On the heels of the G7 pledge to end government support for coal, oil and gas by 2025, global momentum for fossil fuel subsidy reform is soaring.
The past year has proven a boon for the cause: as world fuel prices fell to historic lows, many national policy-makers seized the opportunity to reduce their subsidies.
Yet the real challenge remains: How to ensure these policies “stick” if and when fuel prices rebound?
History has shown that fossil fuel subsidy reform policies are often short-lived, as governments yield to mounting political and social opposition.
If we wish to avoid repeating this history, fossil fuel subsidies need to be seen as more than just a number on government balance sheets. Subsidy reforms that simply seek to cut government spending can be like treating a bullet wound with a Band-Aid: a short-term solution that doesn’t fix the root of the problem.
Instead, designing “sticky” fossil fuel subsidy reform policies requires that we address the failures of the energy systems that required or enabled the subsidies in the first place.
Take the case of South Africa. Subsidies to electricity producers and consumers of have allowed its population to enjoy some of the lowest electricity prices in the world, leading to an energy-intensive economy that depends on cheap power. The subsidies support an inefficient and monopolistic electricity system that has grown reliant on artificially cheap coal.
Removing the subsidies would, in theory, correct those inefficiencies – but in the time it takes consumers, industry and the energy sector to adjust, many would struggle. Experience to date has shown that many fossil fuel subsidy reforms are repealed well before they achieve these expected benefits.
But there is an alternative: Instead of a top-down, fiscal austerity approach to fossil fuel subsidy reform, we can erode the foundations of fossil fuel subsidies from the bottom up – technically, politically and economically – by supporting the deployment of low-carbon technologies.
From a technical standpoint, the logic is simple. Every new megawatt of renewable energy capacity reduces the need for fossil-fueled power and, consequently, the subsidies it demands.
Less obviously but perhaps more crucially, the introduction of renewable energy technologies can be a game-changer for the political economy surrounding fossil fuel subsidy reform.
Renewable energy independent power producers are stepping up to challenge the coal-based interests that have monopolized South Africa’s electricity sector for decades – the very same interests that are fighting to keep domestic coal below international prices.
The emergence of a local low-carbon industry has also created economic opportunities for its population at a time when South Africa’s coal mining industry – and mining jobs – are in decline.
From an economic perspective, supporting renewables is now often cheaper than continuing to subsidize fossil fuel plants.
Thanks largely to South Africa’s competitive bidding scheme to procure wind and solar PV capacity, those technologies have experienced massive cost reductions since their initial introduction in 2011.
The most recent solar PV and wind bids even fell below the coal-dominated national electricity utility’s average cost of electricity supply.
Even in South Africa, a country characterized by its coal interests and cheap electricity, the emergence of renewables is shifting power structures, introducing diversity into the electricity mix, and reframing public perceptions of the energy transition – all of which help make fossil fuel subsidy removal a more feasible and permanent possibility.
South Africa is not unique. The cost of renewables is coming down across the globe.
In Mexico and Qatar, for example – two countries that also subsidize fossil fuels – solar energy prices are reaching groundbreaking lows, undercutting the economic rationale for subsidies from both a government and consumer standpoint.
Still, some countries may need help setting these dynamics in motion. International institutions wishing to support fossil fuel subsidy reform could offer financial and technical assistance to help lower barriers to renewable energy diffusion.
Such support could even be made conditional on the implementation and success of fossil fuel subsidy reforms.
Unlike traditional fossil fuel subsidy reform policies that often combined fiscal austerity with compensation schemes, support for low-carbon technologies likely entails a natural sunset clause because, while much uncertainty remains about the future price of fossil fuels, one thing is certain: renewables are only going to get cheaper.
Tyeler Matsuo is a PhD candidate in the Energy Politics Group at ETH Zürich. Tobias Schmidt is assistant professor of energy politics and head of the Energy Politics Group.
This post is part of a series written for “The Politics of Fossil Fuel Subsidies and Their Reform“, a workshop co-hosted by Lund University and the Stockholm Environment Institute at SEI in Stockholm on 16–17 June.