Editing IPCC:AR6/WGIII/Chapter-13 (section)

=== 13.6.3 Economic Instruments ===

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Economic instruments, including carbon taxes, emissions trading systems (ETS), purchases of emission reduction credits, subsidies for energy efficiency, renewables and research and development and fossil fuel subsidy removal, provide a financial incentive to reduce emissions. Pricing instruments, especially ETS and carbon taxes, have become more prevalent in recent years ( [[#13.6.1|Section 13.6.1]] ). They have proven effective in promoting implementation of the low-cost emissions reductions, and practical experience has driven progress in market mechanism design ( ''robust evidence'' , ''hi'' ''gh agreement'' ).

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==== 13.6.3.1 Carbon Taxes ====

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A carbon tax is a charge on carbon dioxide or other greenhouse gases imposed on specified emitters or products. In practice features such as exemptions and multiple rates can lead to debate as to whether a specific tax is a carbon tax ( [[#Haites--2018|Haites 2018]] ). While other taxes can also reduce emissions by increasing the price of GHG emitting products, the result may be inefficient unless the tax rate is proportional to the emissions intensity. a tax on value of fossil fuels, for example, could raise the price on natural gas more than the price of coal, and hence increase emissions if the resulting substitution towards coal were to outweigh reductions in energy use.

As of April 2021, 27 carbon taxes had been implemented by national governments, mostly in Europe ( [[#World%20Bank--2021a|World Bank 2021a]] ). Most of the taxes apply to fossil fuels used for transportation and heating and cover between 3% and 79% of the jurisdiction’s emissions. Several countries also tax F-gases. Tax rates vary widely from less than USD1 to over USD137 per tCO 2 -eq. a few jurisdictions lowered existing fuel taxes when they implemented the carbon tax, thus reducing the effective tax rate ( [[#OECD--2021a|OECD 2021a]] ). How the tax revenue is used varies widely by jurisdiction.

Carbon taxes tend to garner the least public support among possible mitigation policy options ( [[#Rhodes--2017|Rhodes et al. 2017]] ; [[#Rabe--2018|Rabe 2018]] ; [[#Maestre-Andrés--2019|Maestre-Andrés et al. 2019]] ; [[#Criqui--2019|Criqui et al. 2019]] ) although some regulations also meet with opposition ( [[#Attari--2009|Attari et al. 2009]] ). Policymakers sometimes use the revenue to build support for the tax, allocating some to address regressivity, to address competitiveness claims by industry, to reduce the economic cost by lowering existing taxes, and to fund environmental projects ( [[#Gavard--2018|Gavard et al. 2018]] ; [[#Klenert--2018|Klenert et al. 2018]] ; [[#Levi--2020|Levi et al. 2020]] ).

Carbon tax rates can be adjusted for inflation, increases in income, the effects of technological change, changing policy ambition, or the addition or subtraction of other policies. In practice, numerous jurisdictions have not increased their tax rates annually and some scheduled tax increases have not been implemented ( [[#Haites--2018|Haites et al. 2018]] ). Predictability of future tax rates helps improve economic performance ( [[#Bosetti--2011|Bosetti and Victor 2011]] ; [[#Brunner--2012|Brunner et al. 2012]] ). Uncertainty about the future existence of a carbon price can hinder investment ( [[#Jotzo--2012|Jotzo et al. 2012]] ) and uncertainty about future price levels can increase the resource costs of carbon pricing ( [[#Aldy--2020|Aldy and Armitage 2020]] ).

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==== 13.6.3.2 Emission Trading Systems ====

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The most common ETS design – cap-and-trade – sets a limit on aggregate GHG emissions by specified sources, distributes tradable allowances approximately equal to the limit, and requires regulated emitters to submit allowances equal to their verified emissions. The price of allowances is determined by the market, except in cases where government determined price floors or ceilings apply.

ETSs for GHGs were in place in 38 countries as of April 2021 ( [[#World%20Bank--2021a|World Bank 2021a]] ). The EU ETS, which covers 30 countries, was recently displaced by China’s national ETS as the largest. ETSs tend to cover emissions by large industrial and electricity generating facilities. [[#footnote-003|2]] Allowance prices as of April 1, 2021 ranged from just over USD1 to USD50, and coverage between 9% and 80% of the jurisdiction’s emissions.

