Full Title: The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation
Author(s): International Institute for Sustainable Development
Publisher(s): International Institute for Sustainable Development
Publication Date: December 1, 2014
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Description (excerpt):
Fossil-fuel subsidies are prevalent in many countries. The International Energy Agency (IEA) has estimated that consumer subsidies to fossil fuels amounted to US$548 billion in 2013 (IEA, 2014b). In the same year, subsidies to renewable energy were estimated at US$121 billion. However, a comparison of numbers does not reveal the extent to which renewable energy is being disadvantaged in favour of continued reliance on fossil-fuel generation. The high level of fossil-fuel subsidies certainly creates disadvantages for renewable energy, but to understand the true impact it is necessary to explore the range of subsidy mechanisms rather than focus simply on the magnitude of the cost of subsidies.
This paper offers a more complete examination of how fossil-fuel subsidies can impact the deployment of renewable energy from an economic and political economy perspective. The analysis will be of interest to policy-makers and researchers working on barriers to renewable energy and the impact of fossil-fuel subsidies. Section 1 outlines a framework for defining and identifying energy subsidies. Section 2 describes the specifics of the electricity sector, highlighting key differences between renewable energy and fossil-fuel-powered generation in terms of cost structures. Section 3 discusses the mechanisms by which fossil-fuel subsidies impair the deployment and development of renewable energy technologies. Section 4 introduces the process of fossil-fuel subsidy reform, and how it relates to renewable energy deployment.
This paper contends that fossil-fuel subsidies can act as a barrier to the development and deployment of renewable energy technologies. It identifies three impacts of fossil-fuel subsidies on renewable energy. First, subsidies reduce the costs of fossil-fuel-powered electricity generation and thereby impair the cost competitiveness of renewable energy. Second, subsidies create an incumbent advantage reinforcing the position of fossil fuels in the electricity system. Finally, the presence of fossil-fuel subsidies creates conditions under which investments in fossil-fuel- based technologies are favoured over renewable alternatives. Accordingly, fossil-fuel subsidy reform should be a priority for governments, to remove barriers to renewable energy and realize numerous other economic, social and environmental benefits.