Subsidy Phase-out and Reform Catalyst Bonds by pogden

Hi, we were not sure how to amend the proposal to respond to the judges comments, but please find our responses to the questions above as follows: • Need more fleshing out about where the money is coming from and which institutions will be involved. Is there any evidence of interest among International Financing Institutions? Governments? Efforts to reform fossil fuel subsidies have been gaining traction and increased momentum in recent years. In 2009 and 2012, the G20 has called for a phase out of fossil fuel subsidies around the world. World Bank President Jim Yong Kim similarly called for removal of fossil fuel subsidies at the World Bank Group’s 2015 annual spring meetings. This interest among the world’s developed countries and International Financing Institutions suggests a foundation on which a pilot for SPARC bonds could be built. G20 countries back their calls to reform global fossil fuel subsidies with seed capital to develop a finance facility to attract private investors, support distribution of SPARC bonds, and provide backing to the initial bonds. Backed by international financial institutions—and potentially subsidized by donor countries—SPARC bonds would allow a government to raise money at better terms than the market could currently provide. • There are several financing innovations in this space – it would be helpful to provide an overview of some of them and explain how this product is different. Currently, the World Bank and other IFIs provide green bonds to finance lending for projects focused on climate change mitigation and adaptation. These bonds raised from private investors support World Bank projects with a mission to combat climate change. As a result, this financing is targeted at clean energy projects and infrastructure resilience. While laudable and necessary, combatting climate change requires reform of the perverse incentives fossil fuel subsidies create in national energy markets. Fossil fuels are subsidized at a rate five times greater than renewable energy subsidies. Green bonds cannot erase this difference alone. Additionally, international financing institutions have a history of providing bonds for social and infrastructure projects. However, these bonds are intended for specific purposes dictated by project proposals. SPARC bonds would be more flexible in order to facilitate reform through coalition building. Government leaders could dictate the best methods for investment based on the needs of their citizens and the concerns of affected parties. Furthermore, repayment of most IFI bonds do not require government payback from a specific source of capital. As a result, these bonds are paid back through traditional methods of debt repayment, and fail to encourage governments to change the status quo. SPARC bonds would be conditionally issued to countries in need of assistance reforming their fossil fuel subsidies in exchange for long-term reductions in fossil fuel subsidy reductions. • Needs more robust discussion of the economic impacts and feedback of this intervention. Are we essentially taking oil revenues to pay off the loan? What happens to overall GDP and economic activity in these states when the fossil fuel sector shrinks or leaves? SPARC bonds would be repaid through savings accrued from fossil fuel subsidy reform. In other words, the money not spent by governments to subsidize fossil fuels below their real price would be used to repay the bond. Whether or not this would be financed with oil revenue would obviously depend on the tax base of the particular government using a SPARC bond (e.g. in Saudi Arabia oil revenue makes up the lion’s share of government revenue, while in India it does not). Even in the case of governments with significant oil revenues, the elimination of subsidies would reduce harmful economic distortions. In a similar vein, the broader economic effects of subsidy reform will depend on the several aspects of the country in question: the form subsidies take, the beneficiaries (e.g. producers or consumers), the role of the fossil fuel sector in the wider economy, etc. For this reason any country reforming energy prices, via SPARC bonds or other means, would need to model the effects of reform for their particular context. • Political feasibility: fossil fuel subsidies are deeply entrenched for political reasons, not just economic reasons. How will these considerations be addressed? Is a project requiring this level of multilateral decision-making and cooperation really feasible? The purpose of SPARC bonds is to provide the capital necessary for coalition building that can overcome the political forces that keep fossil fuel subsidies deeply entrenched in many countries. Fossil fuel subsidy reform can reduce strain and enhance stability on government budgets over the long term. However, reform can also elicit protests, unrest, and opposition in the short term. Governments could use the proceeds from SPARC bonds to invest in low-carbon alternatives to fossil fuels, conditional cash transfers to citizens, protection for vulnerable populations that may benefit from subsidies, or other social projects that could mobilize powerful new coalitions for reform. SPARC bonds would be backed a central facility housed within an IFI or similar institution such as the Green Climate Fund, which would provide a central point for multilateral negotiations and facilitate bond repayments. • Does the time scale of this solution match the time scale of the problem? Decarbonizing economies is a very long-term problem, but the bonds are potentially a much shorter-term solution. Fossil fuel subsidy reform could provide an immediate impact on a countries seeking to reduce fossil fuel consumption, while supporting clean energy markets by leveling the playing field between industries. Reducing fossil fuel demand is the first step to decarbonizing national economies, and the best way to do that is by bringing market prices in line with the actual costs of fossil fuels. A 2010 report by the IEA found that a 10 year phase out of fossil fuel subsidies in 40 non-OECD countries including India, Indonesia, and Saudi Arabia, would reduce energy-related carbon dioxide emissions 7 percent by 2020. Subsidy reform in these countries to reduce demand for these fuels could catalyze long-term emissions reductions by promoting market preference for cleaner forms of transportation and electricity generation. Decarbonizing economies will depend in part on shifting the balance of incentives away from fossil fuel. Fossil fuel subsidies that artificially depress the cost of fossil fuels promote continued investment at the expense of renewable energy. In the Middle East, this disparity is particularly acute. Oil subsidies in the Middle East reduced projected 2020 costs of oil based electric generation by 70 percent, well below the costs of renewable energy. Without subsidies, onshore wind electricity was about half the cost of oil based electricity and solar PV was two-thirds the cost. Therefore, immediate solutions such as SPARC bonds to catalyze market shifts have the potential to spark movements to decarbonize participating economies around the world. Additional information about the concept can be found at https://www.americanprogress.org/issues/green/report/2014/06/25/90277/subsidy-phase-out-and-reform-catalyst-bonds-2/ Thank you, Ben Bovarnick on behalf of Pete Ogden