Rajan Wilcox
Fossil fuel subsidies are defined as any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers. Fossil fuel companies receive substantial government funding for research and development. These subsidies are intended to protect consumers by keeping prices low, but they come at a significant cost. In 2022, global subsidies for fossil fuel consumption exceeded $1 trillion for the first time, with global explicit subsidies for fossil fuels amounting to around $1.5 trillion. In 2023, this figure rose to a record $7 trillion.
| Characteristics | Values |
|---|---|
| Global fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Global fossil fuel consumption subsidies in 2023 | $620 billion |
| Global explicit subsidies for fossil fuels in 2022 | $1.5 trillion |
| Fossil fuel subsidies in the United States in 2022 | $757 billion |
| Explicit subsidies in the United States in 2022 | $3 billion |
| Implicit subsidies in the United States in 2022 | $754 billion |
| Global explicit subsidies in 2022 | $1.26 trillion |
| Fossil fuel subsidies in India and Morocco | Dramatically reduced or almost abolished |
| Fossil fuel subsidies in Russia, Iran, China, and Saudi Arabia | High |
| Fossil fuel subsidies in 2030 | Projected to rise to $8.2 trillion |
| Implicit subsidies projection | Expected to grow as developing countries increase fossil fuel consumption |
| Benefits of removing fossil fuel subsidies | Reduced air pollution, increased government revenue, contribution to slowing climate change, reduced energy security concerns, and improved health outcomes |
| Examples of fossil fuel subsidies | Undercharging for supply and environmental costs, tax breaks, and consumption subsidies |
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What You'll Learn
Fossil fuel subsidies rose to $7 trillion in 2022
Fossil fuel subsidies have been a significant concern for governments and environmentalists alike. In 2022, global fossil fuel subsidies rose to a staggering $7 trillion, according to estimates from the International Monetary Fund (IMF). This figure represents a $2 trillion increase since 2020, driven by the surge in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic.
The primary purpose of these subsidies is to support consumers and businesses by keeping energy prices low. However, this comes at a substantial cost. Firstly, it contributes to higher taxes, increased borrowing, or reduced government spending. Secondly, it hinders economic growth by promoting inefficient allocation of resources. And perhaps most importantly, it encourages pollution and accelerates climate change. The environmental costs of consuming fossil fuels are enormous, with consumers failing to pay for over $5 trillion in environmental costs in 2022. These costs arise mainly from local air pollution and global warming, and the health impacts of these issues are significant.
The vast majority of subsidies are implicit, as environmental costs are often not reflected in the prices of fossil fuels, especially coal and diesel. Explicit subsidies, on the other hand, occur when the retail price is below the supply cost of fuel. In 2022, explicit subsidies more than doubled to $1.3 trillion, with most of this amount going to consumers and the rest to fossil fuel production. While these subsidies are intended to protect consumers, they often benefit higher-income households more than lower-income ones.
The removal of fossil fuel subsidies could have significant benefits. According to the IMF, scrapping explicit and implicit subsidies could prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and help meet global warming targets. However, removing these subsidies can be challenging, and governments must carefully design and communicate reforms to ensure vulnerable households are protected from higher energy prices.
As the world grapples with rising temperatures and extreme weather events, the need to curb human-induced climate change becomes increasingly urgent. The rise in fossil fuel subsidies in 2022 underscores the importance of transitioning to low-carbon energy sources and accelerating the green transition.
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Explicit and implicit subsidies
Fossil fuel subsidies are defined differently, including production, consumption, explicit, and implicit subsidies, resulting in varying estimates. Explicit subsidies are direct payments or "classic subsidies" that governments or organisations provide to reduce the costs of producing fossil fuels or make them more affordable for consumers. In 2022, global explicit subsidies for fossil fuels were around $1.5 trillion, with 80% going to consumers and the rest to fossil fuel production. Explicit subsidies occur when the retail price is below the supply cost, making fossil fuels artificially cheap. They are prevalent in the Middle East, North Africa, Europe, the Commonwealth of Independent States, and East Asia and the Pacific.
