Sylvie Willis
Fossil fuel subsidies are any government actions that lower the cost of fossil fuel energy production, raise the price received by energy producers, or lower the price paid by energy consumers. They are intended to protect consumers by keeping prices low, but they come at a substantial cost. The fossil fuel industry receives substantial government funding for research and development, and annual appropriations and grants directed toward the fossil fuel industry can also be considered direct subsidies. These subsidies have sizable fiscal consequences, promote inefficient allocation of an economy’s resources, encourage pollution, and rarely protect vulnerable groups. They are essentially a negative carbon price, and removing them would reduce air pollution, generate revenue, and make a major contribution to slowing climate change.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion |
| Percentage of GDP | 7.1% |
| Fiscal cost of government support for fossil fuels in 2023 | $1.1 trillion |
| Fiscal cost of support for residential users in 2023 | $189 billion |
| Fiscal cost of support for manufacturing and other industries in 2023 | $103.8 billion |
| Percentage of GHG emissions covered by explicit carbon prices in 2023 | 27% |
| Net Effective Carbon Rate (Net ECR) in 2023 | EUR 14.0/tCO2e |
| Share of explicit subsidies in 2022 | 18% |
| Share of explicit subsidies projected by 2030 | 8% |
| Largest contributor to global fossil fuel subsidies | Underpricing for local air pollution costs and climate damages (30% each) |
| Positive impact of removing fossil fuel subsidies | Reduced air pollution, increased revenue, and slower climate change |
| Negative impact of removing fossil fuel subsidies | Higher energy prices for vulnerable households |
| Recommended use of money saved from removing fossil fuel subsidies | Direct payments targeted at poor people or households, cutting taxes, funding public goods |
| Countries that have phased out explicit subsidies | India, Morocco, Saudi Arabia, Ukraine, Ghana, Egypt |
| Countries committed to phasing out inefficient fossil fuel subsidies | G20 countries, Canada |
| Organizations that have urged countries to phase out fossil fuel subsidies | International Monetary Fund, International Energy Agency, OECD, Paris Agreement, G7 leaders |
| Examples of fossil fuel subsidies | Direct funding, tax giveaways, loans and guarantees at favorable rates, government resources at below-market rates, research and development funding, clean up of abandoned oil and gas wells |
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What You'll Learn
- Fossil fuel subsidies are a negative carbon price
- Subsidies have sizable fiscal consequences (higher taxes/borrowing or lower spending)
- Removing subsidies can generate revenue
- Subsidies affect the environment and removing them would save the carbon budget
- Fossil fuel subsidies support an industry that negatively impacts public health
Fossil fuel subsidies are a negative carbon price
In 2022, global fossil fuel subsidies reached a record $7 trillion, reflecting a $2 trillion increase since 2020. This surge in subsidies was driven by government efforts to support consumers and businesses during the spike in energy prices caused by geopolitical events and the economic recovery from the pandemic. However, these subsidies come at a substantial cost. They promote fiscal consequences, hinder economic growth through inefficient resource allocation, and contribute to climate change and adverse health impacts through increased pollution.
The elimination of fossil fuel subsidies is crucial for mitigating climate change and reducing air pollution. By removing these subsidies, governments can generate significant revenue, estimated at $4.4 trillion, and significantly reduce global carbon emissions. Additionally, removing subsidies would alleviate health risks associated with air pollution and improve public health, particularly in vulnerable communities.
Despite the commitments made by G20 countries to phase out inefficient fossil fuel subsidies, their persistence is evident due to voter demand and energy security concerns. The phase-out of these subsidies is politically challenging. However, it is essential to recognize that these subsidies are a negative carbon price and that their removal would benefit energy markets, climate change mitigation efforts, and government budgets. The money saved from eliminating fossil fuel subsidies could be utilized for country-specific needs, such as direct payments targeted at vulnerable populations.
While removing fossil fuel subsidies is a complex process that requires careful planning and implementation, it is a necessary step toward a healthier and more sustainable future. It is crucial to address the power of the fossil fuel industry and its influence on policymakers to ensure a successful transition to renewable energy sources and mitigate the impacts of climate change.
