Sunset Credits – a tool for removing fossil fuel subsidies

Executive Summary

Sunset Credit schemes offer an innovative approach to removing fossil fuel subsidies, avoiding the risk of popular discontent, while at the same time attracting investment for renewable energy and energy efficiency.

This White Paper describes an innovative approach to removing fossil fuel subsidies, without triggering popular backlash, while at the same time supporting the introduction of modern renewable energy technologies and building capacity in developing economies.

Under a Sunset Credit scheme, a government which is currently subsidising fossil fuel consumption would commit to continuing payments for a fixed period of time, most likely between three and 10 years. However, the ongoing subsidies would take the form of credits. The recipients will then be free to decide whether to continue benefiting from the subsidy, or to apply the credits to the purchase and installation of clean energy technologies. These might include energy efficiency measures, renewable heating, cooling or power generating equipment, depending on local conditions. In either case, the subsidy is removed at the end of a fixed period, in the region of three to 10 years.

Implementing a Sunset Credit scheme would require overcoming a number of barriers. These include dealing with the administrative burden; ensuring the presence of clean energy distributors and installers; and financing the replacement of ongoing subsidy payments with up-front investment in clean energy technologies.

By allowing third parties to aggregate Sunset credits once they have been spent on clean energy technologies, it should be possible to tap into sources of funding on advantageous terms from third party investors of various types. A Sunset Credit scheme would contribute to capacity-building among local clean energy solution providers, as well as in financial services and among policy-makers.

In particular the Sunset Credit approach would be ideal in situations – and there are more and more of them around the world – where clean energy already out-competes fossil energy on a level playing field. Schemes can still be implemented where clean energy is more expensive than conventional alternatives, but additional forms of support, in terms of deep concessionary finance or grant funding, would need to be found.

In macro-economic terms, Sunset Credit represents a jiu-jitsu move: it uses the very cash flow which represents a misallocation of resources in the economy to fund investment in clean technologies, and thus to remove the need for subsidy at source.

Sunset Credit schemes will not be appropriate in every situation. However, they might prove a useful tool for some governments wanting to retire fossil fuel subsidies which are draining their resources, without triggering the popular discontent which has made it so hard to take action in the past.

Please download the full white paper for more detailed analysis.

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