Managing Energy Price Crises
Alternatives to fossil fuel subsidies
This report outlines a strategic decision framework for responding to fossil fuel price shocks. It sets out a two-tier approach: first, prioritizing measures that protect consumers and reduce fossil fuel demand without creating new fossil fuel subsidy entitlements; and second, where fossil fuel support is hard to avoid, ensuring that it is limited, well targeted, transparent, time-bound, and linked to efforts that reduce future dependence on fossil fuels.
Policy Recommendations
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Prioritize Tier 1 measures that protect consumers and reduce fossil fuel demand without creating new subsidy entitlements.
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If Tier 1 measures fall short and fossil fuel support is considered, ensure it is targeted, transparent, and timebound (the 3Ts).
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If fossil fuel support is provided to businesses and industry, it should include conditions or incentives that encourage recipients to reduce fossil fuel dependence over time.
Geopolitical tensions and fossil fuel market volatility continue to expose the vulnerability of economies deeply dependent on internationally traded fossil fuels. While untargeted fossil fuel subsidies offer short-term relief during energy price spikes, they place pressure on public budgets and risk deepening the very dependence that makes economies vulnerable in the first place. To build a more resilient economy, governments must support people, not fossil fuels.
This report outlines a strategic decision framework policy-makers can use when responding to fossil fuel price shocks through a two-tier approach.
Tier 1 measures protect consumers and reduce fossil fuel demand without creating new subsidy entitlements in the form of:
- targeted, energy-neutral support for vulnerable households and affected businesses
- measures that reduce demand and save energy
- incentives for renewable energy, storage, efficiency and electrification
Tier 2 measures include emergency fossil fuel support, to be used only when Tier 1 measures fall short. Policy-makers are advised to ensure any fossil fuel support follows the 3Ts:
- Targeted Focused on vulnerable households, essential services or clearly affected sectors.
- Transparent Clear about its purpose, cost and beneficiaries.
- Time-bound Designed with end dates, reviews and phase-out mechanisms.
Furthermore, any new fossil fuel support for businesses should be explicitly linked to efforts that reduce fossil fuel use over time.
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