Mercedes Mullins
Fossil fuel companies are profitable, and they receive substantial government subsidies. These subsidies are intended to protect consumers by keeping prices low, but they have significant fiscal, environmental, and societal consequences. The removal of subsidies could reduce air pollution, generate revenue, and contribute to slowing climate change. However, eliminating subsidies can be challenging, as governments must carefully implement reforms to ensure vulnerable households are not disproportionately impacted by rising energy prices. While fossil fuel companies are highly profitable, the subsidies they receive distort energy markets and prevent a level playing field for renewable energy sources.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Fossil fuel subsidies in 2023 | $8.2 trillion |
| Fossil fuel subsidies in 2025 | $760 billion |
| Fossil fuel subsidy removal impact | Reduced air pollution, revenue generation, contribution to slowing climate change, reduction in health risks of air pollution, and reduction in global carbon emissions |
| Fossil fuel companies' tax structure | Master Limited Partnerships (MLPs) that exempt the company from corporate income taxes |
| Fossil fuel industry funding | Federal funding in the form of project loans, grants, and guarantees |
| Fossil fuel industry benefits | Tax breaks, royalty relief programs, and indirect benefits |
| Fossil fuel industry profits | Billions of dollars in revenue each year |
| Fossil fuel industry consequences | Increased greenhouse gas emissions, air pollution, and climate change |
| Fossil fuel industry policy | G20 countries pledged to phase out inefficient fossil fuel subsidies |
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What You'll Learn
Fossil fuel subsidies are direct financial incentives and tax breaks
While it’s difficult to pinpoint the largest contributor without detailed government budget data and economic modelling, the Expensing of Intangible Drilling Costs (IDCs) and Percentage Depletion Allowance are generally considered to be the major direct subsidies that benefit the US fossil fuel industry. As shown in Table 1, these are just two of many tax breaks available to the fossil fuel industry, though other subsidies likely contribute to a lesser extent.
In addition to research and development projects funded through Department of Energy programs, the fossil fuel industry receives federal funding in the form of project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). These sources of funding are meant to provide capital and fiscal security for investments in emerging markets overseas, but in many cases, they serve to subsidize the expansion of the mature and highly profitable fossil fuel industry. This can result in increased greenhouse gas emissions from projects in countries with weaker environmental regulations.
Fossil fuel subsidies have sizable fiscal consequences (leading to higher taxes/borrowing or lower spending), promote inefficient allocation of an economy’s resources (hindering growth), encourage pollution (contributing to climate change and premature deaths from local air pollution), and are not well targeted at the poor (mostly benefiting higher-income households). Removing subsidies and using the revenue gain for better targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes.
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Fossil fuel companies receive federal funding
Fossil fuel companies are highly profitable, and they receive substantial government subsidies and federal funding. In 2022, fossil fuel subsidies in the United States totaled $757 billion, with $3 billion in explicit subsidies and $754 billion in implicit subsidies. These subsidies are ultimately funded by taxpayers, who also bear the costs of negative externalities, such as negative health impacts and environmental degradation.
The fossil fuel industry receives federal funding in various forms, including research and development projects funded by the Department of Energy. The federal government spent $121 million on research and development for natural gas and petroleum liquids in 2022, and $280 million on coal research and development in the same year. In 2023, Congress allocated $890 million to the Department of Energy's Fossil Energy and Carbon Management (FECM) office.
Additionally, fossil fuel companies receive federal funding in the form of project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). These sources of funding are intended to provide capital and fiscal security for investments in emerging markets overseas but often subsidize the expansion of the already profitable fossil fuel industry, leading to increased greenhouse gas emissions in countries with weaker environmental regulations.
The fossil fuel industry also benefits from various tax advantages, such as the ability to deduct intangible drilling costs and the use of Master Limited Partnerships (MLPs) which allow companies to avoid corporate income taxes. These tax breaks shield fossil fuel companies from market risks and contribute to their extraordinary wealth.
There have been legislative efforts to reduce fossil fuel subsidies, such as the Off Fossil Fuels for a Better Future Act, which aims to eliminate subsidies for the fossil fuel industry. However, as of 2024, fossil fuel tax preferences and credits are still in place, and the industry continues to receive substantial federal funding.
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Fossil fuel subsidies are expected to decline
Fossil fuel companies are profitable before subsidies, and they receive substantial government funding. In 2019, the industry received $760 billion in government subsidies, which are expected to decline in the short term. This decline is attributed to the unwinding of energy price support policies and the decrease in international prices. However, by 2030, it is anticipated that subsidies will rise to $8.2 trillion as the share of fuel consumption in emerging markets increases.
