Removing direct and indirect subsidies on carbon intensive energy (such as lower value-added taxes) is a first step towards pricing that reflects the true cost of energy use. Removing subsidies will increase the price of carbon-intensive fuels and strongly influence adoption of industrial energy-efficiency measures because of the long lifetimes and slow turnover of energy intensive appliances and capital equipment.


Energy producing countries with subsidized fuel prices would also benefit from removing subsidies: carbon-intensive energy sources could be sold at much higher prices on international markets, with positive impacts on government budgets and export earnings, especially in an environment of rising energy prices. Whenever subsidies are removed, the social implications must be taken carefully into account, with compensating mechanisms introduced as necessary to protect poor and disadvantaged groups. Designing an effective way to remove energy subsidies is a major policy challenge. Eliminating the subsidies can have negative effects where, for example, they promote affordable energy for smaller firms.


Eliminating or reducing energy subsidies to encourage industrial energy efficiency should be combined with other measures to help vulnerable firms and households. Strategically redirecting subsidies (leveraging the free-rider effect of energy subsidies for firms that would have made energy-efficiency improvements anyway) can release money for new programmes to support more successful energy-efficiency investments and reduce budget outlays.