Rajan Wilcox
Fossil fuel subsidies are any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers. Governments worldwide subsidize fossil fuel production, and these subsidies have a huge impact on energy prices and the types of energy used. Fossil fuel subsidies surged to a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020 due to government support during the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. While subsidies are intended to protect consumers by keeping prices low, they come at a substantial cost, including sizable fiscal consequences, inefficient allocation of resources, and encouragement of pollution. Removing fossil fuel subsidies would reduce air pollution, generate revenue, and contribute to slowing climate change. However, removing subsidies can be challenging due to potential social unrest and the need to compensate vulnerable households for higher energy prices.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion or 7.1% of global GDP |
| Fossil fuel subsidies in 2023 | $1 trillion |
| Fossil fuel subsidies in 2017 | $5.2 trillion |
| Largest subsidizers in 2015 | China ($1.4 trillion), the United States ($649 billion), and Russia ($551 billion) |
| Fossil fuel subsidies in 2020 | $5 trillion |
| Share of GHG emissions covered by explicit carbon prices | 27% |
| Positive Net ECR | 42% |
| Fiscal cost of government support for fossil fuels in 2023 | $1.1 trillion |
| Coal subsidies in 2023 | $27.7 billion |
| Oil subsidies in 2023 | $400 billion |
| Gas subsidies in 2023 | $343 billion |
| Subsidies for coal-fired power (increase from 2014 to 2017) | $47.3 billion per year |
| Number of countries that tax road transportation use | 160+ |
| Countries that have phased out explicit subsidies | India, Morocco, Saudi Arabia, and Ukraine |
| Countries that pledged to phase out inefficient fossil fuel subsidies | G20 countries |
| Countries that have flipped numbers (more subsidies for renewables than fossil fuels) | The United States |
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What You'll Learn
Fossil fuel subsidies are increasing globally
The largest subsidizers of fossil fuels include China, the United States, and Russia. In the United States, for example, there is a long history of government intervention in energy markets, with various subsidies embedded within the tax code to promote the production of cheap fossil energy. These subsidies have contributed to economic growth, but many of the circumstances that justified their implementation no longer exist. Today, the domestic fossil fuel industry is highly profitable, and renewable alternatives are becoming increasingly price-competitive.
The persistence and growth of fossil fuel subsidies have significant implications for climate change and public health. According to the International Monetary Fund (IMF), reducing fossil fuel subsidies could lower global carbon emissions by 28% and fossil fuel air pollution deaths by 46%. Removing subsidies would also generate substantial government revenue, estimated at $4.4 trillion annually, which could be redirected towards social spending, investments in clean energy, and other public goods.
However, removing fuel subsidies is a complex issue. It requires careful policy design and communication to ensure a smooth transition and avoid social unrest. A key consideration is providing compensation to vulnerable and lower-income households to offset higher energy prices. Nonetheless, the continued growth of fossil fuel subsidies is concerning, particularly as global efforts to mitigate climate change intensify.
Overall, the increasing global fossil fuel subsidies present a significant challenge in the transition to cleaner and more sustainable energy sources. Despite commitments to phase out inefficient subsidies, the surge in energy prices and economic pressures have led to a reversal in progress. As a result, the environmental and social costs of fossil fuel consumption continue to rise, underscoring the urgent need for policy reforms and a more accelerated transition to renewable energy sources.
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The US tax code subsidises fossil fuel production
Fossil fuel subsidies are a significant and controversial topic, with many countries agreeing to phase out inefficient subsidies and related tax breaks. The US tax code does subsidise fossil fuel production, and these subsidies have been increasing. While there are moves to eliminate these subsidies, they have proven challenging to stop.
The US federal government provides direct and indirect subsidies to the fossil fuel industry. Direct subsidies are specific to the industry, while indirect subsidies are provisions aimed at businesses in general. Direct subsidies include tax breaks, such as the ability to expense exploration and development costs, use percentage depletion to recover drilling and development costs, and numerous smaller incentives for production and distribution. Other tax subsidies include publicly traded partnerships, amortization of geological and geophysical expenditures, accelerated depreciation of natural gas infrastructure, investment credits for clean coal facilities, and energy production credits for coal.
The fossil fuel industry also receives substantial government funding for research and development, with initiatives administered by the Department of Energy. Annual appropriations and grants directed towards the industry can be considered direct subsidies as they maintain competitiveness. Efforts to make coal more economical and cleaner have been a particular focus of federal funding, as have Carbon Capture and Storage technologies.
Some subsidies are outdated and embedded in the tax code, and they are inconsistent with the policy goal of reducing fossil fuel use to counter climate change. While fossil fuel subsidies are intended to protect consumers by keeping prices low, they have significant fiscal consequences, promote inefficient resource allocation, encourage pollution, and do not benefit lower-income households. Removing these subsidies would reduce air pollution, generate revenue, and contribute to slowing climate change.
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Fossil fuel subsidies are inefficient and costly
Fossil fuels are the single largest contributor to greenhouse gas emissions. Despite this, governments continue to subsidize the fossil fuel industry, spending a record $7 trillion on fossil fuel subsidies in 2022. This amount reflects a $2 trillion increase since 2020, largely due to government support from surging energy prices.
Subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. They have sizable fiscal consequences, such as higher taxes, promote inefficient allocation of an economy's resources, and encourage pollution, contributing to climate change and premature deaths from local air pollution. Fossil fuel subsidies are also inefficient in targeting the poor, with the benefits mostly going to higher-income households.
