Mercedes Mullins
Fossil fuel subsidies are a significant global issue, with governments providing an estimated $7 trillion in support in 2022. This figure is expected to rise to $8.2 trillion by 2030. These subsidies take various forms, including tax breaks, grants, and loans, and are intended to protect consumers by keeping prices low. However, they have negative consequences, including promoting inefficient allocation of resources, hindering renewable energy growth, and contributing to climate change. The fossil fuel industry in the US, for example, benefits from an estimated $760 billion annually in subsidies, tax breaks, and unpriced externalities, with direct government subsidies ranging from $10 to $52 billion per year. While phasing out fossil fuel subsidies is challenging, it would benefit energy markets, mitigate climate change, and improve government budgets. Removing subsidies would also reduce air pollution and generate revenue, making a significant contribution to addressing climate change.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Fossil fuel subsidies in 2023 | $7 trillion |
| Fossil fuel subsidies in 2030 | $8.2 trillion |
| US fossil fuel subsidies | $760 billion annually |
| US direct subsidies to the fossil fuel industry | $20 billion per year |
| European Union fossil fuel subsidies | €55 billion annually |
| US direct subsidies to the fossil fuel industry | $10 to $52 billion per year |
| Coal subsidies | $27.7 billion |
| Oil subsidies | $400 billion |
| Gas subsidies | $343 billion |
| Fossil fuel consumption subsidies in 2022 | $1 trillion |
| Fossil fuel tax subsidies | $5 trillion |
| Fossil fuel subsidies in Turkey in the 21st century | 0.2% of GDP |
| Fossil fuel subsidies in Saudi Arabia | Implicit in nature |
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What You'll Learn
Fossil fuel subsidies in the US
Fossil fuel subsidies are energy subsidies on fossil fuels. They are direct financial incentives and tax breaks provided by governments to oil, gas, and coal industries. These subsidies lower production costs and distort energy markets, costing taxpayers billions annually while delaying the transition to cleaner energy alternatives. The fossil fuel industry in the US benefits from an estimated $760 billion annually through subsidies, tax breaks, and unpriced externalities, with direct government subsidies alone accounting for $10 to $52 billion per year.
There is a long history of government intervention in energy markets in the US. Numerous energy subsidies exist in the US tax code to promote or subsidize the production of cheap and abundant fossil energy. Some of these subsidies have been around for a century. Conservative estimates put US direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20% currently allocated to coal and 80% to natural gas and crude oil.
The Biden-Harris Administration's FY 2024 budget request would eliminate 13 fossil fuel tax preferences and credits, such as the tax credit for oil and natural gas extracted from marginal wells. The US committed over $1.8 billion to fossil fuel projects abroad in 2023 via the DFC and the US Export-Import Bank. The US Export-Import Bank also provides project loans, grants, and guarantees to the fossil fuel industry, which serves to subsidize the expansion of the mature and highly profitable fossil fuel industry.
Subsidies have sizable fiscal consequences, leading to higher taxes, borrowing, or lower spending, and they promote inefficient allocation of an economy's resources, hindering growth. They also encourage pollution, contributing to climate change and premature deaths from local air pollution. Removing subsidies would reduce the health risks of air pollution and greatly reduce global carbon emissions, thus helping to limit climate change.
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Fossil fuel subsidies and climate change
Fossil fuel subsidies are energy subsidies on fossil fuels. They may take the form of tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks on oil exploration. They may also be free or cheap negative externalities, such as air pollution or climate change due to burning gasoline, diesel, and jet fuel.
Fossil fuel subsidies have sizable fiscal consequences, leading to higher taxes, lower spending, and inefficient allocation of an economy's resources. They also encourage pollution, contributing to climate change and premature deaths from local air pollution. According to the International Energy Agency (IEA), phasing out fossil fuel subsidies would benefit energy markets, mitigate climate change, and improve government budgets. Removing subsidies would also reduce energy security concerns related to volatile fossil fuel supplies.
The removal of fossil fuel subsidies would also reduce the health risks of air pollution and greatly reduce global carbon emissions, thus helping to limit climate change. According to the International Institute for Sustainable Development, G7 countries should reveal their subsidies every year under Sustainable Development Goal (SDG) indicator 12.c.1 (fossil fuel subsidies).
In 2023, the OECD estimated that coal subsidies amounted to $27.7 billion, oil to $400 billion, and gas to $343 billion. The International Energy Agency estimates that governments subsidized the consumption of fossil fuels by $1 trillion in 2022. Fossil fuel subsidies surged to a record $7 trillion in 2022 as governments supported consumers and businesses during the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. This $7 trillion is more than governments spend annually on education and about two-thirds of what they spend on healthcare.
At COP26 and 27 in 2021 and 2022, countries agreed to accelerate efforts to phase out inefficient fossil fuel subsidies.
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Fossil fuel subsidies and air pollution
Fossil fuel subsidies are energy subsidies on fossil fuels. They may be tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks on oil exploration. They may also be free or cheap negative externalities, such as air pollution or climate change due to burning gasoline, diesel, and jet fuel. According to the International Energy Agency (IEA), phasing out fossil fuel subsidies would benefit energy markets, mitigate climate change, and help government budgets.
Fossil fuel subsidies 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. Removing fossil fuel subsidies would reduce the health risks of air pollution and greatly reduce global carbon emissions, thus helping to limit climate change. Scaling back subsidies would reduce air pollution, generate revenue, and make a major contribution to slowing climate change.
