Hybridizing low-carbon technology deployment policy and fossil fuel subsidy reform: a climate finance perspective

Abstract

The environmental argument behind fossil fuel subsidy reform is strong, particularly among international finance institutions wishing to support ‘transformational’ low-carbon development. However, supporting reform in practice has often met methodological and political barriers. Instead, a large share of international climate finance has flowed to national policies and measures that incentivize the deployment of low-carbon technologies such as renewable energy technologies. In this paper, we propose that ‘hybrid’ policies that package fossil fuel subsidy reform with low-carbon technology deployment policy offer an opportunity for donors to support mitigation activities that achieve both concrete environmental impacts as well as long-term structural change. Specifically, we model the abatement cost, fossil fuel subsidy savings, and generation cost resulting from combining wind and solar photovoltaic deployment policy with fossil fuel subsidy phase-out in four country case studies. Our results not only show the extent to which fossil fuel subsidies can undermine the financial viability of low-carbon energy technologies, but also how cost uncertainties can be buffered by combining fossil fuel subsidy reform with renewable energy deployment. Furthermore, we assess the proposed hybrid policy against typical climate finance criteria and thus contribute to debates surrounding donor strategies to support low-carbon development.