Katerina Swanson
The debate around the subsidisation of renewable resources compared to fossil fuels is a highly topical issue. Fossil fuel subsidies are a significant contributor to global warming and climate change, with the production and burning of fossil fuels releasing harmful greenhouse gases and local air pollutants. Governments subsidise fossil fuels to protect consumers by keeping prices low, but this comes at a substantial cost, including higher taxes, inefficient allocation of resources, and adverse environmental and public health impacts. In contrast, renewable energy sources are also subsidised to level the playing field and help non-climate-polluting energy become more cost-competitive. While the data varies depending on the source, it appears that fossil fuels receive more subsidies in total, but when compared based on the amount spent per unit of power produced, renewables receive significantly more.
| Characteristics | Values |
|---|---|
| Global fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Global fossil fuel subsidies in 2030 | $8.2 trillion |
| Largest contributor to global fossil fuel subsidies | Underpricing for local air pollution costs and climate damages (30%) |
| Second largest contributor to global fossil fuel subsidies | Explicit subsidies (18%) |
| Fossil fuel subsidies in the US in 2022 | $3.2 billion |
| Renewable energy subsidies in the US in 2022 | $15.6 billion |
| Percentage of federal money spent on subsidizing energy from 2016 to 2022 that went to renewables | 50% |
| Percentage of federal money spent on subsidizing energy from 2016 to 2022 that went to oil, gas, and coal | Less than 15% |
| Percentage of energy subsidies that went to renewables in 2022 | 77% |
| Percentage of energy subsidies that went to fossil fuels in 2022 | 16% |
| Percentage of global subsidies received by fossil fuels in 2015 | 85% |
| Percentage of global subsidies received by fossil fuels in 2017 | 70% |
| Percentage of global subsidies received by renewables in 2017 | 20% |
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What You'll Learn
Fossil fuel subsidies are common in the US tax code
Fossil fuel subsidies have long been a feature of the US tax code, with some existing for over a century. These subsidies have contributed to the United States' economic growth over the past 100 years by promoting cheap energy. However, the circumstances that initially justified these subsidies no longer apply. Today, the fossil fuel industry is highly profitable, and renewable energy alternatives are increasingly price-competitive. Despite this, US taxpayer dollars continue to fund many fossil fuel subsidies that are outdated and embedded in the tax code.
The US federal government provides numerous direct and indirect subsidies to the fossil fuel industry. Direct subsidies include special provisions in the tax code designed to support and reward domestic fossil fuel-related production. For example, the federal income tax allows for the expensing of exploration, development, and intangible drilling costs, as well as the use of percentage depletion to recover drilling and development costs. Indirect subsidies are provisions in the tax code aimed at businesses in general but still benefit the fossil fuel industry. One example is Master Limited Partnerships (MLPs), where more than three-quarters of MLPs are fossil fuel companies. MLPs offer tax benefits, such as exemption from corporate income taxes, that are not available to renewable energy companies.
Fossil fuel subsidies can also be found in the form of government funding for research and development. The Department of Energy (DOE) administers federal funding through initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Additionally, annual appropriations and grants directed towards the fossil fuel industry can be considered direct subsidies as they aim to maintain the industry's competitiveness.
While the total amount of fossil fuel subsidies is challenging to pinpoint due to varying definitions and calculations, estimates range from hundreds of billions to $7 trillion globally. In 2022, global explicit subsidies for fossil fuels were approximately $1.5 trillion, with 80% going to consumers and the rest to fossil fuel production. In the US, fossil fuel subsidies may be even higher when considering the negative externalities associated with their use, such as greenhouse gas emissions and other pollution, which totaled an estimated $5.3 trillion globally in 2015.
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Fossil fuel subsidies are outdated and embedded
Fossil fuel subsidies have long been a feature of the global energy market, but their continued existence is increasingly being questioned. While they were once a key driver of economic growth, the circumstances that led to their implementation no longer apply. Today, the fossil fuel industry is mature and highly profitable, and renewable alternatives are increasingly price-competitive. Despite this, fossil fuel subsidies remain embedded within the tax codes of many countries, including the US, and the removal of these subsidies is proving challenging.