Multiple regional pilot ETSs with different designs have been implemented in China since 2013 to provide input to the design of a national system that is to become the world’s largest ETS ( [[#Jotzo--2018|Jotzo et al. 2018]] ; [[#Qian--2018|Qian et al. 2018]] ; [[#Stoerk--2019|Stoerk et al. 2019]] ). Assessments have identified potential improvements to emissions reporting procedures ( [[#Zhang--2019|Zhang et al. 2019]] ) and the pilot ETS designs ( [[#Deng--2018|Deng et al. 2018]] ). China’s national ETS covering over 2200 heat and power plants with annual emissions of about 4 GtCO 2 took effect in 2021 ( [[#World%20Bank--2021a|World Bank 2021a]] ).

All of the ETSs for which data are available have accumulated surplus allowances which reduces their effectiveness ( [[#Haites--2018|Haites 2018]] ). Surplus allowances indicate that the caps set earlier were not stringent relative to emissions trends. Most of those ETSs have implemented measures to reduce the surplus including removal/cancellation of allowances and more rapid reduction of the cap. Several ETSs have adopted mechanisms to remove excess allowances from the market when supply is abundant and release additional allowances into the market when the supply is limited, such as the EU ‘market stability reserve’ ( [[#Hepburn--2016|Hepburn et al. 2016]] ; [[#Bruninx--2020|Bruninx et al. 2020]] ). Initial indications are that this mechanism is at least partially successful in stabilising prices in response to short term disruptions such as the COVID-19 economic shock ( [[#Gerlagh--2020|Gerlagh et al. 2020]] ; [[#Bocklet--2019|Bocklet et al. 2019]] ).

Some ETS also include provisions to limit the range of market prices, making them ‘hybrids’ ( [[#Pizer--2002|Pizer 2002]] ). a price floor assures a minimum level of policy effect if demand for allowances is low relative to the ETS emissions cap. It is usually implemented through a minimum price at auction, as for example in California’s ETS ( [[#Borenstein--2019|Borenstein et al. 2019]] ). a price ceiling allows the government to issue unlimited additional allowances at a pre-determined price to limit the maximum cost of mitigation. Price ceilings have not been activated to date.

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==== 13.6.3.3 Evaluation of Carbon Pricing Experience ====

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A carbon tax or GHG ETS increases the prices of emissions intensive goods thus creating incentives to reduce emissions ( [[#Stavins--2019|Stavins 2019]] ) for a comparison of a tax and ETS). The principal advantage of a pricing policy is that it promotes implementation of low-cost reductions; for a carbon tax, reductions whose cost per tCO 2 -eq reduced is lower than the tax and for an ETS the lowest cost (per tCO 2 -eq) reductions sufficient to meet the cap. Both a tax and an ETS can be designed to limit adverse economic impacts on regulated sources and emissions leakage.

The corresponding limitations of pricing policies are that they have limited impact on adoption of mitigation measures when decisions are not sensitive to prices and do not encourage adoption of higher cost mitigation measures. Their effectiveness in influencing long-term investments depends on the expectation that the policy will continue and expectations related to future tax rates or allowance prices ( [[#Brunner--2012|Brunner et al. 2012]] ). Other policies can be used in combination with carbon pricing to address these limitations.

The number of pricing policies has increased steadily and covered 21.5% of global GHG emissions in 2020 ( [[#World%20Bank--2021a|World Bank 2021a]] ). Effective coverage is lower because virtually all jurisdictions with a pricing policy have other policies that affect some of the same emissions. For example, a few jurisdictions reduced existing fuel taxes when they introduced their carbon tax thus reducing the effective tax rate, and many jurisdictions have two or more pricing policies

There is abundant evidence that carbon pricing policies reduce emissions. Statistical studies of emissions trends in jurisdictions with and without carbon pricing find a significant impact after controlling for other policies and structural factors ( [[#Best--2020|Best et al. 2020]] ; [[#Rafaty--2020|Rafaty et al. 2020]] ). Numerous assessments of specific policies, especially the EU ETS and the British Columbia carbon tax, conclude that most have reduced emissions ( ''robust evidence'' , ''high agreement'' ) ( [[#Narassimhan--2018|Narassimhan et al. 2018]] ; [[#Haites--2018|Haites et al. 2018]] ; [[#Aydin--2018|Aydin and Esen 2018]] ; [[#Pretis--2019|Pretis 2019]] ; [[#Andersson--2019|Andersson 2019]] ; [[#FSR%20Climate--2019|FSR Climate 2019]] ; [[#Metcalf--2020|Metcalf and Stock 2020]] ; [[#Rafaty--2020|Rafaty et al. 2020]] ; [[#Bayer--2020|Bayer and Aklin 2020]] ; [[#Diaz--2020|Diaz et al. 2020]] ; [[#Green--2021|Green 2021]] ; [[#Arimura--2021|Arimura and Abe 2021]] ).