On the other hand, implicit subsidies refer to the undercharging for environmental costs and forgone consumption taxes. They are considered "post-tax subsidies" and are higher than explicit subsidies. Implicit subsidies are projected to increase as developing countries with higher-polluting industries and dense populations raise their fossil fuel consumption. The vast majority of subsidies are implicit, as environmental costs are often not reflected in fossil fuel prices, especially for coal and diesel. Consumers did not pay for over $5 trillion in environmental costs in 2022. Implicit subsidies include the societal costs of burning fossil fuels, such as local air pollution, climate change, road accidents, and congestion.
The removal of explicit and implicit subsidies would significantly reduce global carbon dioxide emissions, improve air quality, reduce premature deaths, and generate additional government revenue. However, eliminating fuel subsidies can be challenging, and governments must carefully design and communicate policy reforms. A portion of the increased revenue could compensate vulnerable households facing higher energy prices, while the rest could be used for tax cuts and funding public goods such as education, healthcare, and clean energy.
According to the International Monetary Fund (IMF), fossil fuel subsidies reached a record $7 trillion in 2022, equivalent to 7% of global GDP. This estimate includes both explicit and implicit subsidies, with the latter constituting the majority of the total. While explicit subsidies range from $1.2 to $1.5 trillion, addressing the remaining $5.7 trillion in implicit subsidies requires a range of approaches.
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Fossil fuel subsidies in Canada
Fossil fuel subsidies have surged to a record $7 trillion globally. These subsidies are projected to grow as developing countries increase their consumption of fossil fuels. Fossil fuel subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. They can be defined as explicit subsidies ?(undercharging for supply costs) or implicit subsidies (undercharging for environmental costs and forgone consumption taxes).
In Canada, the government has recognized that inefficient fossil fuel subsidies undermine efforts to address climate change, wasteful energy consumption, market distortions, and barriers to clean energy investment. The Office of the Auditor General of Canada has been working on fossil fuel subsidies since 2000 and has produced several studies and audits on the topic. However, Canada's progress in phasing out inefficient fossil fuel subsidies has been slow, and the government has not fully implemented its plans.
One challenge in phasing out fossil fuel subsidies is the potential impact on energy prices and consumers. Removing subsidies can lead to higher energy prices, which may disproportionately affect vulnerable and lower-income households. However, it is important to note that consumption subsidies can also distort markets and hinder the transition to cleaner energy sources.
To address these concerns, any removal of fossil fuel subsidies should be carefully designed and implemented as part of a comprehensive policy package. This includes using the increased revenues to compensate vulnerable households, cut taxes on work and investment, and fund public goods such as education, healthcare, and clean energy initiatives.
By phasing out inefficient fossil fuel subsidies, Canada can contribute to global efforts to reduce carbon emissions, improve air quality, and promote a healthier and more sustainable future.
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Fossil fuel subsidies and climate change
Fossil fuel subsidies have surged to a record $7 trillion, accounting for 7.1% of global GDP in 2022. This unprecedented spike in subsidies is attributed to government efforts to support consumers and businesses amidst the global energy crisis triggered by Russia's invasion of Ukraine and the economic recovery from the pandemic. While subsidies aim to protect consumers by keeping prices low, they come with substantial costs and adverse environmental impacts.
The existence of fossil fuel subsidies can be traced back to historical policies designed to lower production costs and incentivize new domestic energy sources. Over time, these subsidies have become outdated, yet they remain embedded within the tax codes of many countries, including the United States. The persistence of these subsidies is challenging to justify, given the mature and highly profitable nature of the fossil fuel industry today. Moreover, the availability of increasingly competitive renewable alternatives underscores the need for a transition away from fossil fuels.