The subsidies granted to the fossil fuel industry have historically served to lower production costs and incentivise new domestic energy sources. However, they have also contributed to significant negative externalities, including an estimated $5.3 trillion in global costs from greenhouse gas emissions and pollution in 2015 alone. These externalities have adverse environmental, climate, and public health impacts, and they also result in substantial fiscal consequences, such as higher taxes or lower government spending. Additionally, fossil fuel subsidies promote inefficient allocation of resources, hindering economic growth, and they disproportionately benefit higher-income households.
The removal of fossil fuel subsidies is supported by organisations such as the IEA, which has monitored these subsidies for over a decade. The IEA highlights that removing inefficient fossil fuel subsidies could positively impact energy markets, government budgets, and efforts to tackle climate change. The persistence of these subsidies can be attributed to their alignment with politicians' stated priorities, such as energy security and pollution control. However, their presence in the tax code can also be attributed to their age, with some subsidies having been in place for over a century.
While the removal of fossil fuel subsidies is a complex issue, it is clear that they are outdated and embedded within the energy sector. Their continued existence hinders the transition to cleaner renewable energy sources and contributes to adverse environmental and fiscal outcomes. As such, there is a growing recognition that these subsidies should be reduced or eliminated, with the potential for significant benefits across a range of domains.
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Fossil fuel subsidies are for non-economic purposes
Fossil fuel subsidies have existed in the US tax code for a century, promoting the production of cheap and abundant fossil energy. While these subsidies have contributed to economic growth, they are now outdated and remain in place due to inertia. Today, the fossil fuel industry is mature, highly profitable, and increasingly facing competition from clean and renewable alternatives.
The primary purpose of fossil fuel subsidies is to protect consumers by keeping prices low. However, this comes at a substantial cost. Subsidies lead to higher taxes, inefficient allocation of resources, hindering growth, and promoting pollution and climate change. They also disproportionately benefit higher-income households, as the rich get the most absolute benefit, and the poorest do not typically own cars or consume energy in ways that would make them the primary beneficiaries.
The negative consequences of fossil fuel subsidies extend beyond the economic and environmental realms. The International Monetary Fund (IMF) estimates that fossil fuel subsidies cause hundreds of thousands of deaths from air pollution each year. Additionally, by encouraging excess energy use, subsidies can make countries more vulnerable to variations in international energy prices.
Despite calls from institutions like the G20, the International Energy Agency (IEA), and the Organization for Economic Cooperation and Development (OECD) for a phase-out of fossil fuel subsidies, these subsidies are actually increasing. This is partly due to the political difficulty of removing subsidies, as it may be unpopular among citizens and impact industries that provide employment. However, removing fossil fuel subsidies would have numerous benefits. It would improve energy markets, mitigate climate change, reduce health risks from air pollution, and free up government money for other purposes.
In conclusion, fossil fuel subsidies are largely for non-economic purposes, such as consumer protection and maintaining industry competitiveness. However, they have far-reaching negative consequences that extend beyond economics and into the realms of the environment, public health, and energy security.
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Fossil fuel subsidies are being questioned
Fossil fuel subsidies are being increasingly questioned by organisations and governments. The IEA, for example, has long advocated for the reduction or removal of fossil fuel subsidies, arguing that they distort markets, send the wrong price signals to users, widen fiscal deficits in emerging economies, and discourage the adoption of cleaner renewable energy sources. The broader utility of fossil fuel subsidies is being questioned at a time when renewable energy technology is increasingly cost-competitive with fossil fuel generation.
The negative externalities associated with fossil fuel use, such as greenhouse gas emissions and other forms of pollution, have significant adverse environmental, climate, and public health impacts. These externalities have been estimated to have totalled $5.3 trillion globally in 2015 alone. The underpricing of local air pollution costs and climate damages are the largest contributors to global fossil fuel subsidies, accounting for about 30% each. Removing fossil fuel subsidies would reduce energy security concerns related to volatile fossil fuel supplies and could have a positive impact on energy markets, government budgets, and efforts to tackle climate change.