Estimating the emission reductions due to a specific policy is difficult due to the effects of overlapping policies and exogenous factors such as fossil fuel price changes and economic conditions. Studies that attempt to attribute a share of the reductions achieved to the EU ETS place its contribution at 3–25% ( [[#FSR%20Climate--2019|FSR Climate 2019]] ; [[#Bayer--2020|Bayer and Aklin 2020]] ; [[#Chèze--2020|Chèze et al. 2020]] ). The relationship between a carbon tax and the resulting emission reductions is complex and is influenced by changes in fossil fuel prices, changes in fossil fuel taxes, and other mitigation policies ( [[#Aydin--2018|Aydin and Esen 2018]] ). But the effectiveness of a carbon tax generally is higher in countries where it constitutes a large part of the fossil fuel price ( [[#Andersson--2019|Andersson 2019]] ).

Few of the world’s carbon prices are at a level consistent with various estimates of the carbon price needed to meet the Paris Agreement goals. In modelling of mitigation pathways that limit warming to 2°C (&gt;50%)( [[IPCC:Wg3:Chapter:Chapter-3#3.6.1|Section 3.6.1]] ) marginal abatement costs of carbon in 2030 are about 60 to 120 USD2015 per tCO 2 , and about 170 to 290 USD2015 per tCO 2 in pathways that limit warming to 1.5°C (&gt;50%) with no or limited overshoot ( [[IPCC:Wg3:Chapter:Chapter-3#3.6|Section 3.6]] ). One synthesis study estimates necessary prices at USD40–80 per tCO 2 by 2020 ( [[#High-Level%20Commission%20on%20Carbon%20Prices--2017|High-Level Commission on Carbon Prices 2017]] ). Only a small minority of carbon pricing schemes in 2021 had prices above USD40 per tCO 2 , and all of these were in European jurisdictions ( [[#World%20Bank--2021a|World Bank 2021a]] ). Most carbon pricing systems apply only to some share of the total emissions in a jurisdiction, so the headline carbon price is higher than the average carbon price that applies across an economy ( [[#World%20Bank--2021a|World Bank 2021a]] ).

Where ETS or carbon taxes exist, they apply to different proportions of the jurisdiction’s greenhouse gas emissions. The share of emissions covered by ETSs in 2020 varied widely, ranged from 9% (Canada) to 80% (California) while the share of emissions covered by carbon taxes ranged from 3% (Latvia and Spain) to 80% (South Africa) ( [[#World%20Bank--2021a|World Bank 2021a]] ).Where carbon pricing policies are effective in reducing GHG emissions, they usually also generate co-benefits including better air quality. For example, a Chinese study of air quality benefits from lower fossil fuel use under carbon pricing suggests that prospective health co-benefits would partially or fully offset the cost of the carbon policy ( [[#Li--2018|Li et al. 2018]] ). Depending upon the jurisdiction (for example, if there are fossil fuel subsidies) carbon pricing could also reduce the economic distortions of fossil fuel subsidies, improve energy security through greater reliance on local energy sources and reduce exposure to fossil fuel market volatility. Substantial carbon prices would be in the domestic self-interest of many countries if co-benefits were fully factored in ( [[#Parry--2015|Parry et al. 2015]] ).

Economic theory suggests that carbon pricing policies are on the whole more cost effective than regulations or subsidies at reducing emissions ( [[#Gugler--2021|Gugler et al. 2021]] ). Any mitigation policy imposes costs on the regulated entities. In some cases entities may be able to recover some or all of the costs through higher prices ( [[#Neuhoff--2019|Neuhoff and Ritz 2019]] ; [[#Cludius--2020|Cludius et al. 2020]] ). International competition from less stringently regulated firms limits the ability of emissions-intensive, trade-exposed (EITE) firms to raise their prices. Thus, a unilateral mitigation policy creates a risk of adverse economic impacts, including loss of sales, employment, profits, for such firms and associated emissions leakage ( [[#13.6.6.1|Section 13.6.6.1]] ).

