Katerina Swanson
Despite the availability of low-carbon energy sources, the world remains heavily dependent on fossil fuels. In 2022, global fossil fuel subsidies surged to a record $7 trillion, or 7.1% of global GDP. This amount is more than what governments spend annually on education and almost two-thirds of what they spend on healthcare. Fossil fuel production and use impose massive environmental, economic, and social costs. They are the leading contributor to global warming and air pollution, which have been linked to millions of premature deaths each year. The economic cost of air pollution in sectors regulated under the Clean Air Act was estimated at $9 trillion between 1970 and 2000. The negative externalities of fossil fuel use are estimated to have totaled $5.3 trillion in 2015 alone. As the world grapples with the urgent need to curb climate change, the continued support and investment in fossil fuels by governments impede progress toward a sustainable future.
| Characteristics | Values |
|---|---|
| Global fossil fuel subsidies in 2022 | $7 trillion |
| Fossil fuel subsidies as a percentage of global GDP | 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% |
| Global fossil fuel support by governments in 2022 | $1.7 trillion |
| Fossil fuel subsidies included in global fossil fuel support | $1.3 trillion |
| Fossil fuel investments by state-owned enterprises in G20 countries included in global fossil fuel support | $350 billion |
| Lending from public financial institutions by G7 countries and multilateral development banks included in global fossil fuel support | $22 billion |
| Annual spending by American consumers and businesses on coal, oil, and natural gas | $700 billion to $1 trillion |
| Percentage of money spent on energy by an American household that goes towards fossil fuels | 10 cents per dollar |
| Estimated U.S. fossil fuel spending between 2010 and 2030 | $23 trillion |
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What You'll Learn
Fossil fuel subsidies
> "...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 are intended to protect consumers by keeping prices low, but they have significant fiscal consequences, including higher taxes, inefficient allocation of resources, and increased pollution. They also disproportionately benefit higher-income households.
The total amount spent on fossil fuel subsidies varies depending on the definition used and the specific fuels included. In 2022, fossil fuel subsidies in the United States totaled $757 billion, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. Globally, fossil fuel subsidies were estimated to be around $7 trillion or 7.1% of global GDP in 2022, a $2 trillion increase since 2020 due to surging energy prices. This amount is expected to rise to $8.2 trillion by 2030 as fuel consumption in emerging markets increases.
There have been recent efforts to reduce or eliminate fossil fuel subsidies. The Biden-Harris Administration's FY 2024 budget request, for example, proposes eliminating 13 fossil fuel tax preferences and credits, which could reduce the federal deficit by almost $31 billion over 10 years. Additionally, the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) include incentives for carbon capture and sequestration projects. However, despite pledges from G20 countries to phase out inefficient fossil fuel subsidies, they have largely continued due to voter demand and energy security concerns.
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Fossil fuel spending in the US
In 2017, the US spent an estimated $649 billion on fossil fuel subsidies, making it the second-largest subsidizer globally. While there have been discussions about repealing these subsidies, no significant action has been taken. The US federal government provides substantial funding to the fossil fuel industry through the Department of Energy (DOE) and organizations like the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). This funding includes project loans, grants, and guarantees, as well as initiatives like the Office of Advanced Fossil Energy R&D and the Loan Guarantee Program.
The US has also witnessed the financial impact of fossil fuel dependence at the state and local levels. Between 2015 and 2020, fossil fuels generated approximately $138 billion annually for US localities, states, tribes, and the federal government. States like Wyoming, North Dakota, Alaska, and New Mexico are highly dependent on fossil fuel revenues, with over 14% of their total state and local revenues derived from this source. However, as the energy landscape shifts, these communities face fiscal challenges in transitioning to clean energy sources.
While the US has taken initial steps toward a clean energy future, powerful interests have criticized such policies as expensive. However, continuing the status quo will result in mounting economic and environmental costs. The London School of Economics highlights that studies often underestimate the harm of climate dangers by neglecting the cascading effects on ecological and economic systems. The true cost of fossil fuels extends beyond dollars and cents, impacting human well-being, ecosystems, and the economy in ways that are challenging to quantify.
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Fossil fuel revenues
The revenue generated from fossil fuels has significant implications for communities that rely on them, especially those with low-cost and low-emission extraction processes. Fossil fuel revenues are vital for funding essential services such as schools, public health, and infrastructure. However, the social and economic costs of fossil fuel dependence are also substantial. The environmental costs of fossil fuel consumption, including air and water pollution, global warming, and damage to health and the environment, impose a massive economic burden.
The economic cost of air pollution in sectors regulated under the Clean Air Act was estimated at $9 trillion between 1970 and 2000, with costs arising from early mortality, illness, healthcare expenses, and lost productivity. Additionally, the costs of continuing the current energy path are steep, with American consumers and businesses spending approximately $700 billion to $1 trillion annually on coal, oil, and natural gas. If the US continues on this path, fossil fuel spending is projected to reach $23 trillion between 2010 and 2030.
To address the fiscal challenges posed by the transition to clean energy, policymakers must plan ahead by adopting smart tax policies and investing in new economic sectors, including clean energy. Removing fossil fuel subsidies can generate additional government revenues and contribute to achieving global warming targets. According to estimates, scrapping explicit and implicit fossil fuel subsidies could increase government revenues by $4.4 trillion while preventing 1.6 million premature deaths annually.