According to the International Monetary Fund (IMF), fossil fuel subsidies surged to a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020 due to government support from surging energy prices. Globally, fossil fuel subsidies were 7.1% of GDP in 2022. Underpricing for local air pollution costs and climate damages are the largest contributor to global fossil fuel subsidies, accounting for about 30% each, followed by explicit subsidies (18%), broader road transport externalities such as congestion and road accidents (17%), and forgone consumption tax revenue (5%).
The United States provides a number of tax subsidies to the fossil fuel industry as a means of encouraging domestic energy production. Conservative estimates put US direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20% currently allocated to coal and 80% to natural gas and crude oil. European Union subsidies are estimated to total 55 billion euros annually.
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Fossil fuel subsidies in emerging markets
Fossil fuel subsidies have existed for a long time, with tax breaks for oil and gas exploration in place since at least the early 20th century. In 2022, global fossil fuel subsidies were estimated to be $7 trillion or 7.1% of global GDP, a $2 trillion increase since 2020 due to surging energy prices. This increase was partly driven by the global energy crisis triggered by Russia's invasion of Ukraine, which caused international fuel prices to surpass the actual costs paid by many consumers. The largest subsidizers in 2015 were China ($1.4 trillion), the United States ($649 billion), Russia ($551 billion), the European Union ($289 billion), and India ($209 billion).
Emerging markets play a significant role in the context of fossil fuel subsidies. In 2023, governments, especially in emerging and developing economies, heavily subsidized the use of fossil fuels, spending $620 billion. This amount was significantly higher than the $70 billion spent on supporting consumer-facing clean energy investments. The share of fuel consumption in emerging markets is expected to contribute to a projected increase in fossil fuel subsidies to $8.2 trillion by 2030.
Fossil fuel subsidies have significant environmental and economic impacts. They contribute to climate change, local air pollution, and premature deaths. Removing fossil fuel subsidies could reduce these negative impacts and improve energy market efficiency, government budgets, and efforts to tackle climate change. Additionally, eliminating subsidies could free up resources for the transition to net-zero and accelerate innovation in energy efficiency.
However, removing fossil fuel subsidies can be politically challenging. Subsidies are intended to protect consumers by keeping prices low, and some argue that they help poorer citizens. Yet, they often benefit higher-income households and hinder economic growth by promoting the inefficient allocation of resources.
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Fossil fuel subsidies and free-market competition
Fossil fuel subsidies have existed for a long time, with tax breaks for oil and gas exploration in place since at least the early 20th century. In recent years, these subsidies have come under scrutiny due to their impact on the environment and the economy. In 2022, global fossil fuel subsidies totalled around $7 trillion, reflecting a $2 trillion increase since 2020 due to government support during the energy price surge caused by the Ukraine-Russia conflict and the post-pandemic economic recovery. These subsidies are expected to decline in the near term as energy prices stabilize but are projected to rise to $8.2 trillion by 2030 as emerging markets increase their consumption of fossil fuels.
The existence of fossil fuel subsidies contradicts the notion of free-market competition in the industry. In a truly free market, the fossil fuel industry would compete without government assistance, and the prices consumers pay would reflect the true cost of production and delivery. Instead, a complex network of subsidies, including tax breaks and unpriced externalities, props up fossil fuel ventures, shielding them from the true forces of supply and demand. For example, a 2017 study found that nearly half of new US oil fields would not be viable without this support.
The impact of these subsidies extends beyond market distortions. They incentivize the reckless extraction and burning of fossil fuels, contributing to climate change, air and water pollution, and the destruction of precious habitats. The health risks associated with air pollution, such as respiratory illnesses and heart disease, drive up healthcare costs for everyone. Additionally, the money funnelled into fossil fuel subsidies could be invested in cleaner, sustainable energy sources, fostering innovation and job creation in those sectors.
Removing fossil fuel subsidies would have economic, social, and environmental benefits. It would correct inefficient economic interventions, save taxpayer money, and reduce negative social and environmental impacts. It would also generate revenue for governments, which could be used to compensate vulnerable households for higher energy prices, cut taxes on work and investment, and fund public goods such as education, healthcare, and clean energy. However, removing subsidies can be challenging, as governments must carefully design and communicate reforms to ensure a smooth transition.
In summary, the existence of fossil fuel subsidies contradicts the principle of free-market competition and has far-reaching consequences. Phasing out these subsidies would benefit energy markets, mitigate climate change, and improve government budgets, but it requires careful policy implementation to balance the needs of all stakeholders.
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Frequently asked questions
Fossil fuel subsidies are energy subsidies on fossil fuels. They can take the form of tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks on oil exploration.
Fossil fuel subsidies are substantial. In 2022, they totalled around $7 trillion globally, reflecting a $2 trillion increase since 2020. The United States provides an estimated $760 billion in subsidies, tax breaks, and unpriced externalities to the fossil fuel industry annually.
Fossil fuel subsidies incentivize the reckless extraction and burning of fossil fuels, fueling climate change, polluting air and water, and destroying habitats. They also hinder the growth of renewable energy sources by providing an incentive to use fossil fuels.
Removing fossil fuel subsidies would reduce air pollution, generate revenue, and make a major contribution to slowing climate change. However, it could also lead to higher energy prices for consumers, which would need to be addressed through policy interventions.
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