Reducing Carbon Emissions by Phasing Out Fossil Fuel Subsidies - Empirical Evidence from the Philippines

Abstract: Eliminating subsidies on fossil fuels is widely recognized as one of the most important steps in the fight against climate change. While fossil fuel subsidies have received increasing attention in research, there is little to no empirical evidence confirming the theoretical emission reduction potential of phasing out such subsidies. The present thesis aims to fill this gap and answer the question, whether phasing out fossil fuel subsidies on petroleum products reduces greenhouse gas emissions from transport at the real-world example of the 1996 fossil fuel subsidy reform in the Philippines. To this end, I construct a synthetic Philippines from a pool of comparable donor countries, where the fossil fuel subsidy reform did not occur. I then compare emissions from transport in the actual Philippines to this hypothetical counterfactual to isolate the effect of the reform from other confounding factors. The results suggest that nine years after the reform, emissions were 26% lower compared to the scenario where fossil fuel subsidies persisted. In absolute terms, the elimination of fossil fuel subsidies reduced emissions by more than 33 million tons of CO 2 equivalent between 1996 and 2004. The results are statistically significant at the 1% level and robust to all standard robustness tests from the synthetic control literature. The present thesis complements the mostly theoretical modeling literature by providing some first ex-post empirical evidence that phasing out fossil fuel subsidies substantially reduces greenhouse gas emissions.