current obstacles to private investment in CCD, and then to use these same instruments to foster such investment."

"There is current momentum," the paper concludes, "acknowledging the need to eliminate climate-incompatible subsidies, and developed country governments committing significant levels of finance to support CCD. We must take advantage of this opportunity and these resources to support developing countries in their efforts to reduce emissions and build resilience with speed and at scale."


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