Regan Brown
Fossil fuel subsidies are a pressing issue that demands attention. In 2022, global subsidies for fossil fuel consumption exceeded $1 trillion for the first time, with a significant surge during the global energy crisis. These subsidies have wide-ranging impacts, from environmental degradation to economic and social consequences. The money allocated for fossil fuel subsidies could be redirected to other critical sectors, such as education and healthcare, which often receive less funding. Additionally, the environmental costs associated with fossil fuel consumption are enormous, and the underpricing of local air pollution costs and climate damages further exacerbates the problem. As countries strive to limit global warming and mitigate climate change, phasing out fossil fuel subsidies becomes imperative.
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What You'll Learn
The cost of fossil fuel subsidies
Fossil fuel subsidies have surged to a record $7 trillion, with governments spending the equivalent of 7.1% of global gross domestic product. This is more than twice the amount spent on education and about two-thirds of healthcare spending. The largest price gaps are for coal, followed by diesel and gasoline.
The United States provides an estimated $20 billion in direct subsidies to the fossil fuel industry annually, with 20% allocated to coal and 80% to natural gas and crude oil. European Union subsidies are estimated to total €55 billion annually. Conservative estimates put the cost of US tax subsidies to the fossil fuel industry at $20 billion per year.
The phase-out of fossil fuel subsidies has been recognised by the Group of 20 advanced and emerging market economies, who called for a phase-out of inefficient fossil fuel subsidies in all countries in 2009, and reaffirmed this in 2012. At COP26 and COP27 in 2021 and 2022, countries agreed to accelerate efforts to phase out these subsidies. Removing fossil fuel subsidies would reduce energy security concerns related to volatile fossil fuel supplies and promote sustainable and equitable outcomes.
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The environmental impact of subsidies
Fossil fuel subsidies have surged to a record $7 trillion, with governments spending the equivalent of 7.1% of global gross domestic product. This is more than twice what is spent on healthcare and more than what is spent on education. These subsidies have risen by $2 trillion in the past two years, with explicit subsidies (undercharging for supply costs) more than doubling to $1.3 trillion.
The environmental impact of these subsidies is significant. Fossil fuels account for 85% of all global subsidies, and reducing these subsidies would lower global carbon emissions by 28% and fossil fuel air pollution deaths by 46%. Consumers did not pay for over $5 trillion of environmental costs last year, and this number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature. The true price of carbon and other pollutants is not reflected in the actual cost of fossil fuels and fossil-derived products, and fossil fuel externalities, including societal costs, environmental costs, and health costs, are largely overlooked.
Subsidies encourage pollution and contribute to climate change and premature deaths from local air pollution. They also disproportionately affect minority and low-income populations, who are more likely to live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries. Removing subsidies would reduce air pollution, generate revenue, and make a major contribution to slowing climate change. It is estimated that scrapping explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets.
In addition to the environmental impact, fossil fuel subsidies also have significant economic and social consequences. They lead to higher taxes, borrowing, or lower spending, promote inefficient allocation of resources, hindering economic growth, and are not well-targeted at the poor, mostly benefiting higher-income households. 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.
There have been calls from various international institutions, including the G20, the International Energy Agency, and the Organization for Economic Cooperation and Development (OECD), for the phase-out of fossil fuel subsidies. At COP26 and 27 in 2021 and 2022, countries agreed to accelerate efforts to phase out inefficient fossil fuel subsidies. However, despite these agreements, fossil fuel subsidies continue to increase.
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The social impact of removing subsidies
Fossil fuel subsidies have surged to a record $7 trillion, with governments spending the equivalent of 7.1% of global gross domestic product. This is more than governments spend annually on education and almost two-thirds of what they spend on healthcare. The vast majority of these subsidies are implicit, as environmental costs are often not reflected in the prices of fossil fuels, especially coal and diesel.
The removal of fossil fuel subsidies could have a significant social impact. Firstly, it would reduce global carbon emissions and fossil fuel air pollution deaths, improving public health and quality of life, especially for minority and low-income populations who are disproportionately affected by the negative externalities of fossil fuel combustion and extraction. This would lead to cleaner air and less lung and heart disease. Additionally, removing subsidies would increase government revenues, providing more fiscal space for governments to invest in social spending and productive investments, promoting sustainable and equitable outcomes.
However, there are also potential negative social impacts to consider. Removing subsidies may lead to higher energy prices, which could disproportionately affect lower-income households and those living below the poverty line. It is important to design and implement reforms carefully and communicate the benefits clearly to ensure a just transition. Additionally, while removing subsidies may reduce global carbon emissions, it may not strongly stimulate the growth of renewable energy by 2030, and its impact on the transition to renewable energy sources should be considered.