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Subsidies have sizable fiscal consequences (higher taxes/borrowing or lower spending)
Fossil fuel subsidies have significant fiscal implications, which can lead to higher taxes, increased borrowing, or reduced government spending. 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. The high fiscal cost of these subsidies can lead to several consequences for a country's economy.
Firstly, higher taxes may be required to offset the cost of subsidies. This can impact both businesses and individuals, potentially reducing their disposable income and affecting their spending and investment decisions. Higher taxes can also lead to an increased federal budget deficit if they are not accompanied by immediate spending cuts. This, in turn, can result in reduced national savings and higher interest rates, impacting the country's long-term economic growth.
Secondly, increased borrowing may be necessary to finance the subsidies. Extended periods of debt-financed tax cuts can put pressure on a country's inflation, foreign exchange reserves, and exchange rates. It can also delay economic recovery by diverting resources from the private sector. Additionally, creditors may doubt the government's ability to manage its finances effectively, further impacting its ability to borrow and invest in stimulus programs.
Thirdly, governments may need to reduce spending in other areas to compensate for the cost of subsidies. This can affect social spending, investments in infrastructure, or other areas that may be important for economic growth and social well-being. Reduced spending on education, healthcare, or environmental protection, for example, can have long-term consequences for a country's development.
The removal of fossil fuel subsidies is expected to lead to sizable fiscal gains. Full price reform is estimated to raise revenues of $4.4 trillion, or 3.6% of global GDP, in 2030. These additional revenues can be used for better targeted social spending, reductions in inefficient taxes, and productive investments, promoting sustainable and equitable outcomes.
In summary, fossil fuel subsidies have sizable fiscal consequences, and their impact on a country's economy can be complex and far-reaching. The management of these subsidies and their potential removal can significantly influence a country's fiscal health and its ability to promote growth and address social and environmental challenges.
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Removing subsidies can generate revenue
Fossil fuel subsidies are intended to protect consumers by keeping prices low, but they come at a high cost. They have sizable fiscal costs, promote inefficient allocation of an economy's resources, encourage pollution, and are not well-targeted at the poor. Removing subsidies and using the revenue gain for better-targeted social spending can promote sustainable and equitable outcomes.
In 2009, the Group of 20 advanced and emerging market economies called for a phase-out of inefficient fossil fuel subsidies in all countries. Several countries have succeeded in removing explicit subsidies and/or phasing in taxes and other pricing measures to cover external costs. For example, the EU Emissions Trading Scheme forces power plants and industrial sources to pay for carbon emissions. Other countries that have phased out explicit subsidies include India, Morocco, Saudi Arabia, and Ukraine.
Removing fossil fuel subsidies would reduce the health risks of air pollution and greatly reduce global carbon emissions, thus helping to limit climate change. According to the International Energy Agency, phasing out fossil fuel subsidies would benefit energy markets, climate change mitigation, and government budgets. An Overseas Development Institute study found that subsidies for coal-fired power increased almost threefold, to $47.3 billion per year, from 2014 to 2017.
Removing subsidies can generate significant revenue. For example, the Office of Management and Budget estimated that repealing a subsidy for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. In 2016, the JCT estimated that closing a loophole for American businesses operating in countries without corporate income taxes would generate $12.7 billion in tax revenue over the following decade. According to the IMF, removing fossil fuel subsidies would increase government revenue by 3.8% of GDP. Removing only explicit subsidies reduces emissions by 5% below the baseline, while full price reform raises revenues of $4.4 trillion, or 3.6% of global GDP, in 2030.
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$91.51 $158
Subsidies affect the environment and removing them would save the carbon budget
Fossil fuel subsidies are intended to protect consumers by keeping prices low. However, they have significant negative consequences, including fiscal impacts, inefficient allocation of resources, and promotion of pollution. The environmental costs of fossil fuel subsidies are substantial, with underpricing for local air pollution and climate damages being the largest contributors to global fossil fuel subsidies. These subsidies encourage the use of fossil fuels, leading to increased greenhouse gas emissions and harmful local air pollutants.