Pricing policies can be designed to minimise these risks; free allowances can be issued to EITE participants in an ETS and taxes can provide exemptions or rebates. An extensive ''ex post'' literature finds no statistically significant adverse impacts on competitiveness or leakage (13.6.6.1).

An ''ex post'' analysis of European carbon taxes finds no robust evidence of a negative effect on employment or GDP growth ( [[#Metcalf--2020|Metcalf and Stock 2020]] ). The British Columbia carbon tax led to a small net increase in employment ( [[#Yamazaki--2017|Yamazaki 2017]] ) with no significant negative impacts on GDP possibly due to full recycling of the tax revenue ( [[#Bernard--2021|Bernard and Kichian 2021]] ). Few carbon taxes apply to EITE sources ( [[#Timilsina--2018|Timilsina 2018]] ), so competitiveness impacts usually are not a particular concern.

Government revenue generated by carbon pricing policies globally was approximately 53 billion USD in 2020 split almost evenly between carbon taxes and ETS allowance sales (World Bank 2021). Revenue raised though carbon pricing is generally considered a relatively efficient form of taxation and a large share of revenue enters general government budgets ( [[#Postic--2020|Postic and Fetet 2020]] ). Some of the revenue is returned to emitters or earmarked for environmental purposes. Allowance allocation and revenue spending measures have been used to create public support for many carbon pricing policies including at every major reform stage of the EU ETS ( [[#Klenert--2018|Klenert et al. 2018]] ; [[#Dorsch--2020|Dorsch et al. 2020]] ) (Box 5.11).

The most commonly studied distributional impact is the direct impact of a carbon tax on household income. Typically it is regressive; the tax induced increase in energy expenditures represents a larger share of household income for lower income households ( [[#Grainger--2010|Grainger and Kolstad 2010]] ; [[#Timilsina--2018|Timilsina 2018]] ; [[#Dorband--2019|Dorband et al. 2019]] ; [[#Ohlendorf--2021|Ohlendorf et al. 2021]] ). Governments can rebate part or all of the revenue to low-income households, or implement other changes to taxation and transfer systems to achieve desired distributional outcomes ( [[#Jacobs--2019|Jacobs and van der Ploeg 2019]] ; [[#Saelim--2019|Saelim 2019]] ; [[#Sallee--2019|Sallee 2019]] ) (Box 5.11). The full impact of the tax – after any distribution of tax revenue to households and typically adverse effects on investors – generally is less regressive or progressive ( [[#Williams%20III--2015|Williams III et al. 2015]] ; [[#Goulder--2019|Goulder et al. 2019]] ). Where the tax revenue is treated as general revenue the government relies on existing income redistribution policies (such as income taxes) and social safety net programmes to address the distributional impacts.

Carbon taxes on fossil fuels have effects similar to the removal of fossil fuel subsidies ( [[#Ohlendorf--2021|Ohlendorf et al. 2021]] ) ( [[#13.6.3.6|Section 13.6.3.6]] ). Even if a carbon tax is progressive it increases prices for fuels, electricity, transport, food and other goods and services that adversely affect the most economically vulnerable. Redistribution of tax revenue is critical to address the adverse impacts on low-income groups ( [[#Dorband--2019|Dorband et al. 2019]] ) (Box 5.11). In countries with a limited capacity to collect taxes and distribute revenues to low-income households, such as some developing countries, carbon taxes may have greater distributional consequences.

Distributional effects have generally not been a significant issue for ETSs. Equity for industrial participants typically is addressed through free allocation of allowances. Impacts on household incomes, with the exception of electricity prices, are too small or indirect to be a concern. Some systems are designed to limit electricity price increases ( [[#Petek--2020|Petek 2020]] ) or use some revenue for bill assistance to low-income households ( [[#RGGI--2019|RGGI 2019]] ).

Carbon pricing, especially an ETS that covers industrial sources, stimulates technological change by participants and others ( [[#Calel--2016|Calel and Dechezleprêtre 2016]] ; [[#FSR%20Climate--2019|FSR Climate 2019]] ; [[#van%20den%20Bergh--2021|van den Bergh and Savin 2021]] ) ( [[#13.6.6.3|Section 13.6.6.3]] and Chapter 16). The purpose of pricing policies is to encourage implementation of the lowest cost mitigation measures. Pricing policies therefore are more likely to stimulate quick, low cost innovation such as fuel switching and energy efficiency, rather than long term, costly technology development such as renewable energy or industrial process technologies ( [[#Calel--2020|Calel 2020]] ; [[#Lilliestam--2021|Lilliestam et al. 2021]] ). To encourage long-term technology development carbon pricing policies need to be complemented by other mitigation and research and development (R&amp;D) policies.

