Mercedes Mullins
Fossil fuel subsidies are a pressing issue that has attracted renewed attention in recent years. In 2022, global fossil fuel subsidies reached a staggering $7 trillion, a $2 trillion increase since 2020, due to surging energy prices and the economic recovery from the pandemic. These subsidies, intended to protect consumers by keeping prices low, have significant fiscal, environmental, and societal implications. While subsidies have long been used to lower production costs and promote domestic energy sources, they are now under scrutiny for their role in hindering growth, encouraging pollution, and benefiting higher-income households. With the growing urgency to address climate change and transition to low-carbon energy sources, the focus is on reducing fossil fuel subsidies and reallocating resources to promote sustainable and equitable outcomes.
| Characteristics | Values |
|---|---|
| Global fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Global fossil fuel subsidies in 2023 | $1.1 trillion |
| Increase in fossil fuel subsidies from 2020 to 2022 | $2 trillion |
| Explicit subsidies in 2022 | $1.3 trillion or 18% of total subsidies |
| Implicit subsidies in 2022 | $5.7 trillion or 82% of total subsidies |
| Projected fossil fuel subsidies in 2030 | $8.2 trillion |
| Fossil fuel subsidies as a percentage of regional GDP | CIS: 23%, MENA: 19%, South Asia: 10%, EAP: 10%, Europe and North America: 3% |
| CO2 emissions reduction by 2030 if fossil fuel prices reflected true cost | 10% |
| CO2 emissions reduction by 2030 if fuel prices raised to efficient levels | 43% below baseline levels or 34% below 2019 emissions |
| Projected increase in government revenue by scrapping explicit and implicit fossil fuel subsidies | $4.4 trillion |
| Projected number of prevented premature deaths annually by scrapping explicit and implicit fossil fuel subsidies | 1.6 million |
| Fossil fuel subsidies as a percentage of global income spent on education and healthcare | More than annual spending on education (4.3%), two-thirds of spending on healthcare (10.9%) |
| Examples of explicit subsidies | Tax breaks on consumption and production, such as lower sales tax on natural gas for residential heating and tax breaks on oil exploration |
| Examples of implicit subsidies | Undercharging for environmental costs, such as local air pollution and climate change due to burning fossil fuels |
| Examples of fossil fuel subsidies in the US | Intangible Drilling Costs Deduction, Percentage Depletion |
| Examples of fossil fuel subsidies in Canada | Fuel tax exemption for farmers, sales tax exemption for natural gas used for heating |
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What You'll Learn
Fossil fuel subsidies rose to $7 trillion in 2022
Fossil fuel subsidies have been a long-standing government intervention in energy markets. In 2022, these subsidies reached a record $7 trillion, or 7.1% of global GDP, reflecting a $2 trillion increase since 2020. This surge in subsidies was driven by government efforts to support consumers and businesses during the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. This resulted in a substantial rise in the consumption of oil, coal, and natural gas.
The majority of fossil fuel subsidies are implicit, as they do not reflect the environmental costs associated with their consumption. These implicit subsidies occur when the retail price is below a fuel's supply cost, and they are predominant in the East Asia and Pacific (EAP) region. In 2022, consumers did not pay for over $5 trillion of environmental costs, including local air pollution and damage from global warming. This undercharging for environmental costs and forgone consumption taxes accounted for 82% of the 2022 fossil fuel subsidies.
The consequences of these subsidies are significant. Firstly, they contribute to climate change and local air pollution, leading to negative health impacts and premature deaths. Secondly, they hinder economic growth by promoting the inefficient allocation of resources. Additionally, they often benefit higher-income households rather than targeting support towards the poor.
However, removing fossil fuel subsidies can be challenging. A sudden elimination of subsidies may impact vulnerable households with higher energy prices. Therefore, a carefully designed and communicated reform policy is necessary. A potential solution is to use the increased revenues from removing subsidies to compensate vulnerable households, cut taxes, and fund public goods such as education, healthcare, and clean energy initiatives.
