How harmful are fossil fuel subsidies to the diffusion of low-carbon energy technologies?

Abstract

Global fossil fuels subsidies remain large despite the evident environmental and economic gains from their removal. The increasing attempts to avert climate change-related challenges while creating economic opportunities are promoting energy transition through investments in low-carbon energy technologies and their diffusion. Yet, the existing literature has not assessed how fossil fuel subsidies influence the international trade and diffusion of low-carbon energy technologies. This investigation attempts to shed light on this question by studying the relationship between fossil fuel subsidies and the diffusion of low-carbon technologies using an unbalanced panel for 167 countries and the period 2017 to 2021. By relying on the theoretical framework of gravity model of international trade, we apply the Poisson Pseudo-Maximum Likelihood (PPML) estimator. The results establish a link between international trade in energy technologies and fossil fuel subsidies. The results reveal that fossil fuel subsidies reduce import demand for low-carbon energy technologies and also discourage exports of these goods. Disaggregated analysis shows that especially explicit subsidies reduce the diffusion of low-carbon energy technologies to importing countries. In comparison, both explicit and implicit subsidies are responsible for increasing exports and imports in conventional energy technologies. Meanwhile, implicit subsidies related to air pollution have a negative effect on trade in all energy technologies. Additionally, explicit subsidies for coal and electricity reduce low-carbon exports while subsidies for electricity and natural gas reduce import demand for low-carbon energy technologies.