Furthermore, removing subsidies may have varying impacts in different regions. For example, lower-income regions may be more affected by the removal of subsidies, as subsidies cost less in these regions when oil prices are lower. Therefore, supportive policies and reforms are necessary to protect vulnerable populations from the potential negative consequences of removing subsidies.
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The economic impact of removing subsidies
Fossil fuel subsidies have surged to a record $7 trillion, or 7.1% of global GDP, as governments supported consumers and businesses during the global energy crisis exacerbated by Russia's invasion of Ukraine. This is more than governments spend annually on education (4.3% of global income) and about two-thirds of what they spend on healthcare (10.9%).
Increased government revenue
Removing fossil fuel subsidies would increase government revenue by $4.4 trillion, or 3.6% of global GDP, in 2030. This is due to the removal of explicit subsidies (undercharging for supply costs) and implicit subsidies (undercharging for environmental costs and forgone consumption taxes). The revenue gains would vary across regions, broadly mirroring the distribution of subsidies. For example, the revenues generated by full price reform in 121 emerging and developing countries in 2030 would amount to $3 trillion, which is in line with their additional spending needs for Sustainable Development Goals.
Reduced government spending
Addressing fossil fuel externalities could save taxpayers billions of dollars in societal costs. For example, the 2010 Deepwater Horizon oil spill cost BP $61.6 billion. Removing subsidies would also reduce energy security concerns related to volatile fossil fuel supplies.
Reduced fiscal consequences
Subsidies lead to higher taxes or borrowing, or lower spending. Removing subsidies would allow for better targeted social spending, reductions in inefficient taxes, and productive investments, promoting sustainable and equitable outcomes.
Reduced health costs
Subsidies encourage pollution and contribute to climate change and premature deaths from local air pollution. Removing subsidies would lead to cleaner air and less lung and heart disease, preventing 1.6 million premature deaths annually.
Reduced inequality
Fuel subsidies benefit rich households more than poor ones. Removing subsidies would redistribute income and ease the burden on lower-income households, which is both socially fair and economically efficient.
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The progress of phasing out subsidies
Fossil fuel subsidies have been a persistent issue, with global subsidies reaching a record $7 trillion in 2023. This surge in subsidies was largely due to the economic recovery from the pandemic and the need to support consumers and businesses during the energy price spike caused by Russia's invasion of Ukraine. These subsidies have enormous environmental and fiscal costs, contributing to climate change, local air pollution, and higher taxes or lower spending.
Recognizing these detrimental effects, governments have repeatedly affirmed their commitment to phasing out inefficient fossil fuel subsidies. In 2009, the Group of 20 advanced and emerging market economies first called for the phase-out of such subsidies, and this commitment was reaffirmed in 2012. At COP26 and COP27 in 2021 and 2022, countries further agreed to accelerate their efforts.
Some countries have already made progress in phasing out these subsidies. India, Morocco, Saudi Arabia, and Ukraine have eliminated explicit subsidies and, in some cases, introduced taxes. Over 160 countries also tax road transportation use. However, many countries have faced challenges in implementing reforms due to concerns about social unrest, inflation, and competitiveness.
To address these obstacles, a new approach has been proposed, emphasizing the creation of time-bound roadmaps, closing loopholes, and providing support for lower-income countries. Roadmaps would increase accountability for governments, reduce the risk of legal challenges from fossil fuel investors, and keep the issue of phasing out subsidies at the forefront of policymakers' agendas. Additionally, by clearly communicating and implementing reforms as part of a comprehensive policy package, governments can ensure a smooth transition away from fossil fuel subsidies.
In conclusion, while the phase-out of fossil fuel subsidies has been slow and challenging, there is ongoing progress and commitment from governments to address this issue. The proposed roadmaps and international cooperation provide a promising strategy to accelerate the phase-out and mitigate the negative impacts of fossil fuel subsidies on the environment and society.
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Frequently asked questions
It is estimated that fossil fuel subsidies surged to a record $7 trillion last year. This equates to around $19 billion per day.
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. This includes direct subsidies to corporations and other tax benefits to the fossil fuel industry.
Major oil producers, such as Saudi Arabia, Turkmenistan, Libya, and Algeria, spend more than $500 per person on fossil fuel subsidies, with subsidies representing more than 10% of GDP. Iran has also been known to spend over 15% of its GDP on fossil fuel subsidies, making it the world's largest subsidizer of energy prices.
