If we want to have a likely chance to stay below 2°, and preserve the possibility to stay below 1.5°, as agreed in Cancun, we need to phase out all fossil fuels by 2050. However, fossil fuel subsidies are a major obstacle to full decarbonisation. Despite the enormous threat climate change poses, countries keep subsidizing fossil fuels to the tune of USD 600-1000 billion a year.
These subsidies undermine climate protection as they prologue the use of fossil fuels, create disadvantages for renewable energy and disincentivise investments in energy savings. They also impose large costs on society and drain resources away from education and health care. Fossil fuel subsidies cause illness and premature deaths due to local air pollution. If such externalities are included, the costs to society for subsidizing fossil fuel are a staggering USD 5.3 trillion a year.
The climate benefits of removing fossil fuel subsidies would be gigantic. If governments were to both remove subsidies and start taxing fossil fuels correctly this could reduce global CO2 emissions by over 20% and raise global economic welfare by USD 1.8 trillion.
Most governments have acknowledged the benefits of such a phase out but little action has been taken so far. Similarly in the run up to Paris, little attention has been given to the phase out of such subsidies. European countries all still significantly subsidize fossil fuel use. Fossil fuel subsidies in Europe and elsewhere should be phased out and the revenues used to support wider public goods, including support for the transition to low-carbon energy systems and universal energy access.
In Paris countries should publically state their commitment to phasing out fossil fuels, starting immediately. After Paris, countries must put their words into action. In addition, the new climate agreement must include language that emphasizes the need to shift investment away from carbon-intensive infrastructure.