Ameer Randolph
Fossil fuel subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. In 2022, global fossil fuel subsidies amounted to $7 trillion, or 7.1% of global GDP, reflecting a $2 trillion increase since 2020. This is more than four times the amount from a decade earlier and is projected to rise to $8.2 trillion by 2030. The largest contributors to global fossil fuel subsidies are underpricing for local air pollution costs and climate damage, followed by explicit subsidies, and broader road transport externalities. The World Bank also poured billions of dollars into fossil fuels in 2022. Fossil fuel subsidies impose enormous environmental and economic costs, and removing them would significantly reduce global carbon dioxide emissions, improve health, and free up government revenues.
| Characteristics | Values |
|---|---|
| Global fossil fuel subsidies in 2022 | $7 trillion or 7.1% of global GDP |
| Fossil fuel subsidies as a percentage of global gross domestic product | 7.1% |
| Fossil fuel subsidies as a percentage of global income spent on education | More than 4.3% |
| Fossil fuel subsidies as a percentage of global income spent on healthcare | Two-thirds of 10.9% |
| Fossil fuel subsidies in 2020 | $5 trillion |
| Fossil fuel subsidies in 2030 | $8.2 trillion |
| Fossil fuel subsidies in the US between 2010 and 2030 | $23 trillion |
| Fossil fuel subsidies in the US between 2010 and 2030 if oil prices reach $200 per barrel by 2030 | $30 trillion |
| World Bank funding for fossil fuels in 2022 | $3.7 billion |
| Global explicit subsidies for fossil fuels in 2022 | $1.5 trillion |
| Global implicit subsidies for fossil fuels | $5 trillion |
| Global revenue gain from full price reform in 2030 | $4.4 trillion |
| Global revenue gain from partial price reform | Two-thirds of full price reform |
| Fossil fuel subsidies in major oil-producing countries | More than $500 per person |
| Fossil fuel subsidies in countries across Europe, North and South America, and East Asia | Less than $100 per person |
| Fossil fuel subsidies in Africa and South Asia | Less than $20 per person |
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What You'll Learn
Fossil fuel subsidies
According to the International Monetary Fund (IMF), fossil fuel subsidies surged to a record $7 trillion in 2022, a $2 trillion increase since 2020. This amount is more than four times the $1.5 trillion in explicit subsidies given in 2022, which was equivalent to around 1.5% of the global gross domestic product (GDP). The increase in subsidies can be attributed to the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic.
The countries that provide the largest subsidies are often large fossil fuel producers, such as Saudi Arabia, Turkmenistan, Libya, and Algeria, spending more than $500 per person, sometimes over $1,000. These subsidies can represent more than 10% of their GDP. In contrast, countries across Europe, North and South America, and East Asia typically give less than $100 per person, while in Africa and South Asia, it's even less, sometimes close to zero.
The high cost of fossil fuel subsidies has significant fiscal consequences, leading to higher taxes, borrowing, or lower spending. They also promote inefficient allocation of resources, hindering economic growth, and encouraging pollution, contributing to climate change and premature deaths from local air pollution. Removing these subsidies is projected to prevent 1.6 million premature deaths annually and put emissions on track to reach global warming targets. However, removing fuel subsidies can be challenging, and governments must carefully design and communicate reforms as part of a comprehensive policy package.
Despite pledges from the G20 countries and other international institutions to phase out inefficient fossil fuel subsidies, they have continued due to voter demand and energy security concerns. As of 2023, global fossil fuel subsidies have risen to $7 trillion, with EU countries among those increasing support for fossil fuels.
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Environmental costs
Fossil fuels impose enormous environmental costs, from local air pollution to damage from global warming. The environmental costs of fossil fuels are often not reflected in their prices, 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.
The use of fossil fuels results in significant climate, environmental, and health costs. Each stage of the fossil fuel supply chain, from extraction and transportation to refining and burning, generates externalities. Burning fossil fuels emits greenhouse gases, such as carbon dioxide, which trap heat in the Earth's atmosphere and contribute to climate change. In 2019, fossil fuels accounted for 74% of US greenhouse gas emissions. Ocean acidification is another consequence, with at least a quarter of the carbon dioxide emitted from fossil fuels being absorbed by the ocean, changing its chemistry (pH).
The environmental impact of fossil fuels also includes sea level rise due to oceanic and atmospheric warming, causing more frequent flooding, storm surges, and saltwater intrusion. Fossil fuels produce hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury, which are harmful to the environment and human health. Air pollution from fossil fuels can cause acid rain, eutrophication, damage to crops and forests, and harm to wildlife. It can also lead to various health issues, including asthma, cancer, heart disease, and premature death. Globally, fossil fuel pollution is responsible for one in five deaths, with 350,000 premature deaths in the US in 2018 attributed to fossil fuel-related pollution.
The annual cost of the health impacts of fossil fuel-generated electricity in the US is estimated to be up to $886.5 billion. Fossil fuel combustion is the leading contributor to global warming, which could also inflict massive economic damage. Sea level rise and increased storm severity could put cities like New York, Miami, and New Orleans at risk of costly storm damage. A 2008 study estimated that high-intensity hurricanes could cause up to $422 billion in damages in Atlantic and Gulf Coast states between 2025 and 2100. Additionally, global warming has already impacted agriculture, with significant crop losses between 1981 and 2002, resulting in economic damages.
Removing fossil fuel subsidies and transitioning to cleaner energy sources can help address these environmental costs. By eliminating subsidies and imposing corrective taxes, fuel prices would increase, encouraging firms and households to consider environmental impacts and leading to reduced emissions, cleaner air, and improved public health. Scrapping fossil-fuel subsidies is projected to prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion. Additionally, transitioning away from petroleum and investing in clean energy can bring economic savings and support climate goals.
