An Analysis of the Effects of Energy Subsidies on Carbon Dioxide Emissions from Electricity Generation

Abstract

Energy subsidies are a key governmental policy measure used to lower the cost of energy as a means of promoting economic development, alleviating energy poverty, increasing the competitiveness of specific industries, and reducing dependence on fuel imports. However, literature concerning the topic of energy subsidies demonstrates that these subsidies can lead to inefficient levels of production or consumption of energy, and result in an increase in greenhouse gas emissions. The purpose of this analysis is to examine how different types of energy subsidies used in the electricity market affect carbon dioxide emissions from electricity generation. I focus my analysis on fourteen developed OECD countries over the years 2005-2011. A country and time fixed effects regression model is used to measure the effects of production, consumption, and general services (RD&D) subsidies to fossil fuels, and general services (RD&D) subsidies to renewables on three emissions variables: CO2 emissions from electricity production per capita, CO2 emissions from electricity production per unit of electricity produced, and the percentage of total CO2 emissions from electricity production. The results indicate that fossil fuel consumption subsidies are significantly associated with increases in CO2 emissions per capita and CO2 emissions per unit of electricity produced. RD&D subsidies to renewables were marginally associated with increases in CO2 emissions per capita and CO2 emissions per unit of electricity produced. Recommended policy reforms should focus on the gradual removal of fossil fuel consumption subsidies coupled with continued emphasis on replacing inefficient fossil fuel combustion with cleaner sources of energy.