Despite the urgent need to curb climate change, governments provided over $1.7 trillion in public money to support fossil fuels in 2022, a record high. This support included fossil fuel subsidies, investments by state-owned enterprises, and lending from public financial institutions. The vast majority of these subsidies are implicit, as environmental costs are often not reflected in fossil fuel prices. Consumers bore over $5 trillion in environmental costs last year, and this number would almost double if the damage to the climate was valued at levels found in recent studies.
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Fossil fuel production and consumption subsidies
Fossil fuel subsidies are a negative carbon price, using government money that could be spent on other things. The International Monetary Fund (IMF) states that by encouraging excess energy use, fossil fuel subsidies can make countries more vulnerable to variation in international energy prices. However, some governments argue that these subsidies are necessary to protect consumers by keeping prices low.
There is a long history of government intervention in energy markets. Numerous energy subsidies exist in the US tax code to promote or subsidize the production of cheap and abundant fossil energy. Some of these subsidies have been in place for a century, and while the United States has enjoyed unparalleled economic growth over the past 100 years—thanks in no small part to cheap energy—in many cases, the circumstances relevant at the time subsidies were implemented no longer exist. Today, the domestic fossil fuel industries (coal, oil, and natural gas) are mature and highly profitable. Conservative estimates put US direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20% currently allocated to coal and 80% to natural gas and crude oil.
The federal government provides numerous subsidies, both direct and indirect, to the fossil fuel industry. Special provisions in the US tax code designed to specifically support and reward domestic fossil fuel-related production are direct subsidies. Other provisions in the tax code aimed at businesses in general create indirect subsidies that are not exclusive to the fossil fuels industry. In certain cases, quantifying these subsidies is fairly simple. In the case of indirect subsidies, establishing an amount associated with these subsidies is more challenging. While not covered in this fact sheet, another source of federal aid to the fossil fuel industry is the discounted cost of leasing federal lands for fossil fuel extraction. Some fossil fuel subsidies provide public assistance, such as the Low-Income Home Energy Assistance Program (LIHEAP), which assists low-income households with heating costs.
In May 2019, the UN Environment Programme (UNEP) published a report detailing an internationally accepted methodology that will help countries make their fossil fuel subsidies more transparent. Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active) is a provision that allows companies to deduct a majority of the costs incurred from drilling new wells domestically. In its analysis of President Trump’s Fiscal Year 2017 Budget Proposal, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $1.59 billion in revenue in 2017, or $13 billion in the next ten years. Percentage Depletion (26 U.S. Code § 613. Active) is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time.
According to the International Energy Agency (IEA), phasing out fossil fuel subsidies would benefit energy markets, climate change mitigation, and government budgets. Subsidies affect the environment, and removing them would save the carbon budget and help limit climate change. Many economists recommend replacing consumption subsidies with direct payments targeted at poor people or households. However, phase-out is politically difficult.
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Fossil fuel support from governments
Fossil fuels have provided substantial revenue for governments, with the industry being a backbone for some communities. For instance, in the US, fossil fuels generated roughly $138 billion each year for localities, states, tribes, and the federal government between 2015 and 2020. In 2022, fossil fuel subsidies hit a global high of $1 trillion, with taxpayers in the US contributing about $20 billion. However, the largest subsidy is considered to be the "license to pollute for free", with the IMF estimating the cost of this at a $5.4 trillion annual subsidy worldwide, and $646 billion in the US.
The US federal government provides numerous direct and indirect subsidies to the fossil fuel industry. Direct subsidies include special provisions in the US tax code to support and reward domestic fossil fuel-related production. Indirect subsidies include provisions aimed at businesses in general, and the discounted cost of leasing federal lands for fossil fuel extraction. The fossil fuel industry also receives substantial government funding for research and development, with funding 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. The federal government also provides project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM).
Some sources state that 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 included subsidies, investments by state-owned enterprises in G20 countries, and lending from public financial institutions by G7 countries and multilateral development banks. However, other sources state that world governments hit a record high of $1.7 trillion in fossil fuel support in 2022. This amount includes fossil fuel subsidies, investments, and lending, with fossil fuel subsidies accounting for $1.3 trillion.
While removing fuel subsidies can be challenging, governments can design and implement reforms as part of a comprehensive policy package. Redirecting financial support from fossil fuel consumption and production and raising fossil fuel taxes could help support developing countries' energy transitions and boost national social welfare, sustainable industries, clean energy, and behavioural change. Removing explicit subsidies and imposing corrective taxes would increase fuel prices, causing firms and households to consider environmental costs when making decisions, and significantly reducing global carbon dioxide emissions. Scrapping explicit and implicit fossil fuel subsidies is estimated to prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and help achieve global warming targets.
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Frequently asked questions
In 2022, fossil fuel subsidies surged to a record $7 trillion, or 7.1% of global GDP. This is a substantial increase from the $1.7 trillion spent in 2021.
For every dollar that an American household spends each year, about 10 cents go towards the purchase of energy, with most of that money going towards fossil fuels. Overall, American consumers and businesses spend roughly $700 billion to $1 trillion each year on coal, oil, and natural gas.
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 to meet global warming targets.