The fossil fuel industry has a long history of government intervention and enjoys numerous subsidies in the US tax code. These subsidies have promoted the production of cheap fossil energy, contributing to the country's economic growth over the past century. While some argue that these are standard tax deductions, they are, in fact, direct financial incentives and tax breaks provided by the government to oil, gas, and coal industries.
Master Limited Partnerships (MLPs) is a structure that combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. More than three-quarters of MLPs are fossil fuel companies, and they are exempt from corporate income taxes. Additionally, the industry receives federal funding through project loans, grants, and guarantees from organizations like the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM).
The expected decline in fossil fuel subsidies in the near term is attributed to various factors. Firstly, the removal of subsidies can lead to substantial gains in revenue, which can be redirected towards better targeted social spending, reductions in inefficient taxes, and productive investments. This can promote sustainable and equitable outcomes and reduce energy security concerns related to volatile fossil fuel supplies. Secondly, the coronavirus pandemic caused a drop in fossil fuel prices and consumption, leading to a decrease in the value of the subsidy per unit of consumption. Finally, the development and increasing price competitiveness of clean and renewable energy alternatives have played a role in the expected decline of fossil fuel subsidies.
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Fossil fuel subsidies are a negative carbon price
Fossil fuel subsidies have been estimated to cause hundreds of thousands of deaths from air pollution each year, as well as contributing to climate change. The social cost of carbon includes the health impacts of pollution and the effects of climate change, which are often overlooked in decision-making. By encouraging excess energy use, subsidies can make countries more vulnerable to fluctuations in international energy prices.
The fiscal cost of government support for fossil fuels was 1.1 trillion USD in 2023, with most (90%) related to the consumption of fossil fuels. Globally, fossil fuel subsidies were estimated to be $7 trillion or 7.1% of GDP in 2022, reflecting a $2 trillion increase since 2020. These subsidies are expected to decline in the short term as energy price support policies are phased out, but they will likely rise again as fuel consumption in emerging markets increases.
Removing fossil fuel subsidies would have multiple benefits. It would reduce the health risks of air pollution and lower global carbon emissions, helping to limit climate change. It would also reduce energy security concerns related to volatile fossil fuel supplies. Additionally, removing subsidies and reinvesting the revenue in targeted social spending, reduced taxes, and productive investments can promote sustainable and equitable outcomes.
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Fossil fuel subsidies are energy subsidies
Fossil fuel subsidies are financial incentives and tax breaks provided by governments to oil, gas, and coal industries. They can be direct or indirect subsidies. Direct subsidies are those that are specifically designed to support and reward domestic fossil fuel-related production, while indirect subsidies are provisions in the tax code aimed at businesses in general and not exclusive to the fossil fuels industry.
Direct subsidies include project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). Indirect subsidies include tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, and subsidies on production, such as tax breaks on oil exploration.
Fossil fuel subsidies have sizable fiscal consequences, including higher taxes, inefficient allocation of resources, and encouragement of pollution. They also contribute to climate change and have adverse effects on public health. Removing fossil fuel subsidies would reduce the health risks of air pollution and lower global carbon emissions, helping to limit climate change.
According to the International Monetary Fund, fossil fuel subsidies make countries more vulnerable to variations in international energy prices. However, some governments argue that subsidies are necessary to protect citizens from these variations. There is a consensus among economists that the rich benefit most from fossil fuel subsidies, although removing them may negatively impact the poor through indirect price increases.
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Frequently asked questions
Fossil fuel subsidies are any policies that favour fossil fuel companies over other energy sources. They can take the form of tax breaks, low-interest loans, royalty relief programs, and indirect benefits. Fossil fuel subsidies totalled around $1.5 trillion in 2022 under a narrow definition, and $7 trillion under a broader definition.
Fossil fuel subsidies make fossil fuels appear cheaper, shielding companies from real market risks. This means that unprofitable fossil fuel ventures are kept afloat by taxpayers. However, subsidies also amplify success, contributing to the extraordinary wealth accumulated by the most successful fossil fuel companies.
Removing fossil fuel subsidies would reduce air pollution, generate revenue, and slow climate change. It would also reduce the health risks associated with air pollution, which disproportionately affect communities of colour. Additionally, ending subsidies would cut into massive corporate profits and reduce the industry's political power.
Removing fossil fuel subsidies can be tricky, as it may result in higher energy prices for vulnerable households. Additionally, fossil fuel companies argue that increasing taxes would cause unemployment and reduce national energy security. Policymakers must carefully design and communicate reforms to ensure a smooth transition.