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==== 13.6.3.4 Offset Credits ====

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Offset credits are voluntary GHG emission reductions for which tradable credits are issued by a supervisory body ( [[#Michaelowa--2019b|Michaelowa et al. 2019b]] ). a buyer can use purchased credits to offset an equal quantity of its emissions. In a voluntary market governments, firms and individuals purchase credits to offset emissions generated by their actions, such as air travel. a compliance market al.ows specified offset credits to be used for compliance with mitigation policies, especially ETSs, carbon taxes and low-carbon fuel standards. ( [[#Newell--2013|Newell et al. 2013]] ; [[#Bento--2016|Bento et al. 2016]] ; [[#Michaelowa--2019a|Michaelowa et al. 2019a]] ).

When used for compliance, governments typically specify a maximum quantity of offset credits that can be used, as well as the types of emission reduction actions, the project start dates and the geographic regions eligible credits. Initially, the EU ETS, Swiss ETS and New Zealand ETS accepted credits issued under the Kyoto Protocol (Chapter 14), but they terminated or severely constrained the quantity of international credits allowed for compliance use after 2014 ( [[#Shishlov--2016|Shishlov et al. 2016]] ) ( [[#13.6.6|Section 13.6.6]] ).

A key question for any offset credit is whether the emission reductions are ‘additional’: reductions that only happen because of the offset credit payment ( [[#Greiner--2003|Greiner and Michaelowa 2003]] ; [[#Millard-Ball--2010|Millard-Ball and Ortolano 2010]] ; [[#van%20Benthem--2013|van Benthem and Kerr 2013]] ; [[#Burke--2016|Burke 2016]] ; [[#Bento--2016|Bento et al. 2016]] ). To assess additionality and to determine the quantity of credits to be issued, regulators develop methodologies to estimate baseline (business-as-usual) emissions in the absence of offset payments ( [[#Newell--2013|Newell et al. 2013]] ; [[#Bento--2016|Bento et al. 2016]] ). Credits are issued for the difference between the baseline and actual emissions with adjustments for possible emissions increases outside the project boundary ( [[#Rosendahl--2011|Rosendahl and Strand 2011]] ). Some research suggests that procedural and measurement advances can significantly reduce the risk of severe non-additionality ( [[#Mason--2013|Mason and Plantinga 2013]] ; [[#Bento--2016|Bento et al. 2016]] ; [[#Michaelowa--2019a|Michaelowa et al. 2019a]] ).

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==== 13.6.3.5 Subsidies for Mitigation ====

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Subsidies for mitigation encourage individuals and firms to invest in assets that reduce emissions, changes in processes or innovation. Subsidies have been used to improve energy efficiency, encourage the uptake of renewable energy and other sector-specific emissions saving options (Chapters 6 to 11), and to promote innovation. Targeted subsidies can achieve specific mitigation goals yet have intrinsically narrower coverage than more broad-based pricing instruments. Subsidies are often used not only to achieve emissions reductions but to address market imperfections or to achieve distributional or strategic objectives. Subsidies are often used alongside or in combination with other policy instruments, and are provided at widely differing cost per unit of emissions reduced.

Governments routinely provide direct funding for basic research, subsidies for R&amp;D to private companies, and co-funding of research and deployment with industry ( [[#Dzonzi-Undi--2016|Dzonzi-Undi and Li 2016]] ). Research subsidies have been found to be positively correlated with green product innovation in a study in Germany, Switzerland and Austria ( [[#Stucki--2018|Stucki et al. 2018]] ). Government subsidies for R&amp;D have been found to greatly increase the green innovation performance of energy intensive firms in China ( [[#Bai--2019|Bai et al. 2019]] ). For more detail see Chapter 16.

