SUBSIDIES, PRIVILEGES, UNPRICED EXTERNALITIES AND THE ENERGY TRANSITION

In order to meet the Paris Agreement objective that the global temperature rise be kept to “well below 2 °C”, the global energy sector requires nothing short of a complete transformation, during the coming decades. At the same time, while the political will to avoid
dangerous climate change demonstrated by the countries of the world in signing the Paris Agreement is welcome, as the IPCC Special Report on “Global Warming of 1.5 °C” makes clear, time is of the essence.

The IRENA analysis demonstrates that renewable energy technologies are increasingly cost-competitive in many geographies and markets and that the energy transition will yield significant economic benefits New-build renewable power generation technologies, increasingly without subsidies, will even displace existing coal, or nuclear power plants. This is because their total lifetime costs are lower than these older plants’ variable operating costs. This trend implies that the energy transition is both ecologically and economically sustainable.

WHAT PURPOSE DO SUBSIDIES SERVE AND HOW TO DEFINE THEM?
Subsidies can arise as the result of deliberate interventions by governments, or as the unintended consequences of policy decisions, or from market failures. Energy subsidies are not necessarily bad per se, but this depends on how and why they are being implemented.2
What matters are the objectives being pursued and how the subsidies may interact with other
policy priorities.

Unfortunately, there has been little progress in ensuring that fossil fuels pay the full cost of their negative externalities, whether from local or global pollutants. In the absence of taxes or quotas set at optimal levels (to create a market), policy makers have often looked for alternative options to deploy renewables to address market failures in the energy sector
and unlock the dynamic economies of scale many renewable technologies exhibit. The use of subsidies in this context can be seen as governments trying to ensure that the market operates more efficiently than today.

Different definitions of energy subsidies Today, there is no systematically applied, standardised
definition of what an energy sector subsidy is, despite the prevalence of subsidies in the energy system. Even without this uncertainty around definitions, given the breadth and complexity of support given to different energy sub-sectors or fuels, calculating subsidy levels
or unpriced externalities can be difficult (Sovacool, 2017).

Expanding on definitions: Categorising and calculating subsidy levels
Although the differences in definitions can explain some of the differences in subsidy estimates, what is clear is that the focus of different institutions can not only affect their decision about what methodology to use in the calculation of subsidies, but also what types
of policies are included in their analysis. This can be due to:
• The policy question being addressed by the institution.
• Fundamental differences in the conception of what policies represent energy sector subsidies.
• Data limitations, or limits in the institutional resources available for subsidy analysis.

ENERGY SECTOR SUBSIDY ESTIMATE

The present part of the analysis examines the levels of energy sector subsidy estimates made by some of the major institutions that have produced reports on global subsidy levels. The focus is on comprehensive studies that look at global subsidy levels. This is in order to ensure that the numbers presented are as comparable as possible. There are, however, a number of important regional subsidy estimates, particularly for fossil fuels, that can in some cases provide useful detail to complement or inform these global estimates. Notable examples
include fossil and renewable energy subsidies in Europe (Trinomics, 2018; and Gençsü and Zerzawy, 2017), fossil-fuel subsidies in Asia (ADB, 2016), and federal tax subsidies in the United States (CBO, 2016; and CRS, 2017). There is also a significant body of analysis and data at a country level compiled by the International Institute for Sustainable Development’s Global Subsidies Initiative.

RENEWABLE ENERGY SUBSIDIES
To-date, analysis of energy sector subsidies at a global level has predominantly focused on environmentally harmful subsidies to fossil fuels,13 given their dominance in the global energy system and total energy subsidies. There are therefore fewer estimates of the financial support given to renewables, calculated on a comprehensive and comparable basis. As a result, available data are often partial, collected on a different basis and difficult to compare. The exceptions are the data in the IEA’s World Energy Outlook, which takes a price-gap approach to estimating renewable energy subsidies, and the analysis.

To give a few examples, data is available for: the German electricity surcharge that funds the deployment of renewable power generation 14 (calculated using a price-gap methodology that also includes some administrative aspects); the United Kingdom’s Renewables Obligation Certificates, Feed-in-Tariffs (FiTs), Contracts for Differences (CfDs) and Renewable Heat Incentive (BEIS, 2016 and 2018); and the United States’ support through the production and investment tax credits for wind and solar (Congressional Research Service, 2017). There are also the regional subsidy estimates that have been mentioned. All of these sources usually apply either a price-gap or inventory of programme costs methodology, making comparability
and completeness an issue. For attaining an order of magnitude of what total subsidies may look like globally to renewable energy, however, this is a useful starting point.

