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September 12, 2016

Responding To: The Challenge of Climate Change

Climate Change and the Need to Reform Fossil Fuel Subsidies

Paasha Mahdavi

In recent decades, scientific and technological innovations across the world have offered bountiful solutions to mitigate climate change. From nanotechnology and synthetic fertilizer to renewable energy and self-driving electric cars, human ingenuity has devised countless new options to reduce our environmental impact and maintain safe global temperatures.

Despite these breakthroughs, fossil fuels such as petroleum and coal continue to dominate our society, as we consume more energy today than ever before in the history of our species. What, then, explains the gap between innovation and broad implementation?

One answer is at once simple and yet complex: politics. The combination of bad policies and political inaction is a critical barrier to realizing the innovation-to-implementation linkage. Governments around the world enact policies that promote the inefficient use of energy and natural resources, thereby skewing the playing field against efficiency-enhancing innovations that artificially appear too costly to implement.

Political leaders similarly fail to craft and enforce laws to prevent the long-term environmental and ecological damage caused by the extraction of petroleum, coal, precious metals, and non-fuel minerals. The resulting lax regulations make it all the more difficult for consumers to adopt breakthroughs in renewable, carbon-free technologies.

Foremost among these political impediments is the subsidization of fossil fuels. Policies that support below-market prices for gasoline and other petroleum products, as well as coal and natural gas, are prevalent across emerging markets such as China, India, Russia, and the Middle East. These policies not only encourage grossly inefficient consumption habits but also drain precious government funds that could be diverted to development-enhancing investments such as roads, schools, and hospitals. The IMF estimates that in 2015 the full social and environmental cost of these subsidies amounted to $5.3 trillion, equivalent to 6.5 percent of global GDP.

In the advanced economies, low taxes on energy products simultaneously increase end-use consumption of fossil fuels and disincentivize renewable alternatives. Consider that in the United States, the last increase in the federal gasoline tax was nearly 25 years ago. This inaction puts gasoline prices in the U.S. on par with petrostates such as Russia and Nigeria—far removed from prices in Norway, Singapore, and the U.K.

Reforming policies on fossil fuel subsidies is a straightforward solution that can help countries around the world both cut global greenhouse gas emissions and generate local co-benefits such as reducing road congestion, traffic fatalities, and air pollution. Ending subsidies on gasoline and diesel alone will foster conservation in what is now the fastest growing source of global greenhouse gas emissions.

The window of opportunity to prevent the myriad catastrophes of climate change is rapidly closing. The agreements reached at the Paris “COP21” meetings in November 2015 are a crucial step in the right direction. But implementing these ambitious goals will require governments to abandon failed policies such as fuel subsidies, and to enact bold new policies that encourage, not dissuade, the adoption of climate-saving innovations.

Paasha Mahdavi is an assistant professor in the McCourt School of Public Policy. In 2016-2018, he will serve as fellow for the Council on the Future of Energy in the World Economic Forum, Network of Global Future Councils.

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