Mercedes Mullins
The world is currently facing a climate crisis, and governments are spending billions of dollars in taxpayer money to subsidize fossil fuels. These subsidies are intended to protect consumers by keeping prices low but come with significant environmental, health, and fiscal costs. They contribute to climate change, cause local air pollution, and result in millions of premature deaths annually. The total cost of these negative externalities was estimated to be $5.3 trillion in 2015. Despite the increasing competitiveness of renewable energy, governments continue to fund the fossil fuel industry through various initiatives, grants, and loans, creating a wrong price signal to consumers and hindering the transition to cleaner energy sources.
| Characteristics | Values |
|---|---|
| Funding Sources | Department of Energy programs, project loans, grants, guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM) |
| Funding Amount | Hundreds of billions of dollars to over a trillion dollars annually |
| Funding Purpose | Research and development, capital and fiscal security for investments, maintaining competitiveness, and supporting consumers with lower prices |
| Funding Impact | Increased greenhouse gas emissions, adverse environmental, climate, and public health impacts, contributing to climate change, and increased energy consumption |
| Funding Alternatives | Renewable energy technologies, such as geothermal and offshore wind |
| Funding Reform | Countries have agreed to phase out inefficient fossil fuel subsidies, but implementation is challenging due to potential social unrest and lack of public confidence |
| Funding Costs | Fiscal consequences, inefficient allocation of resources, promotion of pollution, and favoring higher-income households |
| Funding Benefits | Protecting consumers by keeping prices low, providing energy security, and redistributing income |
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What You'll Learn
Fossil fuel subsidies
In the United States, fossil fuel subsidies totalled $757 billion in 2022, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. Federal funding for fossil fuels is largely administered by the Department of Energy (DOE) through initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. The Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM) also provide funding to the fossil fuel industry, which serves to subsidize the expansion of the industry.
The broader utility of fossil fuel subsidies is being questioned, especially at a time when renewable energy technology is becoming increasingly cost-competitive with fossil power generation. Removing fossil fuel subsidies would reduce air pollution, generate revenue, and contribute to slowing climate change. It would also help to reduce health risks from air pollution and limit climate change by reducing global carbon emissions.
However, removing fossil fuel subsidies can be tricky, as it may result in indirect price increases for vulnerable households. Additionally, producers argue that increasing taxes on them would cause unemployment and reduce national energy security. Nevertheless, there have been recent attempts to alter fossil fuel subsidies, including in the Biden-Harris Administration's FY 2024 budget request, which proposes eliminating 13 fossil fuel tax preferences and credits.
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Government funding for research and development
The fossil fuel industry receives substantial government funding for research and development. This funding is largely administered by the Department of Energy (DOE) through three initiatives: the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed toward the fossil fuel industry can be considered direct subsidies, as they are linked to maintaining the industry's competitiveness. Efforts to make coal more economical and cleaner have been a particular focus of federal government funding, as has Carbon Capture and Storage (CCS). CCS technologies capture carbon dioxide from power and industrial sectors, storing it underground or converting it into usable products.
In addition to research and development projects, the fossil fuel industry receives federal funding in the form of project loans, grants, and guarantees from organisations like the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). These funding sources are intended to provide capital and fiscal security for investments in emerging markets overseas. However, they often subsidise the expansion of the already mature and profitable fossil fuel industry, leading to increased greenhouse gas emissions in countries with weaker environmental regulations.
Over the years, EXIM has lent or issued billions in grants to fossil fuel projects. For instance, between 2001 and 2018, they provided $14.8 billion in grants and loans for 78 projects in the petroleum sector. They also financed $900 million in U.S. mining exports in 2010 and lent $4.5 billion to the power sector in 2009, with significant portions going to the coal and petroleum sectors. Despite calls from President Obama's 2013 Climate Action Plan to end government funding for overseas coal-fired power plants, EXIM continues to fund fossil energy development globally.
While the exact figures vary, it is estimated that governments worldwide spend hundreds of billions of dollars annually subsidising fossil fuels, with some estimates reaching over a trillion dollars. These subsidies contribute to the burning of fossil fuels and the resulting climate pollution. They also create a price signal that discourages consumers from adopting cleaner energy alternatives. According to a 2017 report, fossil fuels received 70% of energy subsidies worldwide, while renewables received only 20%. However, there are efforts to phase out these inefficient fossil fuel subsidies, with several countries already taking steps to remove explicit subsidies and introduce taxes to cover external costs.
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Tax breaks and societal costs
The fossil fuel industry receives substantial government funding for research and development. Federal funding for fossil fuels is administered by the Department of Energy (DOE) through the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed toward the fossil fuel industry can be considered direct subsidies. Efforts to make coal more economical and cleaner have been a particular focus of federal funding, as has Carbon Capture and Storage (CCS).
The United States provides a number of tax subsidies to the fossil fuel industry, including direct subsidies to corporations and other tax benefits. Conservative estimates put U.S. direct subsidies at roughly $20 billion per year, with 20% allocated to coal and 80% to natural gas and crude oil. European Union subsidies are estimated to total €55 billion annually. Tax subsidies for oil, gas, and coal development are expected to reduce federal revenue by $12.9 billion from 2022 to 2026. The three largest subsidies are for excess of percentage over cost depletion ($3.3 billion), exceptions for publicly-traded partnerships ($2.7 billion), and pollution control ($2.5 billion).
