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Global Fossil-fuel Subsidy Reform and Paris Agreement

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  • Chepeliev, Maksym
  • van der Mensbrugghe, Dominique

Abstract

Historically fossil-fuel consumption subsidies have been one of the most widely used energy and public policy intervention. According to the International Energy Agency (IEA), in 2014 they amounted to $493 billion worldwide, which is equivalent to 0.6% of global GDP. Their contribution is even more significant for most energy exporting countries, in many cases exceeding 5-15% of national GDP. With such a large magnitude, fossil-fuel subsidies have a high potential to be used as a policy instrument in fulfilling environmental goals, including climate change targets. However, despite their large magnitude, fossil-fuel consumption subsidies are not explicitly represented in most global economic databases and models, including the Global Trade Analysis Project (GTAP) Data Base. In this paper, we review an approach towards integration of pre-tax fossil-fuel consumption subsidies to the GTAP Data Base and produce a GTAP 9.2 Data Base with incorporated energy subsidies. We further use the dynamic computable general equilibrium ENVISAGE model to estimate the impacts of global fossil-fuel subsidy reform on achieving country-specific emission reduction targets defined by nationally determined contributions (NDCs). As our results show, elimination of pre-tax fossil-fuel consumption subsidies, in addition to CO2 emission taxation, significantly reduces the required tax rates. In the case of heavily subsidized regions, no additional emissions taxes are needed as subsidies elimination is sufficient to meet and surpass the NDC emission reduction targets. Furthermore, the combined energy subsidy removal plus emission taxes with trading actually leads to a global welfare gain—even if the pattern of welfare gains and losses differ significantly across regions compared with other policy combinations. As the losses mainly occur in the energy producers, in principle, targeted transfers could make all regions benefit from this set of policies.

Suggested Citation

  • Chepeliev, Maksym & van der Mensbrugghe, Dominique, 2018. "Global Fossil-fuel Subsidy Reform and Paris Agreement," Conference papers 332945, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332945
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    References listed on IDEAS

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    1. Angel Aguiar & Badri Narayanan & Robert McDougall, 2016. "An Overview of the GTAP 9 Data Base," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 181-208, June.
    2. Maksym Chepeliev & Robert McDougall & Dominique van der Mensbrugghe, 2018. "Including Fossil-fuel Consumption Subsidies in the GTAP Data Base," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(1), pages 84-121, June.
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