Subsidisation is not the only or even main form of climate finance. Currently a large
share of such flows is private investment in
commercially viable renewable energy projects
and the like. But such investments are also
closely related to subsidisation. Commercial
investment only becomes attractive, after
all, where a regulatory framework is in place, or is expected to be put in place,
that in effect imposes a fiscal cost in order to make renewable energy competitive with fossil fuel based energy sources. Regulatory mechanisms aimed at levelling costs, such as a carbon tax, may impose adjustment costs on society over the short- and medium-term that put additional pressure on the fiscus, particularly in countries such as South Africa that have an established fossil fuel based energy sector. Over a transitional period of ten to twenty years the imposition of a carbon tax will generate both
increased energy prices and a shift to
renewables, with the latter, more desirable
supply side response coming to dominate over
time. Initial higher energy costs, and their
impact on poorer households in particular, can and should be compensated for through
recycling carbon tax revenues.