Special provisions in the U.S. tax code are designed to support and reward domestic fossil fuel-related production. These include the expensing of exploration, development, and intangible drilling costs, the use of percentage depletion to recover drilling and development costs, and smaller incentives for production and distribution. Indirect subsidies are also created by provisions aimed at businesses in general, rather than exclusively at the fossil fuels industry. For example, the Domestic Manufacturing Deduction, put in place in 2004, supported a range of companies by decreasing their effective corporate tax rate. While this deduction was available to domestic manufacturers, it nevertheless benefited fossil fuel companies by allowing oil producers to claim a tax break. This subsidy was repealed starting in the 2018 fiscal year.
There are significant societal costs associated with fossil fuel use. The extraction and burning of fossil fuels result in greenhouse gas emissions and other pollution, with adverse environmental, climate, and public health impacts. These negative externalities are estimated to have totaled $5.3 trillion globally in 2015 alone. Researchers from Harvard found that pollutants from oil and gas combustion were responsible for 8.7 million premature deaths annually. Fossil fuel externalities disproportionately affect minority and low-income populations that are more likely to live near facilities that produce high amounts of pollutants, such as airports and petrochemical refineries. The true price of carbon and other pollutants is not reflected in the actual cost of fossil fuels and fossil-derived products.
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The impact on climate change
Fossil fuel subsidies have a significant impact on climate change. Governments worldwide spend billions of dollars annually subsidizing fossil fuels, with a record $7 trillion in subsidies in 2022. These subsidies are intended to protect consumers by keeping prices low, but they have adverse environmental, climate, and public health consequences.
The burning of fossil fuels releases greenhouse gases and harmful local air pollutants, contributing to climate change and causing millions of premature deaths annually. Researchers from Harvard found that pollutants from oil and gas combustion were responsible for 8.7 million premature deaths each year. The extraction and burning of fossil fuels also lead to higher rates of birth defects and childhood leukemia, particularly in communities near extraction sites.
Subsidies for fossil fuels also hinder the adoption of renewable energy sources. By keeping fossil fuel prices artificially low, governments provide a disincentive for consumers to transition to cleaner energy alternatives. This perpetuates the reliance on fossil fuels and delays progress towards global warming targets.
However, removing fossil fuel subsidies can be challenging. A sudden removal of subsidies could lead to social unrest due to increased energy prices. A well-designed and communicated reform package is necessary to ensure a smooth transition and provide support for vulnerable households.
To mitigate climate change effectively, governments must scale back fossil fuel subsidies and redirect funds towards sustainable solutions. This includes investing in research and development for renewable energy sources and providing incentives for their adoption, such as tax credits for utilities supplying clean power and individuals using electric vehicles. By doing so, governments can promote a healthier and more sustainable future for their citizens.
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The impact on human health
The combustion of fossil fuels has been linked to adverse health impacts and climate change. Fossil fuels produce hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury, all of which are harmful to human health. The health costs of air pollution from burning fossil fuels are significant, with an estimated 7 million deaths, work absences, years of life lost, and premature deaths considered together. Researchers from Harvard found that pollutants from oil and gas combustion were responsible for 8.7 million premature deaths annually. Communities around oil and gas extraction sites are particularly vulnerable, with higher rates of birth defects and childhood leukaemia.
The use of fossil fuels also contributes to climate change, which in turn has negative impacts on human health. Climate change leads to more frequent and severe extreme weather events, including wildfires, hurricanes, wind storms, flooding, and droughts. These events can result in direct physical harm to individuals and can also disrupt healthcare services and infrastructure, impacting access to healthcare and increasing health risks. For example, the 2022 floods in Pakistan had devastating effects on human life, and the cost of extreme weather events in the United States between 2016 and 2020 was estimated at $606.9 billion.
The health sector has a crucial role in reducing fossil fuel consumption and mitigating the health impacts of climate change. However, engagement with fossil fuel policy and action has often been limited to health facility decarbonisation. Increased advocacy and action from the health sector are necessary to address the health-harming processes and activities inherent within society. This includes tackling air pollution, carbon emissions, and other health-harming products and processes that are not adequately managed at a societal scale.
Furthermore, the true cost of fossil fuels is often not reflected in market prices. Externalities, such as the environmental and health impacts of fossil fuel use, are often not included in the cost of fossil fuels and fossil-derived products. This results in a "subsidy" for the fossil fuel industry, as the negative consequences of their products are not factored into the price. Removing these subsidies and transitioning to clean energy sources could prevent premature deaths, improve health outcomes, and generate revenue for investment in public goods such as healthcare.
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Frequently asked questions
Yes, governments worldwide subsidize fossil fuels.
Estimates vary, but governments spend hundreds of billions of dollars a year subsidizing fossil fuels, and perhaps over a trillion. Fossil fuel subsidies surged to a record $7 trillion in 2022, equivalent to about 7% of global GDP.
Fossil fuel subsidies have several implications. Firstly, they contribute to climate change by incentivizing the burning of fossil fuels, which leads to increased greenhouse gas emissions. Secondly, they have adverse environmental, climate, and public health impacts, with researchers linking pollutants from oil and gas combustion to millions of premature deaths annually. Additionally, subsidies promote inefficient allocation of resources, hindering economic growth, and favoring higher-income households over vulnerable ones.
