The World's #1 Renewable Energy Network for News, Information, and Companies.

'Sunset Credits' Could Mark End of Day for Oil Subsidies

'Sunset Credits' Could Mark End of Day for Oil Subsidies

There may be little reason to hope the Rio+20 meeting in Brazil this week will lead to major global action against climate change. World leaders have skipped it. The draft agreement the delegates from 190 countries have written is rightly criticized as weak.

Yet it turns out that one specific climate challenge — how to eliminate subsidies for fossil fuels such as oil, gas and coal — is attracting extraordinary interest in Rio de Janeiro and might at least inspire countries to take small but significant steps toward reducing greenhouse-gas emissions.

These rising subsidies cost the world $409 billion in 2010, according to the International Energy Agency. If no efforts are made to curtail them, they could reach $660 billion by 2020, 0.7 percent of global gross domestic product.

What’s at least as bad is that the subsidies keep the price of fossil fuels below market rates — so low as to discourage measures to improve energy efficiency. Getting rid of them could lower total energy demand by 4.1 percent by 2020, the IEA estimates.

Simply ending the subsidies would boost the price of power, however, and leaders naturally want to avoid a popular pushback, whether at the polls or in the streets, especially at a time of financial hardship. That is not the only option.

Our corporate colleague Michael Liebreich, the chief executive of Bloomberg New Energy Finance, has devised a way to phase out fossil-fuel subsidies and, in the process, replace them with financial support for energy-efficiency efforts and renewable power. It’s a strategy that could work in countries large and small — without provoking backlash.

Here’s how it would work: A government would continue providing its energy subsidies for three to 10 more years, but transform them into credits. The recipients would be free to spend these, at least in part, on renewable forms of energy. Where credits could be directed to individual consumers, they could be spent on improvements such as insulation, efficient appliances and rooftop solar panels. Because the credits would not favor one kind of power over another, many renewables would be able, for the first time, to compete strongly against fossil fuels.

Wind energy, for instance, could, on a level playing field, cost as little as 6.5 cents per kilowatt-hour, BNEF estimates. That is about the same as power from new coal plants and, outside the U.S., cheaper than natural gas. Biomass, geothermal and hydro power can also be competitive with coal. And although solar power on a large scale remains relatively expensive, rooftop systems can provide cheaper-than-retail power in many markets. In the developing world, solar lanterns cost less to operate than kerosene ones.

Governments could pay out these “sunset credits,” as Liebreich calls them, in various ways. Where subsidies have been provided to consumers, they could be replaced by rebates on energy bills or by monthly or quarterly vouchers, redeemable with retailers and installers of renewable power or equipment that improves efficiency. If consumers are made aware that the credits will eventually end, they will have the incentive to invest in strategies that ultimately lower their household energy bills.

Those retailers and installers who are paid with sunset credits would in turn surrender them to a redeeming agent — the government, perhaps, or a bank or other lending institution — to be reimbursed the market price for their products and services.

Where subsidies are traditionally given to providers such as electric utilities, those companies would receive the credits and could either pass them along to their customers to spend on efficiency, or invest them in renewable-energy generating capacity or in their own efficiency measures.

In places where governments subsidize gasoline or diesel, credits could be spent on transportation alternatives. Delivered in the form of vouchers, debit cards or mobile-phone banking credits, they could be spent on public transportation fares, more fuel-efficient vehicles, even bicycles.

It’s easy to see, too, how sunset credits could attract investment in renewable power and in technologies that increase energy efficiency, as banks and other lenders provide upfront capital in return for the promise of credits down the line. The lenders could either redeem the credits or perhaps sell them to pension funds, life-insurance companies and other long-term asset holders, and a new credit market would be formed.

Setting up such a system would take effort and money, it’s true. And it would certainly be complicated; mechanisms would be needed to protect against fraud, for example. But such investments are worthwhile if they enable governments to stop spending public money to make fossil fuels unnaturally cheap. The draft agreement for the Rio+20 meeting only vaguely commits countries to phasing out the subsidies. Sunset credits offer a way for them to make it happen.

Copyright 2012 Bloomberg

RELATED ARTICLES

Green microphone podcast

Listen Up: Does Solar Increase the Value of my House?

The Energy Show on Renewable Energy World I bet you don’t know that there is a home improvement investment that you can make that will increase the value of your house more than the investment cost. It’s not remodeling your bathroom (2 percent return). It’s not la...
Thumbs up

Even Solar Haters Are Loving SunEdison's Power Plant Strategy

Christopher Martin, Bloomberg

SunEdison Inc.’s focus on developing renewable energy plants worldwide, rather than the panels that make them work, has won over one of the industry’s top critics.

Clock sky

German Utility's Race for Renewables Seen as Too Little, Too Late

Tino Andresen, Bloomberg

RWE AG, the German utility whose coal-fired plants make it Europe’s largest carbon emitter, officially started the company’s largest renewables project on Thursday: a wind farm in Liverpool Bay off Britain’s coast.

money pile

Deeper Capital Markets for Renewable Energy

Tomas Gardfors and Ann Vesely, Norton Rose Fulbright Following the global financial crisis, a more diversified funding market is developing in Europe. Institutional investors are helping to fill the funding gap left by the contraction in bank lending in the wake of the crisi...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 3
1505REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

FEATURED PARTNERS



EVENTS

Doing Business in South Africa – in partnership with GWEC, the Glob...

Wind Energy in South Africa has been expanding dramatically, growing fro...

SAP for Utilities

The SAP for Utilities conference is the most comprehensive SAP for Utili...

Training: Preparing for Rule 21 - SPI 2015

What: Rule 21 Training When: September 16th @ 4:30-5:30pm Wher...

COMPANY BLOGS

8 Bad Habits Of Communication

Effective communication is essential in building rapport and closing sal...

Powerpoint Or Stream Of Consciousness

Before you create a presentation, you have to ask yourself, “What ...

The Almost There Markets: Just Give ‘Em Some Time

Earlier this year, we reported on recent legalization of third party fin...

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS