Katerina Swanson
Fossil fuel subsidies are a significant barrier to the transition to renewable energy, with governments worldwide spending hundreds of billions of dollars annually to artificially lower fossil fuel prices. In 2022, global fossil fuel subsidies were estimated at $7 trillion, a $2 trillion increase since 2020, due to surging energy prices. These subsidies are intended to protect consumers from high energy costs but come with substantial fiscal and environmental costs, including hindering economic growth, encouraging pollution, and contributing to climate change. While there have been efforts to reduce subsidies, such as Canada's plan to phase out inefficient fossil fuel subsidies, they remain prevalent and pose a challenge to meeting climate goals.
| Characteristics | Values |
|---|---|
| Definition | 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. |
| Global Amount | $7 trillion in 2022, a $2 trillion increase since 2020 due to government support from surging energy prices. |
| Amount as % of GDP | 7.1% in 2022. |
| Regional Amounts | Europe and North America: 3% of regional GDP; CIS: 23% of regional GDP; MENA, South Asia and EAP: 19%, 10% and 10% of regional GDP respectively. |
| Amount in Turkey | $14 billion between January 2020 and September 2021. |
| Amount in Canada | INR 55,250 crore for oil and gas and INR 12,976 crore for coal in 2021. |
| US Federal Funding Administrators | Department of Energy (DOE) through the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. |
| US Legislative Efforts | Off Fossil Fuels for a Better Future Act (H.R. 3671) amends sections of the Internal Revenue Code of 1986 to eliminate subsidies aimed at the fossil fuel industry. |
| Negative Impacts | Promote inefficient allocation of an economy's resources, encourage pollution, contribute to climate change, cause premature deaths from local air pollution, take funding away from social spending, health, development, clean energy and energy access for the poor. |
| Positive Impacts | Protect consumers by keeping prices low. |
| Reduction in Global Fossil Fuel CO2 Emissions | Raising fuel prices to efficient levels reduces projected global fossil fuel CO2 emissions by 43% below baseline levels in 2030 or 34% below 2019 emissions. |
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What You'll Learn
Fossil fuel subsidies totalled $7 trillion in 2022
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. They are one of the biggest financial barriers to the transition to renewable energy sources. In 2022, fossil fuel subsidies totalled $7 trillion, a $2 trillion increase since 2020, due to government support and surging energy prices. This figure is based on the inclusion of externalities such as health costs and environmental impacts, which result in a much larger total.
The $7 trillion figure is an estimate and varies according to different definitions and methodologies. Under a narrow definition, fossil fuel subsidies totalled around $1.5 trillion in 2022. This figure includes tax breaks on consumption, such as lower sales tax on natural gas for residential heating, and subsidies on production, such as tax breaks on oil exploration. However, this narrower definition excludes the costs of negative externalities, such as air pollution and climate change, which are a result of burning fossil fuels.
When these externalities are included, the cost of fossil fuel subsidies rises significantly. The International Monetary Fund (IMF) found that the true cost of fossil fuel subsidies was $7 trillion annually, or $13 million per minute. This figure includes the costs of fossil fuel production subsidies, such as exploration, extraction, and fossil fuel development, as well as the costs of carbon lock-in, where investment in capital-intensive infrastructure locks in fossil fuel dependence and carbon emissions.
The $7 trillion estimate for 2022 also reflects the impact of the energy crisis caused by Russia's invasion of Ukraine. The spike in energy prices led many countries to implement mechanisms to support consumers, such as putting a price cap on gas and electricity, with the government covering the remaining costs. These consumption subsidies doubled from 2021 to 2022 and pushed many households into "fuel poverty", particularly the poorest households.
The high cost of fossil fuel subsidies has significant fiscal, economic, and environmental consequences. They lead to higher taxes, borrowing, or lower spending, hinder economic growth, encourage pollution and contribute to climate change. Removing fossil fuel subsidies would reduce energy security concerns, lower health risks from air pollution, and greatly reduce global carbon emissions, helping to limit climate change.