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Explicit and implicit subsidies
Fossil fuel subsidies are a significant global issue, amounting to a staggering $7 trillion in 2022, according to the International Monetary Fund (IMF). This figure represents approximately 7% of global GDP, highlighting the substantial resources dedicated to supporting fossil fuel consumption and production. This figure includes both explicit and implicit subsidies, which have distinct characteristics and implications.
Explicit subsidies refer to instances where the retail price of fuel is set below its supply cost. In other words, consumers pay less than the actual cost of providing the fuel. These subsidies are often direct payments or price regulations that make fossil fuels more affordable for consumers. They can be found in various regions, including the Middle East, North Africa, Europe, and East Asia. Explicit subsidies accounted for approximately $1.2 to $1.5 trillion of the total subsidy amount in 2022.
On the other hand, implicit subsidies refer to the undercharging or lack of charging for environmental costs associated with fossil fuel use, such as local air pollution, climate change, road accidents and congestion. These indirect costs, often referred to as "externalities," are not reflected in market prices. Implicit subsidies are more challenging to quantify monetarily, but they represent a significant portion of the total subsidy, estimated at around $5.7 trillion.
The distinction between explicit and implicit subsidies is crucial. While explicit subsidies involve direct payments that could potentially be reallocated to other sectors, such as low-carbon technologies, implicit subsidies are indirect and require a more comprehensive approach to address them. Removing explicit subsidies and imposing corrective taxes on fossil fuels would lead to higher fuel prices, encouraging consumers and firms to consider environmental costs and make cleaner choices.
The removal of explicit and implicit fossil fuel subsidies is expected to have numerous benefits. It would reduce global carbon dioxide emissions, improve air quality, reduce premature deaths, increase government revenues, and bring emissions closer to global warming targets. Additionally, it would address the issue of income distribution, as fuel subsidies primarily benefit higher-income households rather than those in need.
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Spending in the US
Fossil fuel subsidies surged to a record $7 trillion last year as governments supported consumers and businesses during the global spike in energy prices. This was caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. As the world struggles to restrict global warming to 1.5 degrees Celsius, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two-thirds of what they spend on healthcare (10.9 percent).
In the United States, by some estimates, taxpayers pay about $20 billion a year to the fossil fuel industry. Economists generally agree that these subsidies offer "little if any benefit in the form of oil patch jobs, lower prices at the pump, or increased energy security for the country". The fossil fuel industry receives substantial government funding for research and development. Federal funding for fossil fuels is largely administered 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 also be considered direct subsidies, as they are directly related to maintaining the competitiveness of the industry.
Efforts to make coal more economical and cleaner—despite declining natural gas and renewable energy prices—have been a particular focus of the federal government’s funding, as has Carbon Capture and Storage (CCS). CCS technologies capture carbon dioxide from power and industrial sectors and store it deep underground in geological formations, or turn it into usable products, such as fuels or chemicals. However, given both the current negative economics of coal for power generation and the energy intensity of carbon capture and storage, CCS is very unlikely to sustain the domestic use of coal power.
The negative externalities of fossil fuel use are estimated to have totaled $5.3 trillion globally in 2015 alone. These costs come in the form of greenhouse gas emissions and other pollution resulting from the extraction and burning of fossil fuels. These negative externalities disproportionately affect communities that are the most vulnerable to the health and environmental impacts of fossil fuel combustion and extraction, namely minority and low-income populations that are more likely to live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries.
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World Bank spending
The World Bank has reported that subsidies for fossil fuels, agriculture, and fisheries exceed $7 trillion in explicit and implicit subsidies, which is around 8% of global GDP. Explicit subsidies, which are direct government expenditures, in these three areas total about $1.25 trillion, equivalent to the size of a large economy such as Mexico's. Implicit subsidies, which are a measure of the impact of these subsidies on people and the planet, amount to over $6 trillion a year, with the burden falling mostly on the poor.
The World Bank's report, "Detox Development: Repurposing Environmentally Harmful Subsidies", highlights that countries spend six times more on subsidizing fossil fuel consumption than they pledged in the Paris Agreement to tackle climate change. This amounts to $455 billion to $485 billion spent on fossil fuel subsidies alone. The report suggests that redirecting these subsidies could unlock at least $500 billion per year towards more productive and sustainable uses.
The true cost of harmful practices in agriculture, fishing, and fossil fuels is not fully captured by direct expenditures. For example, the burning of oil, gas, and coal causes seven million premature deaths each year through toxic air pollution. Implicit subsidies also contribute to pollution, greenhouse gas emissions, road congestion, and the destruction of nature.
The World Bank emphasizes that repurposing these wasteful subsidies can help ensure a green and just transition, providing jobs and opportunities for all. It is critical that subsidy reform does not come at the expense of the poor. Cash and in-kind transfers, such as food vouchers or access to free services, can help protect vulnerable groups during this transition.
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Frequently asked questions
Fossil fuel subsidies surged to a record $7 trillion last year. This is a $2 trillion increase since 2020.
Subsidies are payments that are made to make fossil fuels cheaper. These payments can go towards fossil fuel producers so that the extraction and refining costs are lower, or to consumers so they can buy fossil fuels at a lower market price.
Fossil fuel subsidies impose enormous environmental costs, mostly from local air pollution and damage from global warming. Consumers did not pay for over $5 trillion of environmental costs last year.
Removing fossil fuel subsidies would lead to a significant decrease in global carbon dioxide emissions, cleaner air, and fewer premature deaths. It would also raise government revenues by $4.4 trillion.
