Katerina Swanson
Fossil fuel subsidies are government policies that make energy cheaper than under normal market conditions. They are intended to protect consumers by keeping prices low, but they come at a substantial cost. In 2022, global fossil fuel subsidies were $7 trillion, or 7% of global GDP. Despite the perception that fossil fuel subsidies help the poor, they are inefficient and ineffective at poverty alleviation, with the absolute benefit going to the rich. Removing fossil fuel subsidies would reduce air pollution, generate revenue, and slow climate change, but it could also lead to social unrest and negatively impact the poor through indirect price increases.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion |
| Fossil fuel subsidies as a percentage of global GDP | 7.1% |
| Fossil fuel subsidies as a percentage of global income spent on education | Twice as much |
| Fossil fuel subsidies as a percentage of global income spent on healthcare | Two-thirds |
| Fossil fuel subsidies in 2023 | $1 trillion |
| Percentage of fossil fuel subsidies that are explicit | 18% |
| Percentage of fossil fuel subsidies that are implicit | 82% |
| Fossil fuel subsidies in 2015 | $400 billion |
| Percentage of the overall subsidy benefit received by the poorest fifth of the population in 20 developing countries | 7% |
| Percentage of the overall subsidy benefit received by the richest fifth of the population in 20 developing countries | 43% |
| Percentage of the $22.5 billion spent on fossil fuel subsidies in India in 2010 that benefited the poorest 20% | <2% |
| Fossil fuel subsidies in 2018 | $5.3 trillion |
| Number of deaths caused by air pollution in 2021 | 8.1 million |
| Number of premature deaths that would be prevented annually by removing fossil fuel subsidies | 1.6 million |
| Amount of additional revenue that would be generated by removing fossil fuel subsidies | $4.4 trillion |
| Number of deaths caused by air pollution each year | Hundreds of thousands |
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What You'll Learn
- Fossil fuel subsidies disproportionately benefit the rich and rarely protect the poor
- Removing subsidies may hurt the poor through indirect price increases
- Fossil fuel subsidies are detrimental to economic, environmental, and social sustainability
- Removing subsidies may reduce air pollution, generate revenue, and slow climate change
- Fossil fuel subsidies may reduce the cost of living in the short term
Fossil fuel subsidies disproportionately benefit the rich and rarely protect the poor
Fossil fuel subsidies have surged to a record $7 trillion, or 7.1% of global GDP, in 2022. This is a $2 trillion increase since 2020, largely due to government support for consumers and businesses during the energy price surge caused by the war in Ukraine and the economic recovery from the pandemic. The vast majority of these subsidies are implicit, as they do not reflect the environmental costs of fossil fuel consumption, which are substantial. These implicit subsidies are projected to grow as developing countries increase their consumption of fossil fuels.
While subsidies are intended to protect consumers by keeping prices low, they come at a significant cost. They lead to higher taxes or government borrowing, inefficient allocation of resources, and promote pollution, contributing to climate change and premature deaths from local air pollution. Furthermore, fossil fuel subsidies disproportionately benefit rich households more than poor ones. This is because the negative externalities of fossil fuel use, such as air pollution and climate change, disproportionately affect low-income communities and minority populations who live near highly polluting facilities.
The true price of carbon and other pollutants is not reflected in the cost of fossil fuels. As a result, the public bears the burden of these externalities, which have adverse environmental, climate, and public health impacts. In 2015, these negative externalities were estimated to have cost $5.3 trillion globally. By subsidizing the fossil fuel industry, governments are incentivizing an industry that contributes to climate change and the destruction of ecosystems.
Removing fossil fuel subsidies would have numerous benefits. It would prevent premature deaths, raise government revenues, and put emissions on track to meet global warming targets. Additionally, it would redistribute income, as the savings from removing subsidies could be used to compensate vulnerable households, cut taxes on work and investment, and fund public goods such as education, healthcare, and clean energy.
However, removing fossil fuel subsidies can be challenging and must be carefully managed to avoid social unrest. Gradual reforms are recommended, especially in countries with inadequate social safety nets. Governments must clearly communicate the benefits of removing subsidies and use the increased revenues to mitigate the negative effects on vulnerable groups through enhanced public services and investment in social programs.
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Removing subsidies may hurt the poor through indirect price increases
While subsidies are intended to protect consumers by keeping prices low, they are not well targeted at the poor and can lead to higher taxes or lower spending in other areas. Removing fossil fuel subsidies may hurt the poor through indirect price increases, as higher fuel prices can lead to increased costs for goods and services, including food.
The removal of subsidies may result in price increases for goods and services that are dependent on fossil fuels for production or transportation. This can lead to a rise in the cost of living, which can disproportionately affect low-income households. For example, a $0.25 decrease in per-liter fuel subsidy has been estimated to result in a 6% decrease in income for all groups in society.
The impact of removing subsidies on the poor may be mitigated by using the revenue gained from subsidy removal for better-targeted social spending and investments in social programs. For example, the money saved from removing subsidies could be used to enhance public services, provide cash transfers to vulnerable groups, or subsidize essential utilities like water and electricity.
However, the effectiveness of these measures may depend on the adequacy of social safety nets in a given country. Gradual reforms and clear communication of policy changes are recommended to minimize the potential negative impact on low-income households.