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Fossil fuel subsidies are a barrier to renewable energy
Fossil fuel subsidies are a significant barrier to the transition to renewable energy. Each year, governments spend hundreds of billions of dollars to artificially lower the price of fossil fuels, which is far more than what is invested in renewables. This financial support for the fossil fuel industry comes in the form of tax breaks, direct payments, and other incentives, which make energy from fossil fuels more affordable for consumers. While the intention behind these subsidies is to protect consumers by keeping prices low, they have several negative consequences.
Firstly, fossil fuel subsidies promote the inefficient allocation of resources, hindering economic growth. They also contribute to pollution and climate change, with significant emissions of greenhouse gases and harmful local air pollutants. The health risks associated with air pollution from burning fossil fuels cannot be overlooked, as they result in premature deaths and negative health impacts, particularly in vulnerable communities. Additionally, fossil fuel subsidies are not well-targeted at the poor, and mostly benefit higher-income households.
Furthermore, the continuation of fossil fuel subsidies undermines efforts to transition to renewable energy sources. By locking in capital-intensive infrastructure, these subsidies create a dependence on fossil fuels and make it more challenging to shift to climate-compatible energy pathways. The money spent on fossil fuel subsidies could be redirected towards social spending, health, development, and investments in clean energy technologies. This would not only reduce the health and environmental risks associated with fossil fuels but also promote sustainable and equitable outcomes.
The struggle to eliminate fossil fuel subsidies is real, and the power of the fossil fuel industry over energy policies cannot be understated. However, there is a growing recognition among politicians and governments of the need to phase out these subsidies. Canada, for example, has committed to phasing out inefficient fossil fuel subsidies, although it still provides substantial support for domestic fossil fuel production. Other countries have also taken steps to reduce their fossil fuel subsidies, but more needs to be done to meet the commitments made in the Paris Agreement to limit global warming.
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Fossil fuel subsidies are a cause of climate change
Fossil fuel subsidies are a significant contributor to climate change. They 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." These subsidies have a range of negative consequences, including fiscal costs, inefficient allocation of resources, and encouragement of pollution, ultimately hindering efforts to combat climate change.
The fiscal costs associated with fossil fuel subsidies are substantial. In 2022, global fossil fuel subsidies were estimated to be $7 trillion, or 7.1% of the global GDP, representing a $2 trillion increase since 2020. These subsidies are expected to rise further, reaching $8.2 trillion by 2030, particularly due to increasing fuel consumption in emerging markets. The fiscal costs are not limited to direct subsidies but also include the societal costs of climate change and local air pollution.
Fossil fuel subsidies also promote inefficient allocation of resources, hindering economic growth. By subsidizing fossil fuels, governments create an uneven playing field, favoring mature and highly profitable fossil fuel industries over clean and increasingly price-competitive renewable alternatives. This misallocation of resources slows down the transition to renewable energy sources and delays the realization of the economic benefits associated with a more sustainable energy sector.
Additionally, fossil fuel subsidies encourage pollution and contribute to climate change. Underpricing for local air pollution costs and climate damages are the largest contributors to global fossil fuel subsidies. The continued support for the fossil fuel industry through subsidies results in "carbon lock-in," where capital-intensive infrastructure becomes dependent on fossil fuels, making the transition to climate-compatible energy pathways more challenging. The negative impacts of climate change disproportionately affect vulnerable communities, including Global South communities, Indigenous Peoples, People of Color, and low-income populations.
The elimination of fossil fuel subsidies is crucial to addressing climate change. Removing these subsidies would reduce the health risks associated with air pollution and significantly lower global carbon emissions. It would also free up public funds that could be redirected towards social spending, health, development, and investments in clean energy, benefiting communities and accelerating the transition to a sustainable energy future.
