Governments receiving revenue from fossil fuels will see a sudden gap in budgets if they don’t adapt their fiscal policy to the clean energy transition
A new report has warned that if governments receiving a lot of revenue from fossil fuels—whether through their consumption or production—will see a sudden gap in their budgets if they don’t start adapting their fiscal policy to the clean energy transition.
As the BRICS leaders’ summit starts in Brazil, a new report is the first of its kind to bring together data on both revenues and subsidies related to fossil fuels in Brazil, Russia, India, China and South Africa.
“Beyond Fossil Fuels: Fiscal Transition in BRICS“, from the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD) and Leave it in the Ground (LINGO), estimates that, in 2017, taxes and other revenues from fossil fuel production and consumption amounted to 23.6 percent of general government revenue in Russia, 17.8 percent in India, 6.8 percent in both Brazil and South Africa, and 4.2 percent in China.
“Moving away from fossil fuels will lead to a decrease in revenues for the BRICS governments in two ways: There will be a drop in fossil fuel prices and, over the longer term, less demand for and less supply of fossil fuels,” said Ivetta Gerasimchuk, co-author of the report and lead for Sustainable Energy Supplies at IISD.
“These risks are especially noteworthy for fuel exporters among BRICS: Russia for all fossil fuels, India for refined oil products, Brazil for crude oil and South Africa for coal. China and India also have pockets of dependence on fossil fuel production in coal-extracting regions,” she added.
“The BRICS governments’ budgets are already being eroded by subsidies to both fossil fuel production and consumption,” said Kjell Kühne, the research co-author, founder and director of Leave it in the Ground. “As we enter the fossil fuel endgame and the fossil fuel industry becomes less profitable, coal, oil and gas producers are pressuring governments for subsidies even more. It’s a vicious circle.”
Researchers focus on BRICS as a group of countries that increasingly influence the future of the global clean energy transition due to their growing role in the world’s economy and energy markets. In turn, the clean energy transition also affects BRICS through international climate commitments, the plummeting costs of renewables and domestic efforts to improve energy efficiency, energy security and local air quality.
The report calls on the BRICS governments to foster economic and fiscal diversification and strategic use of the current revenues from fossil fuels. To improve their fiscal stability, governments should phase out fossil fuel subsidies. In the short-to-medium term, they can also increase taxes on fossil fuels and carbon. Such revenues should be used as a temporary bridge to help fund the costs of transition.
The researchers also stress the need to use a portion of ongoing revenues from fossil fuels to cover the social cost of the clean energy transition, including the costs of protecting vulnerable groups. All BRICS countries have significant income inequality, and large portions of their populations are vulnerable to energy price increases. For vulnerable consumers, as well as for communities and workers dependent on fossil fuels, it is necessary to implement targeted support programs such as cash transfers, social safety nets and reskilling training. For example, China runs the CNY 100 billion (USD 14.5 billion) Industrial Special Fund for employment restructuring in coal-dependent areas.
Finally, BRICS governments need to harness public finance institutions and state-owned enterprises as vehicles of economic diversification for a clean energy transition. There are some signs of such diversification already emerging through the BRICS’s New Development Bank, Coal India Limited, and the merger of state-owned enterprises Shenhua and Guodian in China.
“The earlier the fiscal and broader socioeconomic aspects of the clean energy transition are anticipated, the less disruptive, less costly and more constructive the change will be for BRICS,” said Ivetta Gerasimchuk.