Removing fossil fuel subsidies and using the revenue gain for better targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes. Scrapping explicit and implicit fossil fuel subsidies would prevent premature deaths, raise government revenues, and put emissions on track towards reaching global warming targets.
While removing fossil fuel subsidies is urgent, it must be done carefully to avoid harming household finances and affecting poverty levels. Governments must design, communicate, and implement reforms clearly and carefully, ensuring that the poorest households can still obtain or keep access to energy.
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Governments subsidise fossil fuels and renewables
Governments have a long history of intervening in energy markets. Fossil fuels are subsidized by governments around the world, with global fossil fuel subsidies reaching $7 trillion in 2022, or 7.1% of global GDP. This reflects a $2 trillion increase since 2020 due to surging energy prices. The largest subsidizers are China, the United States, and Russia. These subsidies have significant fiscal consequences, including higher taxes, inefficient allocation of resources, and promotion of pollution. Removing fossil fuel subsidies would reduce air pollution, generate revenue, and contribute to slowing climate change.
Fossil fuel subsidies come in various forms, including direct and indirect subsidies. Direct subsidies are specific to the fossil fuel industry, such as special provisions in tax codes. Indirect subsidies are more challenging to quantify and are not exclusive to the fossil fuel industry. Additionally, the fossil fuel industry receives substantial government funding for research and development through initiatives like the Office of Advanced Fossil Energy R&D and the Loan Guarantee Program.
While countries have agreed to phase out inefficient fossil fuel subsidies, it has proven challenging. Removing subsidies can lead to increased prices, potentially causing social unrest. However, it is important to note that subsidies do not always benefit the targeted groups, such as the poor or middle class. Instead, they often benefit higher-income households.
On the other hand, governments also subsidize renewable energy sources. The motivation behind subsidizing renewables is to level the playing field and make clean energy more cost-competitive. These subsidies can take the form of investments in research and development or tax credits for utilities supplying clean power or individuals using renewable energy technologies. In the United States, half of the federal money spent on energy subsidies from 2016 to 2022 went to renewables, while less than 15% went to fossil fuels.
While fossil fuel subsidies have historically dominated, the share of subsidies for renewables is growing. Heavy subsidies for solar panels and onshore wind farms have made these renewable technologies competitive with fossil fuels in most places. However, other renewables like geothermal and offshore wind still require more government support. As countries transition towards cleaner energy sources, the structure of energy subsidies is expected to evolve, reflecting the changing values and priorities of nations.
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Fossil fuel subsidies are a major cause of climate change
Fossil fuel subsidies are a significant contributor to climate change, with governments worldwide providing substantial financial support to the industry. In 2022, global fossil fuel subsidies reached a staggering $7 trillion, or 7.1% of the world's GDP, reflecting a $2 trillion increase since 2020. This surge in subsidies can be attributed to governments' efforts to support consumers and businesses during the energy price spike caused by geopolitical tensions and the pandemic recovery.
These subsidies have far-reaching consequences, including fiscal impacts, inefficient allocation of resources, and most importantly, the exacerbation of climate change. The primary purpose of subsidies is to protect consumers by maintaining low fuel prices. However, this comes at a significant cost to society. The external costs of fossil fuel consumption, such as greenhouse gas emissions, local health impacts, and environmental degradation, are often overlooked or underpriced. For instance, the retail price of gasoline may not include the costs associated with climate change, local air pollution, and public health damages. As a result, the true cost of fossil fuels is not reflected in their market price, leading to a continued reliance on these energy sources.
The underpricing of local air pollution costs and climate damages are the largest contributors to global fossil fuel subsidies, accounting for about 30% each. Additionally, explicit subsidies, where the retail price is below the fuel's supply cost, make up a significant portion, especially in the Middle East and North Africa (MENA), Europe, and East Asia and the Pacific (EAP). While subsidies are intended to protect consumers, they often benefit higher-income households more than the intended beneficiaries, perpetuating social and economic inequalities.
The negative impacts of fossil fuel subsidies are evident in the health and environmental domains. The burning and extraction of fossil fuels result in the release of harmful pollutants, disproportionately affecting vulnerable communities, including minority and low-income populations living near highly polluting facilities. The externalities of fossil fuel production, including societal, environmental, and health costs, are often disregarded in the pursuit of cheap energy. However, addressing these externalities could save taxpayers billions of dollars and improve the health and quality of life for many.
To combat climate change effectively, a coordinated strategy is necessary. Scaling back fossil fuel subsidies and transitioning to renewable energy sources can significantly reduce global carbon emissions and air pollution. Removing explicit and implicit subsidies, imposing corrective taxes, and investing in renewable alternatives can help curb global warming and improve public health. While removing fuel subsidies can be challenging due to potential social unrest and the need to compensate vulnerable households, it is a crucial step towards a sustainable future.
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Frequently asked questions
Fossil fuel subsidies are any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers.
Governments have many reasons to subsidize fossil fuels. One reason is to protect consumers by keeping prices low. Another reason is to promote or subsidize the production of cheap and abundant energy, which can help to stimulate economic growth.
Fossil fuel subsidies have a range of impacts. They can lead to inefficient allocation of resources, hinder economic growth, encourage pollution, and contribute to climate change. They can also disproportionately benefit higher-income households, as lower prices often benefit those with higher incomes more.