By phasing out fossil fuel subsidies, countries can reduce emissions, generate revenue, and contribute to the global effort to curb climate change and limit global warming to the internationally agreed-upon target of 1.5-2 degrees Celsius.
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Explicit and implicit subsidies
Fossil fuel subsidies have risen sharply in recent years, reaching a record $7 trillion in 2022. This figure reflects a $2 trillion increase since 2020, largely driven by government support for consumers and businesses during the surge in energy prices caused by the Russian invasion of Ukraine and the economic recovery from the pandemic. The subsidies are intended to protect consumers by keeping prices low, but they have significant fiscal, economic, and environmental consequences.
The subsidies can be categorised into explicit and implicit subsidies. Explicit subsidies occur when the retail price of fuel is below its supply cost. They are prevalent in the Middle East and North Africa (MENA), Europe, the Commonwealth of Independent States (CIS), and East Asia and the Pacific (EAP). In 2022, explicit subsidies accounted for 18% of the total fossil fuel subsidies, or $1.3 trillion.
On the other hand, implicit subsidies refer to undercharging for environmental costs and forgone consumption taxes. They occur when the environmental and societal costs of fossil fuel use are not reflected in the prices. These costs include local air pollution, climate change, congestion and accidents, and consumption tax revenue. Implicit subsidies are more common in countries that produce fossil fuels, as they represent the opportunity cost of pricing domestic energy below market levels. In 2022, implicit subsidies made up 82% of the total fossil fuel subsidies, amounting to over $5 trillion.
The share of explicit subsidies is projected to decrease to 8% by 2030, while implicit subsidies will continue to dominate as developing countries increase their consumption of fossil fuels. Removing both explicit and implicit subsidies would have significant benefits, including reducing air pollution, generating revenue, preventing premature deaths, and slowing climate change. However, phasing out subsidies can be challenging, and governments must carefully design and implement reforms to ensure a smooth transition.
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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 policy, with some subsidies in the US dating back a century. The purpose of these subsidies has been to lower the cost of fossil fuel production and incentivize new domestic energy sources. However, the circumstances that led to the implementation of these subsidies no longer exist, and the broader utility of fossil fuel subsidies is now being questioned.
In 2022, global fossil fuel subsidies reached a record $7 trillion, or 7.1% of global GDP. This reflects a $2 trillion increase since 2020, largely driven by government support for consumers and businesses during the surge in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. The vast majority of these subsidies were implicit, as environmental costs are often not reflected in the prices of fossil fuels, particularly coal and diesel.
Despite the recent surge in fossil fuel subsidies, they are expected to decline in the near term as energy price support policies are unwound and international prices fall. However, they are then projected to rise to $8.2 trillion by 2030 as the share of fuel consumption in emerging markets, where price gaps are generally larger, continues to climb. This expected increase in subsidies is at odds with international efforts to phase out fossil fuel subsidies and meet global warming targets.
Removing fossil fuel subsidies would have significant benefits, including reducing air pollution, generating revenue, and contributing to slowing climate change. It would also reduce energy security concerns related to volatile fossil fuel supplies. Additionally, scrapping explicit and implicit fossil fuel subsidies is estimated to prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion.
However, removing fuel subsidies can be challenging, and governments must carefully design and communicate reforms as part of a comprehensive policy package. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices, while the remainder could be used to cut taxes and fund public goods such as education, healthcare, and clean energy.
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Removing subsidies would reduce air pollution and slow climate change
Fossil fuel subsidies have surged to a record $7 trillion, with governments spending approximately $577 billion to $600 billion annually on them. These subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. They have sizable fiscal consequences, promote inefficient allocation of an economy's resources, and encourage pollution. The burning of fossil fuels is a significant contributor to air pollution, which kills about seven million people a year and is linked to "huge" reductions in intelligence. Underpricing for local air pollution costs and climate damages are the largest contributor to global fossil fuel subsidies, accounting for about 30% each.
