Environmental Finance - Slashing subsidies on fossil fuels is likely to be the best first step to encourage the switch to low-carbon energy systems, given the problems in imposing carbon pricing, according to experts.

“The first thing to do is to remove the subsidies for fossil fuels,” said Chris Llewellyn Smith, director of energy research at the University of Oxford, speaking at the ReSource conference in the city today.

Of the $400 billion a year spent subsidising fossil fuels - which is often justified in terms of helping the poor, he said - the International Energy Agency has found that only 8% goes to the poorest 20%. “It’s a colossal subsidy to the people in this room, the better off,” Llewellyn Smith added.

“A good, clean, material [carbon dioxide] price, that would be a major mover, and that’s where we need to go,” said Ernie Moniz, director of the Massachusetts Institute of Technology Energy Initiative.

Andrew Gould, chairman of UK gas company BG Group, described the system of fossil fuel subsidies as “completely dysfunctional”, noting that the Italian state makes more from the sale of gasoline than Abu Dhabi does from producing it, given the tax it levies.

“I’m just very sceptical that we’re going to go there, globally … until we get the cost increment [of low-carbon technologies] lower, to encourage policy-makers.”

Yes, a carbon price would have a big effect, but it’s very difficult to do,” agreed Llewellyn Smith. He suggested that those jurisdictions that do introduce carbon pricing, such as Europe, should introduce import tariffs on those that don’t. Not pricing carbon “should be seen as a subsidy, a subsidy for destroying the planet”.

Poppy Allonby, a managing director at Blackrock Investment, who co-manages the firm’s New Energy Fund, said: “From an investment point of view … the main thing is stability, whether it’s a subsidy programme, or tax programme. That’s the key thing an investor is looking for.

Llewellyn Smith added that there is an urgent need to increase research and development (R&D) spending by governments. “A higher carbon price will drive innovation in the private sector, but there’s a lot of long-term things that the private sector won’t do.”

He said that the $25 billion of publicly funded R&D in the energy sector is at roughly the same levels, in real terms, as was spent in 1981.