Removing fossil fuel subsidies would have a positive impact on the environment and contribute to saving the carbon budget. By eliminating subsidies, governments can promote sustainable and equitable outcomes. The revenue gained from removing subsidies can be used for better targeted social spending, reducing inefficient taxes, and investing in productive and sustainable initiatives. This can include investments in renewable energy sources and technologies that reduce carbon emissions, such as carbon capture and storage (CCS).
Several countries and organizations have recognized the importance of phasing out fossil fuel subsidies. For example, the Group of 20 advanced and emerging market economies called for a phase-out of inefficient fossil fuel subsidies in 2009 and reaffirmed this commitment in 2012. At COP26 and COP27 in 2021 and 2022, countries agreed to accelerate their efforts to phase out these subsidies. Some countries, such as India, Morocco, Saudi Arabia, and Ukraine, have successfully phased out explicit subsidies and introduced taxes or other pricing measures to cover external costs.
Removing fossil fuel subsidies can also have economic benefits. For instance, the proposed modifications to fossil fuel tax preferences and credits in the Biden-Harris Administration's FY 2024 budget request are estimated to reduce the federal deficit by almost $31 billion over ten years. Additionally, the budget proposes changes to the taxation rules for the foreign income of U.S. oil and gas companies, resulting in a total savings of $96.9 billion.
While removing fossil fuel subsidies is challenging due to concerns about social unrest and energy security, it is crucial to address these issues comprehensively and transparently. Communicating with stakeholders and implementing measures to protect vulnerable populations during the transition are essential steps in ensuring a successful subsidy reform. Additionally, positive subsidies for organic or regenerative farming can improve soil quality, restore the health of the topsoil ecosystem, and provide environmentally friendly yields.
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Fossil fuel subsidies support an industry that negatively impacts public health
The negative impacts of fossil fuel subsidies on public health are significant. Fossil fuel externalities, including societal costs, environmental costs, and health costs, are often overlooked in policy mechanisms that incentivize fossil fuel production. The undervaluation of these externalities disproportionately affects vulnerable communities, including minority and low-income populations living near highly polluting facilities. The health risks associated with air pollution from fossil fuel combustion and extraction contribute to premature deaths and various health issues.
The International Energy Agency estimates that governments subsidised the consumption of fossil fuels by $1 trillion in 2022. This figure increased to $1.4 trillion in 2023, with 90% of this amount related to the consumption of fossil fuels. The high fiscal cost of government support for fossil fuels hinders economic growth and contributes to inefficient allocation of resources. Additionally, fossil fuel subsidies encourage excess energy use, making countries more vulnerable to variations in international energy prices.
The phase-out of fossil fuel subsidies has been recognised as a necessary step by various organisations and institutions, including the G20, the International Energy Agency, and the Organization for Economic Co-operation and Development (OECD). Despite these pledges, fossil fuel subsidies have persisted due to voter demand and energy security concerns. However, removing these subsidies would reduce energy security risks and free up public money for social spending, health, development, clean energy, and other areas benefiting the public.
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Frequently asked questions
Fossil fuel subsidies are any government actions that lower the cost of fossil fuel energy production, raise the price received by energy producers, or lower the price paid by energy consumers.
Governments have many reasons to subsidize energy. Energy is one of the main drivers of economies, and keeping prices low can help to prevent financial crises or civil unrest. Some governments say that subsidies are necessary to shield citizens from variations in international energy prices.
Fossil fuel subsidies were estimated to be $7 trillion or 7.1 percent of global GDP in 2022. This figure rose to $8.2 trillion in 2023.
Fossil fuel subsidies encourage excess energy use and make countries more vulnerable to variations in international energy prices. They also contribute to air pollution, local environmental pollution from fossil fuel extraction, and climate change.
Fossil fuel subsidies are a negative carbon price. They use government money that could be spent on other things and incentivize the use of fossil fuels over other energy sources. Carbon pricing, on the other hand, is a policy tool to lower emissions by putting a tax or other price on carbon dioxide and other greenhouse gases.
