Rajan Wilcox
Fossil fuel subsidies have been a long-standing feature of government energy policies, but their cost and impact have come under increasing scrutiny. In 2022, global fossil fuel subsidies reached a record-breaking $7 trillion, a substantial increase driven by surging energy prices. This figure represents a significant portion of global GDP, with a cost exceeding annual government spending on education and approaching two-thirds of healthcare expenditure. With the world facing the urgent challenge of curbing global warming and addressing extreme heat, the high cost of fossil fuel subsidies underscores the need for a transition to cleaner energy sources.
| Characteristics | Values |
|---|---|
| Cost of fossil fuel subsidies in 2022 | $7 trillion or 7.1% of global GDP |
| Cost of fossil fuel subsidies in 2023 | $620 billion |
| Cost of fossil fuel subsidies in the US | $20 billion per year |
| Cost of fossil fuel subsidies in the EU | €55 billion per year |
| Cost of fossil fuel subsidies in China | $1.4 trillion in 2015 |
| Cost of fossil fuel subsidies in the US in 2015 | $649 billion |
| Cost of fossil fuel subsidies in Russia | $551 billion |
| Cost of fossil fuel subsidies in India | Fossil fuel subsidies have been dramatically reduced or almost abolished |
| Cost of fossil fuel subsidies in Morocco | Fossil fuel subsidies have been dramatically reduced or almost abolished |
| Cost of fossil fuel subsidies in Saudi Arabia | Fossil fuel subsidies have been phased out |
| Cost of fossil fuel subsidies in Ukraine | Fossil fuel subsidies have been phased out |
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What You'll Learn
Fossil fuel subsidies cost $7 trillion in 2022
Fossil fuel subsidies cost a record $7 trillion in 2022, a $2 trillion increase since 2020. This amount is equivalent to 7.1% of global gross domestic product (GDP). To put this into context, governments spend around 4.3% of global income on education and about two-thirds of this amount (10.9%) on healthcare.
The surge in fossil fuel subsidies was largely driven by the global energy crisis triggered by Russia's invasion of Ukraine, which caused a spike in energy prices. Governments intervened to protect consumers by keeping prices low, providing support such as price caps on gas and electricity. This resulted in consumers paying a rate cheaper than the market price, with governments covering the remaining costs.
The majority of fossil fuel subsidies in 2022 were implicit, reflecting the undercharging of environmental and climate costs. These costs include local air pollution, global warming, and forgone consumption taxes. The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially coal and diesel. Consumers did not pay for over $5 trillion of environmental costs in 2022.
Explicit subsidies, or money spent by governments on undercharging for supply costs, amounted to $1.26 trillion in 2022. This made up about a fifth of the total amount of fossil fuel subsidies. Global explicit subsidies for fossil fuels amounted to around $1.5 trillion in 2022, equivalent to about 1.5% of global GDP.
The removal of fossil fuel subsidies would have significant benefits, including reducing air pollution, generating revenue, and contributing to slowing climate change. It would also encourage the adoption of cleaner, renewable energy sources. However, removing fuel subsidies can be challenging, and governments must carefully design and implement reforms as part of a comprehensive policy package.
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Explicit subsidies made up $1.26 trillion of this
Fossil fuel subsidies surged to a record $7 trillion last year. This was due to governments supporting consumers and businesses during the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. The subsidies for oil, coal and natural gas cost the equivalent of 7.1% of global gross domestic product (GDP). This is more than governments spend annually on education (4.3% of global income) and about two-thirds of what they spend on healthcare (10.9%).
The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel. Consumers did not pay for over $5 trillion of environmental costs last year. This number would almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature. These implicit subsidies are projected to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles—increase their consumption of fossil fuels.
Explicit subsidies made up $1.26 trillion of the total $7 trillion. This includes both production and consumption subsidies. Production subsidies are payments to fossil fuel producers so that the extraction and refining costs are lower. Consumption subsidies are payments to consumers so that they can buy fossil fuels cheaper than the market price. Around 80% of explicit subsidies went to consumers, with the rest going into fossil fuel production.
If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. This would lead firms and households to consider environmental costs when making consumption and investment decisions. Removing explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets.
