The environmental impact of fossil fuel subsidy policies

The environmental impact of fuel subsidy policies is an important but understudied issue. This paper makes use of country-level panel data of 139 countries from 1998 to 2015 and the STIRPAT model to investigate the relationship between fuel subsidy policies and environmental emissions. Our estimations indicate that high fossil fuel subsidies are associated with greater greenhouse gas (GHG) emissions. We find that countries pursuing high-subsidy policies emit approximately 11.4% more GHG emissions than those pursuing high-tax policies. In the unlikely event that crude oil prices would remain at around $120 per barrel and all countries pursuing high-subsidy policies would switch to high-tax policies, we project that global GHG emissions could decline by about 1.28%. We find that while fuel subsidy reform can help reduce global GHG emissions and tackle climate change by improving fuel efficiency, it is far from being a silver bullet and, as a result, only represents a small tool to be used among others to achieve emission reduction goals.