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19th Aug 2018

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Nordic countries prioritise fossil fuel subsidy reform

  • The Nordic countries’ approach to fossil fuel subsidy reform focuses not only on the emissions reduction potential and economic savings of phasing out harmful subsidies, but also the positive effects governments can achieve by reinvesting the savings. (Photo: Johannes Jansson/norden.org)

Nordic countries are actively promoting the need to phase out the massive and harmful fossil fuel subsidies provided by governments all around the world – estimated at $425 billion in 2015.

The cost of the energy transition required to achieve the Paris Agreement has been valued at $1 trillion, so Nordic cooperation continues to place a strong emphasis on the potential of making the switch – from subsidising fossil fuels to investing in renewable energy and energy efficiency.

Nordic PMs prioritise fossil fuel subsidy reform

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In April 2017, prime ministers of the Nordic countries launched a joint initiative - Nordic Solutions to Global Challenges.

Fossil fuel subsidy reform was presented as a key priority of Nordic Climate Solutions, alongside Nordic Green to Scale, an initiative that explores the potential of scaling up 15 existing climate solutions by 2030.

To put the magnitude of fossil fuel subsidies into context, these solutions could reduce emissions by 4.1 gigatonnes in 2030 at a cost equal to a mere nine days of the current global fossil fuel subsidies.

"$425 billion is a huge amount, which could be used much more wisely," said Laura Merrill of the IISD's Global Subsidies Initiative (GSI).

Most of the amount, $325 billion, is spent on consumer subsidies aimed at keeping the price of fossil fuels down, while the remaining $100 billion are government subsidies that keep costs of production artificially low.

"It's worth noting that there's still a large energy access gap that hasn't been filled, despite these subsidies," Merrill pointed out.

"For example, fossil fuel subsidies are inefficient at targeting support for people in poverty and women in developing countries, and in delivering efficient energy access."

The switch - using reform savings to promote sustainable energy

The Nordic countries' approach to fossil fuel subsidy reform focuses not only on the emissions reduction potential and economic savings of phasing out harmful subsidies, but also the positive effects governments can achieve by reinvesting the savings.

"Countries often use the savings from fossil fuel subsidy reform to provide other compensation subsidies or support mechanisms, or invest them in welfare state services, such as education and healthcare," said Hans Jakob Eriksen,

Special Adviser at the Danish Ministry of Energy, Utilities and Climate.

"While this is entirely legitimate, we encourage them to redirect some of these subsidies towards sustainable energy systems – renewable energy and energy efficiency."

Previous research conducted by GSI for the Nordic Council of Ministers modelled the emissions-saving potential of fossil fuel subsidy reform in 20 countries, showing that they could reduce their national greenhouse gas emissions by an average of 11% by 2020.

These reductions would be even greater if the savings were invested in sustainable energy measures.

"By redirecting the savings into sustainable energy, we would increase the mitigation potential and the emissions saved," Eriksen explained.

"As an additional benefit, we would become more decoupled from future increases in oil prices, which would substantially enhance the long-term sustainability of the energy system."

From political intentions to implementation

Nordic countries are members of the Friends of Fossil Fuel Subsidy Reform (FFFSR), a group of countries committed to promoting global political consensus on the importance of the issue.

In 2015, the group launched the Fossil Fuel Subsidy Reform Communique, which recognises reform as "an important climate change mitigation policy with clear economic, social and environmental co-benefits".

Forty-three countries and many businesses and organisations, including OECD, IEA and the World Bank, have endorsed the Communique.

"Gathering global political support is still an important part of our work," said Eriksen. "Currently, however, our focus is shifting towards actual implementation – providing advice on the steps that countries need to take to reform their subsidies. One of the obstacles is that there's virtually no international standard on how to review these subsidies."

In June 2017, the Nordic Council of Ministers published Making the Switch, a report written by researchers at IISD's Global Subsidies Initiative and Gaia Consulting.

The report describes the concept of switching savings from fossil fuel subsidy reform towards sustainable energy, energy efficiency, and safety nets.

"It also provides potential switch outlines for Bangladesh, Indonesia, Morocco and Zambia," said Merrill. "We've created roadmaps to help these countries identify their subsidies and the reforms that could take place, and where they could reinvest the savings to bring down emissions and help finance their energy transition needs."

Cost-effective green transition in the Nordic region

According to Merrill, the research also demonstrates areas in which Nordic countries have successfully introduced government policies to encourage the transition to sustainable energy, including incentives to shift households towards heat pumps in Sweden; Norway's push to promote electric vehicles; and integration of wind energy in the Danish energy system.

These examples, and many others, are described in more detail in the report 'Learning from Leaders', which looks at Nordic and international best practice regarding fossil fuel subsidy reform.

"All Nordic countries are fully aware of the kind of subsidies they have and how they could be removed and used for better purposes," said Erikson. "This is the result of a long tradition of an intergovernmental process to analyse and structure incentive schemes, identify mitigation potentials across all sectors, and finding the most cost-effective ways to mitigate emissions.

"Sharing this knowledge with other countries would be highly beneficial," he continues. "This process and the ways in which the analysis plays into political decision making has enabled us to steer the green transition in cost-effective ways, without compromising economic growth."

The Nordic countries are at COP23 from 6-17 November to highlight Nordic Climate Solutions through a series of events focusing on a greener future. Find out what's going on here.

Pall Tomas Finnsson is a communications adviser, specialising in innovation, sustainability and Nordic culture. He writes for the Nordic Council of Ministers' web magazine Sustainable Growth the Nordic Way.

Disclaimer: This article is sponsored by a third party. All opinions in this article reflect the views of the author and not of EUobserver.

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