The price-gap approach has the advantage of capturing the subsidy rate required to bridge the gap between a renewable technology and the incumbent. Its accuracy depends, however, on choosing the right reference price and in being able to accurately calculate the cost of energy or service delivered by the 27 For instance, by 2015 state-level rebates for solar PV systems had fallen from between USD 1 to USD 4/W by state in 2010 to between USD 0 to USD 0.8/W in 2015 (LBNL, 2018). renewable technology. Neither of these tasks are trivial,
particularly for renewables, given that site-specific factors can greatly impact costs. As a result, the price gap approach is at best an imperfect measure, but is a useful and efficient way of trying to capture policies that reduce the price required for a renewable project to be competitive.

On this basis IRENA has estimated the supply-side subsidies for renewable energy to have been around USD 167 billion in 2017, with total subsidies to renewable power generation of around USD 128 billion in 2015 and transport sector subsidies of USD 38 billion (Figure 4).

Focusing on the renewable power generation technologies receiving support by country/region (Figure 5) reveals that in 2017, Japan had the highest share (77 %) of support going to solar PV (which is also the highest share for one technology). This reflects the overwhelming dominance of solar PV in recent deployment (IRENA, 2018b). Of the EU’s USD 78 billion subsidies for renewable power generation in 2017, 40 % supported solar PV, 23 % supported onshore wind, 22 % went to bioenergy power generation, 7 % to offshore wind, 5 % to “hydropower, geothermal and others” and 3 % to CSP.

Subsidies for biofuels are less concentrated in one region than those for power generation. The United States, with an estimated USD 14.1 billion in subsidies for biofuels, accounted for 37 % of total biofuels subsidies in 2017. As the EU accounted for around 30 % (USD 11.4 billion), the United States and the EU combined therefore accounted for around two-thirds of the total, while India accounted for 2 % (USD 0.9 billion) and China and Japan for 1 % each. The
rest of the world accounted for 30 % (USD 11.4 billion).

Methodology matters: Fossil-fuel subsidies in Germany
The latitude for interpretation in some subsidy definitions, in combination with the different possible calculation methodologies, can have a large impact on country-level subsidy estimates. Subsidy estimates must therefore be clearly documented to allow comparisons to be made.

This is not the largest estimated of fossil-fuel subsidies in Germany, however. Separate analysis conducted for Greenpeace identified the even higher 2016 level of USD 53 billion (Zerzawy, 2017). Most of the difference results from the inclusion of value added tax exemptions for international flights and tax deductions possible by individuals for travel to work by vehicle.
Finally, the IMF estimates Germany’s “pre-tax subsidies and forgone tax revenue” at USD 10.8 billion in 2015, similar to the German self-assessment, but with total subsidies of USD 74 billion. The vast majority of these subsidies come from externalities, with global warming
accounting for USD 22 billion and local air pollution for USD 34 billion.

NUCLEAR POWER SUBSIDIES
Comprehensive global estimates of the subsidies received by the nuclear power sector are currently missing from the total energy sector subsidies debate for incumbent technologies. Indeed, if the situation in terms of cataloguing global fossil-fuel subsidies still leaves much to be desired, the state of knowledge about nuclear is even worse. In part, this is because many nuclear power subsidies are more obscure and indirect than for renewables and fossil fuels and the absence of direct cash transfers makes it harder to estimate their value.

TOTAL ENERGY SUBSIDIES IN 2017 AND THEIR EVOLUTION TO 2050: THE REMAP CASE

This section brings together the IRENA estimates for subsidies for renewables and the adjusted combined IEA/OECD fossil-fuel subsidies, as outlined in the previous sections. Combining the estimates of fossil fuel, renewable and nuclear power subsidies yields an estimate of total direct energy sector subsidies for 2017 of USD 634 billion (Figure 10). The total is dominated by the subsidies received by fossil fuels, which account for 70 % (USD 447 billion). Subsidies
to renewable power generation technologies account for around 20 % of total energy sector subsidies (USD 128 billion), biofuels for 6 % (USD 38 billion) and nuclear for at least 3 % (USD 21 billion), but potentially more, as already noted.

TOTAL ENERGY SECTOR SUBSIDIES TO 2050
IRENA has used the analysis in the REmap Case (IRENA, 2019a), in conjunction with the current
estimates of total energy sector subsidies in 2017, to analyse how total energy sector subsidies out to 2050 might evolve if the world is to stay on track to achieve the Paris Agreement climate goal of restricting global warming to 2 °C or less.

Figure 12 provides an overview of the evolution of some of the key energy sector indicators out to 2050 in the REmap Case that are part of the underlying drivers of the evolution in energy sector subsidies outlined. Although subsidies may provide only one metric by which the transition can be measured, policy makers could benefit from understanding how subsidy needs in the energy sector could evolve over the period until 2050.

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