While governments provide subsidies for both fossil fuels and renewable energy, the distribution of these subsidies is uneven. According to a report by the International Renewable Energy Agency, fossil fuels received 70% of energy subsidies worldwide in 2017, with only 20% going to renewables. In the United States, the Energy Information Administration reported that from 2016 to 2022, half of the federal money spent on energy subsidies went to renewables, while less than 15% went to oil, gas, and coal. However, it is important to note that the overall scale of energy subsidies depends on the larger context, such as federal energy spending increases during economic recovery periods.
The specific types of subsidies also vary, with renewable energy subsidies often taking the form of investments in research and development or tax credits for utilities supplying clean power or individuals purchasing electric vehicles. On the other hand, fossil fuel subsidies are primarily aimed at addressing pollution control, energy security, and tax breaks for domestic production. Additionally, the structure of certain industries, such as Master Limited Partnerships, provides tax benefits to fossil fuel companies that are not available to renewable energy companies.
Despite the shift towards renewable energy sources and the increasing cost-competitiveness of renewables, fossil fuel subsidies remain resilient due to their alignment with politicians' stated priorities, such as energy security and pollution control. However, it is important to recognise that fossil fuel use is influenced by multiple factors, and removing subsidies, while beneficial, will not be a panacea for the challenges faced by renewable energy sources.
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Fossil fuel subsidies are inefficient and inequitable
Fossil fuel subsidies have been a long-standing feature of government energy policies. However, the continuation of these subsidies is increasingly being questioned due to their inefficiency and inequity.
Firstly, fossil fuel subsidies are inefficient. They promote the inefficient allocation of resources, hindering economic growth. For instance, the price that consumers pay for energy rarely reflects the full cost of production and environmental impact. This results in a “wrong price signal” to consumers, removing the incentive to use cleaner energy and leading to inefficient behaviour. Additionally, fossil fuel subsidies contribute to climate change and adverse health impacts, with a global cost of $5.3 trillion in 2015 due to greenhouse gas emissions and other pollution. Removing these subsidies would reduce emissions and contribute to global efforts to mitigate climate change.
Secondly, fossil fuel subsidies are inequitable. They disproportionately benefit higher-income households and the richest 20% of the population, rather than targeting support towards lower-income groups. This contributes to inequality and drives inequality by benefitting the rich. While removing subsidies may impact the incomes of poorer households in the short term, a progressive and gradual reform approach can address this issue.
The continuation of fossil fuel subsidies is particularly inefficient and inequitable given the increasing cost-competitiveness of renewable energy alternatives. Heavy subsidies for solar panels and onshore wind farms have made these renewable sources competitive with fossil fuels in most places, allowing for clean energy adoption without higher energy bills. However, other renewable technologies like geothermal and offshore wind still require more government support to compete.
In conclusion, fossil fuel subsidies are inefficient as they hinder economic growth, contribute to climate change, and promote inefficient energy consumption. They are also inequitable, benefiting higher-income groups and contributing to inequality. Reforming these subsidies is necessary to support the transition to clean and renewable energy, reduce inequality, and address the climate crisis.
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Frequently asked questions
In 2022, the US spent $29.4 billion on energy subsidies. Of that, $8.7 billion were “end-use” subsidies, mainly financial assistance for energy in low-income households ($3.8 billion), home energy efficiency subsidies ($2.7 billion) and electric vehicle subsidies ($1.1 billion).
According to a report by the International Renewable Energy Agency, in 2017, fossil fuels garnered 70% of energy subsidies worldwide, with only 20% for renewables. However, according to the US Energy Information Administration, from 2016 to 2022, half of the federal money spent on energy subsidies went to renewables, while less than 15% went to fossil fuels.
Historically, subsidies were granted to the fossil fuel industry to lower production costs and incentivize new domestic energy sources. Today, fossil fuel subsidies are primarily used to address energy security and pollution control.
