Fossil fuel subsidy reform would not only decrease consumption, but also lower the world market price of traded fossil energy carriers, in particular oil. As a consequence, oil importers would lower their import bills by more than US$ 30 bn per year. Recycling at least a part of these savings to support low-carbon energy technologies in countries that reduce their subsidies could provide a mechanism to jointly incentivize transformation of the energy system and alter the political economy of subsidy reform.
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With tighter domestic political constraints, a government can threaten to forgo transfer payments that are too low to receive support by domestic constituencies. In this way, it can establish a credible committed to only accept outcomes in which a large share of windfall savings are actually transferred (Putnam 1988).
It is of course also conceivable that single countries pay other countries to reduce their fossil fuel subsidies. However, as other countries would also benefit from the reduced world market price for oil and the lower emissions, unilateral action could well be hampered by free-rider incentives and only seems likely to occur if the benefits for a single country are large enough to mandate the costs of paying off subsidizing countries.
Note that this number was derived for an oil price of about US$ 110. It seems likely that subsidies and deadweight losses have declined as a result of the recent oil price decline.
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We thank Patrick Doupé, Christian Flachsland, Jan Steckel and three anonymous referees for useful comments and suggestions. Funding from the German Federal Ministry of Education and Research (BMBF) in the call “Okonomie des Klimawandels” (funding code 01LA11020B/Green Paradox) is gratefully acknowledged.
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Jakob, M., Hilaire, J. Using importers’ windfall savings from oil subsidy reform to enhance international cooperation on climate policies. Climatic Change 131, 465–472 (2015). https://doi.org/10.1007/s10584-015-1406-2
- Recipient Country
- World Market Price
- Deadweight Loss
- Export Revenue
- Fossil Fuel Subsidy