Washington, D.C. — Phasing out wasteful fossil-fuel subsidies brings significant economic, environmental, and energy security benefits, and the leaders of all of the world’s major economies have pledged repeatedly to do away with them. Yet counties continue to spend more than $500 billion every year on such subsidies. To meet this challenge, a new report released today by the Center for American Progress proposes the first financial instrument that would be specifically designed to roll back subsides by equipping countries with the financial leverage needed to overcome political obstacles to reform.
The chief obstacles to removing fossil-fuel subsidies are not technical or economic, but political: These subsidies are deeply woven into the political economies of many countries and are often justified as a way for governments to provide a public good to those in need. In truth, however, the vast majority of fossil-fuel subsidies are highly regressive, with most of the benefits accrued by those least in need. To roll back fossil-fuel subsidies while addressing the political barriers to removal, CAP is proposing a subsidy phase-out and reform catalyst, or SPARC, bonds. SPARC bonds function like a standard bond, allowing governments to raise money from private capital markets by promising to pay investors a fixed amount in the future, but what makes them unique is that they would be repaid exclusively from the savings accrued from phasing down fossil-fuel subsidies.
As outlined in the report, numerous benefits would flow from reforming fossil-fuel subsidies through SPARC bonds. First, they would be a financial boon for many countries, freeing up substantial public resources for development. Second, phasing out fossil-fuel subsidies would be a major step forward in the fight against climate change. Third, counties would reap the myriad of air quality and energy security benefits associated with curbing fossil-fuel usage. Finally, the bonds would help developed countries make critical progress toward fulfilling their international commitment from the 2009 Copenhagen Accord to mobilize $100 billion of climate finance from public and private sources annually by 2020.
“Inefficient fossil-fuel subsidies severely undermine our efforts to promote global economic development and combat climate change. Yet, perversely, countries spend some $500 billion annually—six times the amount spent to promote clean energy—to subsidize the consumption of fossil fuels,” said Pete Ogden, Senior Fellow and Director of International Energy and Climate Policy at the Center for American Progress. “SPARC bonds could reverse this trend by empowering countries to mobilize the resources they need to tackle the tough politics of phasing out fossil-fuel subsidies.”
While many countries have committed to phase out their inefficient fossil-fuel subsidies and institutions such as the World Bank and International Monetary Fund have ramped up their technical assistance to help counties reform subsidies, progress has been painfully slow. Backing, developing, and piloting robust SPARC bond programs provides a way for governments, international financial institutions, and advocacy groups to accelerate fossil-fuel subsidy phase-out.