Removing fossil fuel subsidies and taxing fossil fuels correctly could lead to a decline in fossil fuel-related carbon emissions by over 20% globally. This would also reduce premature air pollution-related deaths by over 50% and raise government revenue by $2.9 trillion. Removing subsidies and using the revenue gain for better targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes. Fossil fuel subsidy removal would also reduce energy security concerns related to volatile fossil fuel supplies.
Subsidies are decomposed into explicit and implicit subsidies. Explicit subsidies occur when the retail price is below a fuel's supply cost. Implicit subsidies occur when the retail price fails to include external costs, such as contributions to climate change through greenhouse gas emissions, local health damages through the release of harmful local pollutants, and traffic congestion and accident externalities associated with the use of road fuels. The share of explicit subsidies is projected to fall from 18% in 2022 to 8% by 2030, while the share of implicit subsidies is expected to increase.
Removing subsidies would lead to an increase in fuel prices, causing firms and households to consider environmental costs when making consumption and investment decisions. This would result in a significant reduction in global carbon dioxide emissions, cleaner air, and improved health outcomes. It is estimated that scrapping explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually and put emissions on track to reach global warming targets.
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The US and Canada are phasing out fossil fuel subsidies
Fossil fuel subsidies surged to a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020. This surge was caused by government support for consumers and businesses during the global spike in energy prices, which was itself 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, which is more than governments spend on education and almost two-thirds of what they spend on healthcare.
These subsidies are intended to protect consumers by keeping prices low, but they have significant fiscal consequences, such as higher taxes or lower spending, and promote inefficient allocation of an economy's resources, hindering growth. They also encourage pollution, contributing to climate change and premature deaths from air pollution.
The US and Canada are taking steps to phase out fossil fuel subsidies. In the US, the Clean Energy for America Act (S. 1288) was introduced in May 2019. This act amends the Internal Revenue Code to replace the 44 existing energy tax credits with three technology-neutral tax provisions that would incentivize the use of low and zero-emissions technologies, including clean electricity, clean transportation, and energy efficiency. Additionally, the Tax Cuts and Jobs Act repealed a subsidy for coal and other hard mineral fossil fuels, saving $173 million between 2012 and 2016. The US government also provides funding for research and development projects through the Department of Energy, which can be considered direct subsidies as they maintain the competitiveness of the fossil fuel industry.
Canada has also shown commitment to phasing out fossil fuel subsidies. After COP27, Canada reiterated its pledge to phase out fossil fuel subsidies by 2023, two years ahead of the G20 commitment. Canada's position was that countries need to accelerate their climate mitigation efforts to limit temperature increases to 1.5 degrees and avoid the worst consequences of climate change. Additionally, the Canadian Climate Institute has stated that phasing out government subsidies for increased fossil fuel production is essential to aligning Canada's economic policy with its climate goals. This new policy will enable a renewed focus on emissions reductions and economic growth, ensuring that support for the fossil fuel sector is aligned with Canada's climate goals.
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Frequently asked questions
Fossil fuel subsidies were \$7 trillion in 2022, reflecting a \$2 trillion increase since 2020. This amount is equivalent to 7.1% of the global GDP.
Fossil fuel subsidies have been found to have several negative impacts. Firstly, they contribute to climate change and local air pollution, leading to premature deaths. Secondly, they hinder economic growth by promoting inefficient allocation of resources. Additionally, they often benefit higher-income households instead of targeting support towards those in greatest need.
Removing fossil fuel subsidies would bring several benefits. It would reduce global carbon dioxide emissions, improve air quality, and prevent premature deaths from local air pollution. Additionally, removing subsidies would generate significant revenue for governments, estimated at \$4.4 trillion, which could be used for social spending, reducing taxes, and investing in sustainable initiatives.
According to a 2019 report, the largest subsidizers of fossil fuels are China, the United States, and Russia. Canada has also been noted to provide significant fiscal support to the oil and gas sector.
Removing fossil fuel subsidies can be challenging due to political and social factors. It may be unpopular with voters, and there may be concerns about energy security and protecting citizens from fluctuations in energy prices. However, economists recommend gradually phasing out subsidies and using the additional revenue to support vulnerable households with higher energy prices.