Subsidies of different forms are often provided for emissions savings investments to businesses and for the retrofit of buildings for energy efficiency. Emissions reductions from energy efficiencies can often be achieved at low cost, but evidence for some schemes suggests lower effectiveness in emissions reductions than expected ''ex ante'' ( [[#Fowlie--2018|Fowlie et al. 2018]] ; [[#Valentová--2019|Valentová et al. 2019]] ). Tax credits can be used to encourage firms to produce or invest in low-carbon emission energy and low-emission equipment. Investment subsidies have been found to be more effective in reducing costs and uncertainties in solar energy technologies than production subsidies ( [[#Flowers--2016|Flowers et al. 2016]] ).

Subsidies have been provided extensively and in many countries for the deployment of household rooftop solar systems, and increasingly also for commercial scale renewable energy projects, typically using ‘feed-in tariffs’ that provide a payment for electricity generated above the market price ( [[#Pyrgou--2016|Pyrgou et al. 2016]] ). Such schemes have proven effective in deploying renewable energy, but lock-in subsidies for long periods of time. In some cases they provide subsidies at higher levels than would be required to motivate deployment ( [[#del%20Río--2014|del Río and Linares 2014]] ). High levels of net subsidies have been shown to diminish incentives for optimal siting of renewable energy installations ( [[#Penasco--2019|Penasco et al. 2019]] ).

A variant of subsidies for deployment of renewable energy are auctioned feed-in tariffs or auctioned contracts-for-difference, where commercial providers bid in a competitive process. Auctions typically lead to lower price premiums ( [[#Eberhard--2016|Eberhard and Kåberger 2016]] ; [[#Roberts--2020|Roberts 2020]] ) but efficient outcomes depend on auction design and market structure ( [[#Grashof--2020|Grashof et al. 2020]] ), although an emergent literature also questions whether spread of auctions is due to performance or the dynamics of the policy formulation process ( [[#Fitch-Roy--2019b|Fitch-Roy et al. 2019b]] ; [[#Grashof--2020|Grashof et al. 2020]] ; [[#Grashof--2021|Grashof 2021]] ). The prequalification requirements or the assessment criteria in the auctions sometimes also include local co-benefits such as local economic diversification ( [[#Buckman--2019|Buckman et al. 2019]] ; [[#White--2021|White et al. 2021]] ).

Support for rollout clean technologies at high prices can be economically beneficial in the long run if costs are reduced greatly as a function of deployment ( [[#Newbery--2018|Newbery 2018]] ). Deployment support, much of it in the form of feed-in tariffs in Germany, enabled the scaling up of the global solar photovoltaic industry and attendant large reductions in production costs that by 2020 made solar power cost competitive with fossil fuels ( [[#Buchholz--2019|Buchholz et al. 2019]] ). There is also evidence for increased innovation activity as a result of solar feed-in tariffs ( [[#Böhringer--2017b|Böhringer et al. 2017b]] ).

Many governments have also provided subsidies for the purchase of electric vehicles, including with strong effect in China ( [[#Ma--2017|Ma et al. 2017]] ), Norway ( [[#Baldursson--2021|Baldursson et al. 2021]] ) and other countries, and sometimes at relatively high rates ( [[#Kong--2019|Kong and Hardman 2019]] ).

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==== 13.6.3.6 Removal of Fossil Fuel Subsidies ====

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Many governments subsidise fossil fuel consumption and/or production through a variety of mechanisms ( [[#Burniaux--2014|Burniaux and Chateau 2014]] ) (Figure 13.5). Different approaches exist to defining the scope and estimating the magnitude of fossil fuel subsidies ( [[#Koplow--2018|Koplow 2018]] ), and all involve estimates, so the magnitudes are uncertain. Rationalising inefficient fossil fuel subsidies is one of the indicators to measure progress toward Sustainable Development Goal 12: Ensure sustainable consumption and production patterns ( [[#UNEP--2019a|UNEP 2019a]] ).

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[[File:b540349da7c55aeec9960c53491f10e0 IPCC_AR6_WGIII_Figure_13_5.png]]

'''Figure 13.5 | Total fossil fuel subsidies, 2010–2019, in USD billion (USD2021 for IMF, USD2019 for others).''' Source: data from [[#OECD--2020|OECD (2020)]] (43 countries, mainly production subsidies), [[#IEA--2020|IEA (2020)]] (40 countries, mainly consumption subsidies), IMF ( [[#Parry--2021|Parry et al. 2021]] ''';''' explicit subsidies for all countries).

Consumption subsidies represent approximately 70% of the total. Most of the subsidies go to petroleum, which accounts for roughly 50% of the consumption subsidies and 75% of the production subsidies ( [[#IEA--2020|IEA 2020]] ; [[#OECD--2020|OECD 2020]] ). Much of the variation in the consumption subsidies is due to fluctuations in the world price of oil which is used as the reference price.

