Fossil fuel subsidies are a country by country game and they can not be looked in isolation of achieving transition, what lies beneath is a bigger opportunity of how to finance a world where it becomes easy to remove such dependency and robust mechanism to move on to renewable energy projects.
Looking at the chart of carbon budgets and decarbonization paths, did you ever think about fossil fuel subsidies and how it works in current state?
Well let me put it it context of developing world and our desire to decarbonize faster and i am jumping several hoops to arrive at this big IF....and that IF is-
In the developing countries, government (if) removes fossil fuel subsidies it can lead the country to shift faster to renewable energy, however there is a challenge of limited finance being available (all things being equal). Why? Financing renewable energy projects can be difficult in developing countries due to lower creditworthiness. Perhaps the finance providers role is to find a different model of providing finance (and the associated metrics they use for judgement - its not a level playing field)
(A 2023 study by the International Institute for Sustainable Development (IISD) found that removing fossil fuel subsidies in India could lead to a significant increase in renewable energy deployment. However, the study also highlighted the importance of other policy measures, such as investing in renewable energy infrastructure and providing financial support to low-income consumers.)
Food for thought – It matters what type of subsidy gets removed. Removing subsidies on consumer prices may have a different impact than removing subsidies for producers. Well there are several strategies that can help banks and financial service providers address these difficulties (I am hoping markets do react to incentives that create new opportunity), these strategies do target on reducing risk e.g. by
1.     Using green bonds (impact investing), Climate investment funds (CIF)
2.     Multilateral institutions, development banks or even governments can offer credit guarantees or share risks to incentivize private lenders. Or, Partnering with NGOs, local communities, and other stakeholders can address social and environmental concerns and attract diverse forms of investment.
3.     perhaps blended finance to mitigate risks for lenders and attracting private investors
For example, Rural Electrification in Rwanda used blended finance approach (combined AfDB loan, World Bank grant, and private sector investment) in order to scale Up of Mini-Grids,
Partners and what they did?:
Government of Rwanda: Provided policy support, regulatory reforms, and rural electrification targets.
African Development Bank (AfDB):Â Financed the project with $75 million loan.
World Bank:Â Provided technical assistance and grant funding for project development.
Private Sector:Â Mini-grid developers like Off-Grid Electric and BBOXX built and operated the mini-grids.
Local Communities: Engaged in project planning, provided land access, and became customers.
 However, one of the underlying issues is to do with credit rating system. Improving to develop credit rating systems that consider environmental and social factors, not just traditional financial metrics, can better assess project risks and attract investment. The ESG-focused credit rating system are fast evolving tool set and the following systems can be used by credit decision makers.
Do share what does your organization use?
Moody's ESG Risk Score (click here to know more) : This framework assesses companies' environmental, social, and governance (ESG) risks and opportunities, providing investors with insights beyond traditional financial metrics. While not specifically focused on project financing, it can inform investment decisions in renewable energy companies operating in developing countries.
Sustainalytics ESG Risk Ratings (click here to know more) : Sustainalytics offers ESG risk ratings for companies and projects, considering environmental, social, and governance factors to assess the ESG performance and potential risks of renewable energy projects.
IFC Environmental and Social Sustainability Policy (ESSP) (click here to know more) : The International Finance Corporation (IFC) has a robust framework for assessing environmental and social risks and opportunities in projects it finances. This framework can be adapted and used by other financial institutions to develop their own ESG-focused credit rating systems for renewable energy projects.
Global Off-Grid Rating System (GOFR) (click here) : This initiative aims to develop a standardized credit rating system for off-grid renewable energy projects, focusing on financial viability, technical soundness, and social impact in developing world
Green Infrastructure Rating System (GIRS): This system is under development by the World Bank and aims to assess the environmental, social, and economic sustainability of infrastructure projects, including renewable energy.