Emission Reduction via Fossil Fuel Subsidy Removal and Carbon Pricing, Creating Synergies with Revenue Recycling

Abstract

The removal of fossil fuel subsidies and the introduction of carbon pricing have been discussed for more than a decade, but their potential contribution to emission reduction is still uncertain, especially in relation to the potential indirect impact of revenue recycling. We have created a simulation model, GSI-IF, designed to assess the emission reduction potential resulting from removing fossil fuel subsidies and recycling part of the avoided subsidy and additional revenue from carbon pricing to renewable energy and energy efficiency. Our results show that emissions could decline by 7.1% in 2030 and up to 19.8% in 2050 compared to a baseline scenario. We find that subsidy removal is most effective in reducing emissions in countries with a high incidence of fossil fuel subsidies and it has stronger impact in the short term. The recycling of carbon pricing is most relevant for larger economies and its impact accumulates over time, generating growing GHG reductions year after year. In the current context (year 2022) with high energy prices, heavy stress on fiscal balances, and the renewed ambition of most governments to reduce emissions toward Net Zero in 2050, subsidy removal and carbon pricing hold promise in the toolbox of decarbonization options while improving fiscal sustainability.