The subsidies can be categorized into explicit and implicit subsidies. Explicit subsidies, found predominantly in the Middle East, North Africa, Europe, Commonwealth of Independent States, and East Asia, occur when the retail price is below the fuel's supply cost. In 2022, global explicit subsidies for fossil fuels reached approximately $1.5 trillion, with around 80% benefiting consumers and the rest going into fossil fuel production. On the other hand, implicit subsidies arise when the retail price fails to account for external costs, such as contributions to climate change, local health impacts, and traffic congestion. The vast majority of subsidies are implicit, and consumers did not pay for over $5 trillion in environmental costs last year.
The continued provision of fossil fuel subsidies has significant implications for climate change and public health. Scaling back these subsidies is crucial to reducing air pollution, generating revenue, and mitigating climate change. Removing explicit subsidies and imposing corrective taxes would incentivize firms and households to factor in environmental costs in their decisions, leading to a substantial reduction in global carbon dioxide emissions and improved air quality. Additionally, scrapping explicit and implicit fossil fuel subsidies is projected to prevent 1.6 million premature deaths annually and generate $4.4 trillion in government revenues.
However, removing fuel subsidies is a complex undertaking. Governments must carefully design, communicate, and implement reforms as part of a comprehensive policy package. A portion of the increased revenues should compensate vulnerable households facing higher energy prices, while the remainder could be utilized to cut taxes on work and investment and fund critical areas such as education, healthcare, and clean energy. As global energy prices recede and emissions rise, the current context presents an opportune moment to phase out explicit and implicit fossil fuel subsidies, fostering a healthier and more sustainable future for the planet.
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Fossil fuel subsidies and consumer costs
Fossil fuel subsidies are defined as "any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers." Fossil fuels are often subsidised, reducing the short-term economic incentives to switch to alternative energy sources.
In 2022, global subsidies for fossil fuel consumption exceeded $1 trillion for the first time, marking a significant increase. This surge was a result of disruptions in energy markets that led to international fuel prices surpassing the actual costs paid by many consumers. The unprecedented subsidies in 2022 were double those of 2021, which were already almost five times higher than the levels recorded in 2020. This jump was particularly pronounced due to the global energy crisis triggered by Russia's invasion of Ukraine. The price of gas increased by as much as 400%, causing a sudden and large jump in the cost of basic energy services such as heating and electricity. This hit the poorest households the hardest, pushing many into "fuel poverty".
Many countries implemented mechanisms to support consumers, such as putting a price cap on gas and electricity so that households paid a rate cheaper than the market price, with the government covering the remaining costs. While subsidies aim to make energy more affordable, particularly for low-income consumers, they can also disproportionately benefit higher-income households. The consensus among economists is that the rich receive the most absolute benefit from fossil fuel subsidies, for example, the poorest people do not usually own cars. However, removing the subsidies may hurt poor people via indirect price increases, such as food prices.
Subsidies also have other negative impacts. They have sizable fiscal consequences (leading to higher taxes, borrowing, or lower spending), promote inefficient allocation of an economy's resources (hindering growth), and encourage pollution (contributing to climate change and premature deaths from local air pollution). The environmental costs of consuming fossil fuels are enormous, mostly from local air pollution and damage from global warming. Consumers did not pay for over $5 trillion of environmental costs last year. This number would almost double if the damage to the climate was valued at levels found in a recent study published in the scientific journal Nature.
Removing fossil fuel subsidies would have a positive impact on energy markets, government budgets, and efforts to tackle climate change. It would also reduce air pollution, generate revenue, and contribute to slowing climate change. If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase, leading firms and households to consider environmental costs when making consumption and investment decisions. This would result in significantly cutting global carbon dioxide emissions, cleaner air, fewer premature deaths, and more fiscal space for governments.
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Frequently asked questions
Fossil fuel subsidies have been estimated at $7 trillion in 2022, reflecting a $2 trillion increase since 2020.
Fossil fuel subsidies are any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers.
Governments provide fossil fuel subsidies to protect consumers by keeping prices low, especially during energy crises.
Fossil fuel subsidies have sizable fiscal consequences, promote inefficient allocation of resources, encourage pollution, and disproportionately benefit higher-income households.
