Global fossil fuel subsidies total US$600 billion per year, and subsidy reform can help reduce and shift vehicle trips, thus decreasing emissions and air pollution. Consumer fossil fuel subsidy removal in the area of transport could have significant air quality impacts in rapidly growing cities in developing countries, as gasoline and diesel pollution in congested urban centers take a growing toll on public health.
- As an economy-wide measure, fossil fuel subsidy reform (FFSR) has the potential to apply comparably to passenger and freight transport.
- Fossil fuel subsidy reform applies to all motorized transport modes, including aviation and shipping.
- Reduces GHG emissions by creating disincentives for conventional private motorization, and thus incentivizing shift to more efficient transport modes, and reducing unnecessary trips. By reducing market distortions, fossil fuel subsidy reform can also increase the reliability of fuel supplies for more sustainable transport modes (e.g. high-quality bus systems).
- Supports sustainable development objectives by reducing vehicle traffic, and thus reducing air pollution and increasing road safety. Crucially enables subsidies to be re-directed toward sustainable transport measures and other supportive SDGs.
Status of deployment:
- India, Indonesia and Egypt all undertook FFSR in 2015. Some countries have invested in social measures to offset the costs to citizens of rising oil prices during the process of reform (as in Indonesia, the Philippines and Iran). Other countries have chosen to invest back into the energy sector and towards renewables (such as Morocco and Ethiopia).
- At present the transport sector is the least diversified energy end-use sector, with about 93% of the sector driven by oil. It has been established that the market attractiveness of policies in favor of decarbonizing fuel depends upon the removal of fossil fuel subsidies, as current fossil-fuel alternatives are likely to remain uncompetitive in market segments with subsidized fuels. Current subsidy arrangements for oil in transport not only obscure the direct costs of producing and distributing fuels, they also neglect the costs incurred by negative externalities, and thus give unfair advantage to oil over cleaner fuels.
- The International Energy Agency (IEA)’s latest estimates indicate that fossil-fuel consumption subsidies worldwide amounted to $493 billion in 201. However, completely eliminating fossil-fuel consumption subsidies in net importing countries within the next ten years, and in net exporting countries (with the exception of Middle East) by 2030, would make it possible to deliver a peak in global energy-related emissions by 2020. By eliminating fossil fuel subsidies, countries could derive an average 2-13% reduction in carbon emissions, and this reduction could be further increased if the savings are reinvested into energy efficiency and renewables.
- A study estimates that in Mexico, 34 million tons of CO2 could be saved every year from 2014-2035, through a mix of Green Growth Transport measures including FFSR, giving a net present value (NPV) of USD $193,300 million in that period. The fiscal space created by subsidy savings in Indonesia has allowed increased funding for state-owned enterprises, including in transport.
- There is a large variation among mitigation estimates due to consideration of different sectors and diversity regarding the intensity of subsidisation. There are several co-benefits to fossil fuel reform, with evidence suggesting that the economic, social and environmental benefits of FFSR are significant, as resources could be used more efficiently. A combination of subsidy reform and corrective taxes on fossil fuels could result in a 23% reduction in air pollutants and a 63% decrease in deaths worldwide from outdoor fossil fuel air pollution, and could also lead to an increase in global Gross Domestic Product (GDP) of up to 0.7% per year to 2050.