Blog Post

Can Fossil Fuel Subsidies Transfer to International Climate Finance?

Oct 4, 2011 | Lynann Butkiewicz

Last month, leaked World Bank documents (which will be presented to the G20 meeting of finance ministers in November) recommended that countries cut fossil fuel subsidies in order to boost funding to tackle climate change. I have discussed previously that securing public funding for climate finance will be difficult given fiscal constraints as governments tighten their budgets to deal with struggling economies. But are fossil fuel subsidies an issue on which governments can and, more importantly, are willing to act?

According to the report, Annex II countries contributed $40 billion to $60 billion a year from 2005 to 2010 in fossil fuel subsidies, and “if reforms resulted in 20 percent of the current level of support being redirected to public climate finance, this could yield $10 billion per year.”

President Obama has made the case to ditch $4 billion in fossil fuel subsidies to invest in clean technologies, reduce the deficit, and create jobs. (The total amount of subsidies the U.S. gives to oil companies is difficult to determine.) And RFF Nonresident Fellow Stephen Brown said in testimony before Congress that eliminating oil and gas company tax preferences would only affect oil prices by a few cents. While the United States may not have a national carbon market of its own, the report suggests that the financing could be targeted to support other markets.

"Governments could make innovative uses of climate finance to sustain momentum in the market while new initiatives are being developed. They could, for example, dedicate a fraction of their international climate finance pledges to procure carbon credits for testing and showcasing new approaches, such as country program concepts, new methodologies, CDM reforms and new mechanisms.

"This would be a cost-efficient use of climate finance as it would target least cost-options and would be performance-based. It would also help build up a supply pipeline for a future scaled-up market, preventing future supply shortages and price pressures."

Still, although devoting the bulk of the money that would otherwise be spent on fossil fuel subsidies to international climate finance might be among the priorities of international organizations, it may not top the list in individual countries. With an election approaching and with constant pressure from Congress to trim from the budget, the United States is more likely to use that money domestically, either toward clean energy technologies or, in the wake of the Solyndra debacle, simply to deficit reduction. Congress has already announced plans to reduce State Department and foreign aid funding.

The United States is not alone in its financial struggles—several European countries are facing default. Even though the European Union runs the largest carbon market and is the largest contributor of development assistance, continuing problems in the Eurozone could force countries to restrict international development spending, using whatever revenue is gained from eliminating fossil fuel subsidies to deal with domestic budgetary issues.