Additionally, it is important to note that fossil fuel subsidies disproportionately benefit higher-income households. For example, an IMF study found that across 20 developing countries, the poorest 20% received only 7% of the overall subsidy benefit, while the richest 20% received 43%. Therefore, removing fossil fuel subsidies and reinvesting the savings in targeted social programs may ultimately benefit the poor and reduce inequality.
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Fossil fuel subsidies are detrimental to economic, environmental, and social sustainability
Secondly, fossil fuel subsidies contribute to climate change and adverse health impacts. By encouraging excess energy use, they make countries more vulnerable to variations in international energy prices and increase local air pollution, leading to premature deaths and negative health outcomes, especially among vulnerable populations. The negative externalities of fossil fuel use have significant environmental, climate, and public health impacts, with global costs totaling $5.3 trillion in 2015 alone.
Thirdly, while subsidies may reduce the cost of living in the short term, they are not well-targeted at the poor and can lead to social unrest when removed. Low-income households may suffer indirect price increases, such as food prices, when subsidies are removed, and governments may struggle to compensate these groups adequately. However, keeping the subsidies in place hinders the transition to renewable energy sources and exacerbates climate change, which disproportionately affects the poor.
Moreover, fossil fuel subsidies can distort energy markets and hinder innovation. With the increasing cost-competitiveness of renewable energy technologies, continuing to subsidize fossil fuels can slow down the transition to cleaner energy sources and limit innovation in energy efficiency. This further exacerbates the negative environmental and social impacts of fossil fuel use.
Finally, the phase-out of fossil fuel subsidies is politically challenging due to voter demand and energy security concerns. Despite commitments made by G20 nations and at COP26 and COP27, the implementation of subsidy reforms has been slow due to the potential for social unrest and the absence of public support. However, gradual reforms that are clearly communicated and combined with effective pro-poor policies can help address these challenges and promote sustainable and equitable outcomes.
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Removing subsidies may reduce air pollution, generate revenue, and slow climate change
Fossil fuel subsidies have been a long-standing feature of energy markets, particularly in the US. These subsidies are intended to protect consumers by keeping prices low. However, they come at a significant cost. One of the most detrimental impacts is the encouragement of pollution, which contributes to climate change and premature deaths from local air pollution.
The removal of fossil fuel subsidies would be an effective way to reduce air pollution. By eliminating these subsidies, fuel prices would increase, leading to reduced consumption and a decrease in the emissions responsible for air pollution and climate change. This would result in cleaner air and improved public health, preventing the millions of deaths caused by air pollution each year.
Ending fossil fuel subsidies would also generate revenue for governments. Currently, governments are spending trillions of dollars on these subsidies, which is a substantial fiscal burden. By scrapping these subsidies, governments could save money, reducing the need for debt, higher taxes, and cuts to public services, all of which can negatively impact low-income households. The saved funds could be reinvested in better-targeted social spending, benefiting those in need.
Additionally, removing fossil fuel subsidies is crucial for slowing climate change. The subsidies contradict the commitments made by governments in the Paris Agreement to tackle climate change. By continuing to subsidize fossil fuels, governments are incentivizing the production and consumption of these fuels, which are the biggest contributors to climate change and the destruction of ecosystems. Redirecting the funds from these subsidies towards renewable energy sources and technologies would help accelerate the transition to cleaner energy and reduce global warming.
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Fossil fuel subsidies may reduce the cost of living in the short term
Fossil fuel subsidies are intended to protect consumers by keeping prices low. In 2022, global fossil fuel subsidies were $7 trillion, or 7% of global GDP. They are expected to rise to $8.2 trillion by 2030. The largest price gaps are generally for coal, followed by diesel and gasoline.
Subsidies have been used to promote or subsidise the production of cheap and abundant fossil energy. They have been around for a long time, and the United States has enjoyed unparalleled economic growth over the past 100 years, partly due to cheap energy. However, fossil fuel industries are now mature and highly profitable, and there are many clean and renewable alternatives that are price-competitive.
Subsidies are generally perceived as a tool to help reduce the cost of living, especially for the poor. By one estimate, a $0.25 decrease in per-liter subsidy results in a 6% decrease in income for all groups in society. However, removing subsidies may hurt poor people through indirect price increases, such as food prices. A rise in fossil fuel prices can also lead to social unrest, as seen in the yellow vest protests in France in 2018.
Despite these concerns, leading economic organizations agree that subsidies are expensive, inefficient, and harmful to the economy. They can also lead to higher taxes or reduced spending in public services, which can further harm low-income households. Removing subsidies and using the revenue for better-targeted social spending can promote more equitable outcomes.
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Frequently asked questions
Fossil fuel subsidies are government policies that make energy cheaper than under normal market conditions. They are intended to protect consumers by keeping prices low.
Fossil fuel subsidies are inefficient at poverty alleviation. The poorest fifth of the population in 20 developing countries received just 7% of the overall benefit, while the richest fifth received 43%. Poorer households in poor countries use less fuel than wealthier households, even when energy is subsidised.
The money saved from cutting fossil fuel subsidies can be used to enhance public services and invest in social programs that benefit the poor. Removing subsidies would also reduce air pollution, which disproportionately affects the poor.