Reducing fossil fuel subsidies would lower CO 2 emissions, increase government revenues ( [[#Jakob--2015|Jakob et al. 2015]] ; [[#Dennis--2016|Dennis 2016]] ; [[#Gass--2017|Gass and Echeverria 2017]] ; [[#Rentschler--2017|Rentschler and Bazilian 2017]] ; [[#Monasterolo--2019|Monasterolo and Raberto 2019]] ), improve macroeconomic performance ( [[#Monasterolo--2019|Monasterolo and Raberto 2019]] ), and yield other environmental and sustainable development benefits ( ''robust evidence'' , ''medium agreement'' ) ( [[#Jakob--2015|Jakob et al. 2015]] ; [[#Rentschler--2017|Rentschler and Bazilian 2017]] ; [[#Solarin--2020|Solarin 2020]] ). The benefits of gasoline subsidies in developing countries accrue mainly to higher income groups, so subsidy reduction usually will reduce inequality ( [[#Coady--2015|Coady et al. 2015]] ; [[#Dennis--2016|Dennis 2016]] ; [[#Monasterolo--2019|Monasterolo and Raberto 2019]] ; [[#Labeaga--2021|Labeaga et al. 2021]] ). Some subsidies, like tiered electricity rates, benefit low-income groups. Reductions of broad subsidies lead to price increases for fuels, electricity, transport, food and other goods and services that adversely affect the most economically vulnerable ( [[#Coady--2015|Coady et al. 2015]] ; [[#Zeng--2016|Zeng and Chen 2016]] ; [[#Rentschler--2017|Rentschler and Bazilian 2017]] ). Distributing some of the revenue saved can mitigate the adverse economic impacts on low-income groups ( [[#Dennis--2016|Dennis 2016]] ; [[#Zeng--2016|Zeng and Chen 2016]] ; [[#Labeaga--2021|Labeaga et al. 2021]] ; [[#Schaffitzel--2020|Schaffitzel et al. 2020]] ).

The emissions reduction that could be achieved from fossil fuel subsidy removal depends on the specific context such as magnitude and nature of subsidies, energy prices and demand elasticities, and how the fiscal savings from reduced subsidies are used. Modelling studies of global fossil fuel subsidy removal result in projected emission reductions of between 1% and 10% by 2030 ( [[#Delpiazzo--2015|Delpiazzo et al. 2015]] ; [[#IEA--2015|IEA 2015]] ; [[#Jewell--2018|Jewell et al. 2018]] ; [[#IISD--2019|IISD 2019]] ) and between 6.4% and 8.2% by 2050 ( [[#Schwanitz--2014|Schwanitz et al. 2014]] ; [[#Burniaux--2014|Burniaux and Chateau 2014]] ).

An extensive literature documents the difficulties of phasing out fossil fuel subsidies ( [[#Schmidt--2017|Schmidt et al. 2017]] ; [[#Gass--2017|Gass and Echeverria 2017]] ; [[#Skovgaard--2018|Skovgaard and van Asselt 2018]] ; [[#Kyle--2018|Kyle 2018]] ; [[#Perry--2020|Perry 2020]] ; [[#Gençsü--2020|Gençsü et al. 2020]] ). Fossil fuel industries lobby to maintain producer subsidies and consumers protest if they are adversely affected by subsidy reductions ( [[#Fouquet--2016|Fouquet 2016]] ; [[#Coxhead--2018|Coxhead and Grainger 2018]] ). Yemen (2005 and 2014), Cameroon (2008), Bolivia (2010), Nigeria (2012), Ecuador (2019) all abandoned subsidy reform attempts following public protests ( [[#Rentschler--2017|Rentschler and Bazilian 2017]] ; [[#Mahdavi--2020|Mahdavi et al. 2020]] ). Indonesia is an example where fossil fuel subsidy removal was successful, helped by social assistance programmes and a communication effort about the benefits of reform ( [[#Chelminski--2018|Chelminski 2018]] ; [[#Burke--2018|Burke and Kurniawati 2018]] ). To-date instances of fossil fuel subsidy reform or removal have been driven largely by national fiscal and economic considerations ( [[#Skovgaard--2019|Skovgaard and van Asselt 2019]] ).

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