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Subsidies are expected to rise to $8.2 trillion by 2030
Fossil fuel subsidies have been a long-standing feature of government intervention in energy markets. In 2022, global fossil fuel subsidies amounted to a staggering $7 trillion, reflecting a $2 trillion increase since 2020. This surge in subsidies was driven by government efforts to support consumers and businesses amid soaring energy prices triggered by the Russian invasion of Ukraine and the economic recovery from the pandemic.
The vast majority of these subsidies are implicit, with environmental costs often not reflected in the prices of fossil fuels, particularly coal and diesel. Consumers failed to cover over $5 trillion in environmental costs last year, and this figure is projected to grow as developing countries increase their consumption of fossil fuels.
The consequences of these subsidies are significant. Firstly, they contribute to local air pollution and global warming, with the environmental costs of fossil fuel consumption imposing enormous burdens on societies. Secondly, they hinder progress towards global warming targets. Removing explicit and implicit subsidies could prevent 1.6 million premature deaths annually and generate an additional $4.4 trillion in government revenues, which could be redirected towards crucial areas such as education, healthcare, and clean energy initiatives.
Despite commitments at COP26 and COP27 to accelerate the phase-out of inefficient fossil fuel subsidies, they are expected to rise to $8.2 trillion by 2030. This projected increase is attributed to the growing share of fuel consumption in emerging markets, where price gaps are typically larger. However, it is important to note that the removal of fuel subsidies can be complex, requiring careful policy design and implementation to balance economic and environmental considerations.
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Subsidies have environmental and societal costs
Fossil fuel subsidies have surged to a record $7 trillion, with governments supporting consumers and businesses during the global spike in energy prices. This is a $2 trillion increase since 2020, and these subsidies now reflect 7.1% of global GDP. This is more than governments spend annually on education.
Subsidies have been used to protect consumers by keeping prices low, but they come at a substantial environmental and societal cost. Firstly, they promote inefficient allocation of an economy's resources, hindering growth. Secondly, they encourage pollution and contribute to climate change. The environmental costs are enormous, with local air pollution and damage from global warming being the most significant contributors. Consumers did not pay for over $5 trillion of environmental costs last year. This number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature.
The health impacts are also significant, with millions of premature deaths every year linked to fossil fuel pollution. Scrapping explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually, mainly from reduced lung and heart disease. The societal costs are also evident in the form of higher taxes, borrowing, or lower spending, and they do not benefit poor households as much as rich ones.
The broader utility of fossil fuel subsidies is being questioned, especially when renewable energy technology is increasingly cost-competitive. Fossil fuel subsidies are also tricky to remove, as governments must carefully design, communicate, and implement reforms as part of a comprehensive policy package. However, removing these subsidies would make a major contribution to slowing climate change and reducing air pollution.
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Removing subsidies could reduce global carbon emissions by 28%
Fossil fuel subsidies surged to a record $7 trillion last year, with governments supporting consumers and businesses during the global spike in energy prices. This is a $2 trillion increase since 2020. The subsidies are costing the equivalent of 7.1% of global gross domestic product (GDP). That is more than governments spend annually on education (4.3% of global income) and about two-thirds of what they spend on healthcare (10.9%).
The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel. Consumers did not pay for over $5 trillion of environmental costs last year. This number would almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature.
However, removing fuel subsidies can be challenging. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscores the benefits. For example, in the UK, due to the implementation of public policies such as carbon emission reduction subsidies, primary energy consumption fell from 152.3 in 2007 to 139.8 in 2009, resulting in an 8% reduction in carbon emissions during the same period.
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Frequently asked questions
Fossil fuel subsidies cost $7 trillion in 2022, according to the International Monetary Fund (IMF).
Fossil fuel subsidies in 2021 were $5 trillion, $2 trillion less than in 2022.
The subsidies are intended to protect consumers by keeping prices low. However, they have significant fiscal consequences, promote inefficient allocation of resources, and encourage pollution.
The environmental costs of these subsidies are enormous, with consumers not paying for over $5 trillion of environmental costs last year. This includes local air pollution and damage from global warming.
The $7 trillion spent on fossil fuel subsidies in 2022 includes both explicit subsidies (18%) and implicit subsidies (82%). Explicit subsidies refer to direct payments to fossil fuel producers, while implicit subsidies refer to the societal costs of burning fossil fuels, such as local air pollution and climate change.