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Fossil fuel subsidies are a health risk
Fossil fuel subsidies are a significant barrier to the transition to renewable energy sources, and they pose a range of health risks to communities worldwide. The production and consumption of fossil fuels contribute to local air pollution, leading to premature deaths and adverse health impacts, particularly in vulnerable populations.
According to the International Monetary Fund (IMF), the cost of fossil fuel subsidies reached $7 trillion globally in 2022, a $2 trillion increase since 2020. This massive financial support for the fossil fuel industry comes at a significant cost to public health. Fossil fuel subsidies encourage the continued use of polluting energy sources, leading to increased local air pollution and greenhouse gas emissions, which contribute to climate change.
The health risks associated with fossil fuel subsidies are particularly pronounced in communities closest to extraction sites and infrastructure, including Global South communities, Indigenous Peoples, People of Color, and low-income populations. These communities bear the brunt of the environmental and health impacts of fossil fuel production, including air pollution, water contamination, and climate change-related extreme weather events.
In addition to the direct health impacts, fossil fuel subsidies also divert public funds away from critical areas such as healthcare, social services, and the development of clean energy alternatives. This misallocation of resources hinders the transition to renewable energy sources and perpetuates the reliance on fossil fuels, further exacerbating the health risks associated with their use.
The elimination of fossil fuel subsidies is crucial to mitigating these health risks. By removing subsidies, governments can incentivize the adoption of renewable energy sources, reduce local air pollution, and decrease the carbon emissions driving climate change. While the removal of subsidies may lead to increased energy prices for consumers in the short term, the development of affordable low-carbon energy sources, such as solar and wind power, can help to ensure that energy remains accessible and affordable for all.
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Fossil fuel subsidies are a financial burden
Fossil fuel subsidies are a significant financial burden, with governments around the world spending hundreds of billions of dollars annually to artificially lower the cost of fossil fuels. This financial burden is expected to rise, with predictions that fossil fuel subsidies will reach $8.2 trillion by 2030. This money could be better spent on social services, health, and the development of clean energy sources.
The financial burden of fossil fuel subsidies is particularly striking when compared to the relatively low amount of funding that renewable energy sources receive. For example, in 2021, fossil fuel subsidies in Canada were estimated to be nine times higher than those for renewable energy sources. This disparity in funding hinders the transition to renewable energy sources and perpetuates the world's dependence on fossil fuels.
The high cost of fossil fuel subsidies is also a significant barrier to achieving global climate goals. Despite repeated pledges by politicians and organizations such as the G7 and G20 to end fossil fuel subsidies, little progress has been made. This inaction has substantial consequences for the environment and public health, as fossil fuel subsidies encourage the continued use of energy sources that contribute to climate change and local environmental pollution.
Furthermore, fossil fuel subsidies disproportionately impact vulnerable communities, including Global South communities, Indigenous Peoples, People of Color, and low-income individuals. These communities often bear the brunt of the negative health and environmental consequences of fossil fuel use without reaping the benefits of lower energy costs.
The financial burden of fossil fuel subsidies is not just a drain on government resources but also a hindrance to progress and a contributor to global inequality. Eliminating these subsidies is a crucial step towards a more sustainable and equitable future.
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Frequently asked questions
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.
Fossil fuel industries receive hundreds of billions of dollars in subsidies each year. In 2022, the figure was estimated to be $1.4 trillion, though it can vary depending on oil prices. Under a more expansive definition, the subsidies totalled around $7 trillion.
Major oil producers such as Saudi Arabia, Turkmenistan, Libya, and Algeria spend more than $500 per person on fossil fuel subsidies. Turkey's fossil fuel subsidies are around 0.2% of its GDP, including at least $14 billion between January 2020 and September 2021.
Fossil fuel subsidies have negative impacts on public health, the environment, and climate change. They also hinder the transition to renewable energy sources and take public money away from other important areas such as social spending, health, and clean energy.
