Katerina Swanson
The amount of money governments spend on fossil fuels is a highly debated topic, with estimates ranging from hundreds of billions to $7 trillion annually. This support comes in the form of subsidies, which are payments made by governments to reduce the costs of producing or consuming fossil fuels. 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. These subsidies have significant fiscal, environmental, and societal impacts, including higher taxes, inefficient allocation of resources, increased pollution, and a disproportionate benefit to higher-income households. While removing subsidies can be challenging, it is projected to significantly reduce global carbon emissions, improve public health, and increase government revenues. The distribution of subsidies varies across regions, with major oil-producing countries providing the largest subsidies per person, sometimes exceeding $500. The United States, for example, provides tens of billions of dollars in subsidies to the fossil fuel industry, while also offering clean energy tax credits. As the world grapples with the urgent need to address climate change, the debate around government spending on fossil fuels and the transition to cleaner energy sources remains a critical focus.
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What You'll Learn
Fossil fuel subsidies
There are two main types of fossil fuel subsidies: explicit and implicit subsidies. Explicit subsidies occur when the retail price of fuel is set below its supply cost. In 2022, explicit subsidies accounted for 18% of the total fossil fuel subsidies. Consumption subsidies, a type of explicit subsidy, include selling electricity or gas at affordable rates, subsidizing gasoline, or supporting fuels like kerosene for cooking and heating in lower-income countries. On the other hand, implicit subsidies occur when the retail price fails to include external costs, such as contributions to climate change, local health impacts, and traffic congestion. Implicit subsidies accounted for 82% of the total fossil fuel subsidies in 2022.
Removing fossil fuel subsidies can be challenging and requires careful policy design and implementation. A sudden removal of subsidies may lead to increased energy prices for vulnerable households. However, a portion of the increased revenues from removing subsidies can be used to compensate these households, while the rest can be utilized to cut taxes and fund public goods such as education, healthcare, and clean energy. Additionally, removing subsidies can encourage firms and households to consider environmental costs in their consumption and investment decisions, leading to a significant reduction in global carbon emissions.
Despite the challenges, there have been global efforts to phase out fossil fuel subsidies. At COP26 and COP27 in 2021 and 2022, countries agreed to accelerate the elimination of inefficient fossil fuel subsidies. The United States, for example, has redirected a significant portion of federal funding towards subsidizing renewable energy sources, with half of the federal money spent on energy subsidies from 2016 to 2022 going to renewables. However, the fossil fuel industry continues to receive substantial government funding for research and development, with federal funding administered through initiatives such as the Office of Advanced Fossil Energy R&D and the Loan Guarantee Program.
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Government spending on fossil fuel research and development
The fossil fuel industry receives substantial government funding for research and development. Federal funding for fossil fuels is primarily distributed by the Department of Energy (DOE) through three initiatives: the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed toward the fossil fuel industry can be considered direct subsidies, as they are linked to maintaining the industry's competitiveness. Efforts to make coal more economical and environmentally friendly have been a particular focus of federal funding, as has Carbon Capture and Storage (CCS) technology.
The American Recovery and Reinvestment Act of 2009 included an economic stimulus package of $787 billion, with $3.4 billion allocated to fossil fuel research and development between 2009 and 2011. The Department of Energy's Loan Programs Office (DOE LPO) has also designated $8 billion in loans for advanced fossil fuel projects aimed at avoiding or sequestering greenhouse gases.
While there have been calls from organisations like the G20, the International Energy Agency, and the Organization for Economic Cooperation and Development (OECD) to phase out fossil fuel subsidies, they have been increasing. The latest data shows that global fossil fuel subsidies reached a record $7 trillion in 2022, a half-trillion-dollar increase since 2015. This amount is more than four times the previous estimate of $1.5 trillion, and it exceeds the amount governments spend on education and is close to two-thirds of healthcare spending.
The largest subsidisers are major fossil fuel producers, with China, the United States, Russia, Saudi Arabia, Turkmenistan, Libya, and Algeria being the top contributors. These subsidies can represent more than 10% of GDP for these countries. In contrast, countries in Europe, North and South America, and East Asia typically provide less than $100 per person, while Africa and South Asia offer even less.
Removing fossil fuel subsidies can be challenging, as governments must carefully design and implement reforms. However, doing so would bring significant benefits, including reducing global carbon emissions, improving air quality, reducing premature deaths, and increasing government revenues. The revenue generated from removing subsidies could then be used to compensate vulnerable households, cut taxes, and fund public goods such as education, healthcare, and clean energy initiatives.
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Tax breaks 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 more than four times the previous estimate of $1.5 trillion. These subsidies are a result of the Russia-Ukraine conflict and the economic recovery from the pandemic. The largest subsidies are provided by major oil-producing countries, with Saudi Arabia, Turkmenistan, Libya, and Algeria spending more than $500 per person, sometimes exceeding $1,000. These subsidies can represent over 10% of GDP.
While the exact figures vary, it is clear that governments provide significant financial support to the fossil fuel industry through various tax breaks and incentives. For example, the Domestic Manufacturing Deduction, implemented in 2004, decreased the effective corporate tax rate for domestic manufacturers, including fossil fuel companies. The Office of Management and Budget estimated that repealing this deduction for coal and other fossil fuels would have saved $173 million between 2012 and 2016. This subsidy was eventually repealed in 2018.
Another example is the Intangible Drilling Costs Deduction, which allows companies to deduct most of the costs incurred from drilling new wells domestically. The Joint Committee on Taxation estimated that eliminating this tax break would have generated $1.59 billion in revenue in 2017 and $13 billion over ten years. Additionally, federal tax law allows independent producers to deduct 15% of gross revenue from oil and gas properties as percentage depletion, while integrated oil and gas companies can deduct 70% of these costs in the first year and the remaining 30% over the next five years.
These tax breaks and subsidies have significant societal costs. The continued consumption of fossil fuels and the associated fiscal policies have severe environmental, climate, and public health impacts. The negative externalities of fossil fuel use, including greenhouse gas emissions and pollution, are estimated to have totaled $5.3 trillion globally in 2015 alone. The World Health Organization (WHO) declared in 2018 that "climate change is the greatest challenge of the 21st century, threatening human health and development." The relationship between climate change and adverse health impacts is well-established, with increasing greenhouse gas emissions, particularly from fossil fuel combustion, driving climate change and its health consequences.
Furthermore, removing fuel subsidies can be challenging. 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. The rest could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy initiatives.
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Government intervention in energy markets
In 2022, global explicit subsidies for fossil fuels amounted to around $1.5 trillion, with 80% going to consumers and the rest to fossil fuel production. This surge in subsidies can be attributed to the spike in energy prices caused by the Russia-Ukraine conflict. However, the true cost of fossil fuel subsidies may be much higher when implicit subsidies are considered. According to the IMF, fossil fuels account for 85% of all global subsidies.
The impact of government intervention in energy markets can be complex. On the one hand, it can help make energy more affordable for households and businesses, especially in times of crisis. On the other hand, it can distort capital investment decisions and increase costs for consumers in the long run. For example, removing explicit and implicit fossil fuel subsidies could prevent 1.6 million premature deaths annually, raise government revenues, and significantly reduce carbon emissions.
While the debate around government intervention in energy markets continues, there is a growing recognition that intervention may be necessary to address the social cost of carbon and support the development of new energy technologies. The EU, for instance, has issued guidance for renewable support schemes and encourages cooperation between countries to meet renewable energy targets. Similarly, the US government has provided funding for research and development in advanced nuclear energy, carbon capture, and storage and transmission technologies for wind and solar energy.
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Impact of fossil fuel subsidies on climate change
Fossil fuel subsidies have surged to a record $7 trillion, or 7.1% of global GDP in 2022, reflecting a $2 trillion increase since 2020. This surge is attributed to government support to cushion consumers and businesses from the spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. Fossil fuels account for 85% of all global subsidies.
The impact of these subsidies on climate change is significant. Firstly, they contribute to global warming and climate change by encouraging the continued use of fossil fuels, which are the primary cause of climate change. As governments subsidize fossil fuels, consumers are incentivized to purchase them at lower prices, leading to increased consumption. This results in higher carbon dioxide emissions, which contribute to global warming and climate change.
Secondly, fossil fuel subsidies hinder the transition to cleaner and renewable energy sources. By making fossil fuels more affordable, subsidies discourage investment in renewable energy technologies, which are often more expensive. This delays the adoption of renewable energy sources, which could help mitigate climate change.
Thirdly, fossil fuel subsidies disproportionately affect vulnerable communities, including minority and low-income populations. These communities are more likely to live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries. The negative externalities of fossil fuel combustion and extraction, such as air pollution and climate change, have adverse health and environmental impacts on these vulnerable communities.
Finally, fossil fuel subsidies have fiscal consequences, leading to higher taxes, borrowing, or lower spending. Removing fossil fuel subsidies and imposing corrective taxes on fuels would increase fuel prices, encouraging firms and households to consider environmental costs when making consumption and investment decisions. This could lead to a significant reduction in global carbon dioxide emissions, cleaner air, improved public health, and increased government revenues.
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Frequently asked questions
The amount spent by governments on fossil fuels varies. In 2022, global explicit subsidies for fossil fuels amounted to around $1.5 trillion. However, when taking into account implicit subsidies, the total amount of fossil fuel subsidies surged to a record $7 trillion.
Explicit subsidies are when the retail price of a fuel is below its supply cost. These subsidies are typically provided to fossil fuel producers to lower extraction and refining costs or to consumers to reduce the market price of fossil fuels.
Implicit subsidies occur when the retail price of a fuel fails to include external costs, such as contributions to climate change, local health damages, and traffic congestion. Implicit subsidies can also include tax breaks and other societal costs associated with the use of fossil fuels.
Governments provide subsidies to protect consumers by keeping prices low and to promote economic growth. In the case of fossil fuels, subsidies have been used to support energy markets and ensure energy security. However, subsidies have also led to increased burning of fossil fuels, contributing to climate change and local air pollution.
