Sylvie Willis
Fossil fuel subsidies in the United States have been a long-standing topic of discussion, with the federal government providing substantial funding for research and development in this industry. The Department of Energy (DOE) administers initiatives such as the Office of Advanced Fossil Energy R&D, Loan Guarantee Program, and the National Energy Technology Lab. While the specific amounts vary, estimates place the US fossil fuel industry's benefits at around $760 billion annually, including subsidies, tax breaks, and externalities. This figure includes direct government subsidies ranging from $10 to $52 billion annually. The Biden-Harris Administration has proposed budget changes to eliminate certain fossil fuel tax preferences and credits, aiming to reduce the federal deficit and reallocate funds towards something else, such as low-carbon technologies.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in the US in 2022 | $757 billion |
| Federal funding for fossil fuels | Administered by the Department of Energy (DOE) through the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab |
| Explicit subsidies | $3 billion |
| Implicit subsidies | $754 billion |
| Global fossil fuel subsidies in 2022 | $1 trillion |
| Fossil fuel industry income in 2022 | $4 trillion |
| US taxpayer money paid to the fossil fuel industry | $20 billion |
| US fossil fuel industry benefits | $760 billion |
| Direct government subsidies | $10 to $52 billion |
| Fossil fuel subsidies in 2023 | $7 trillion |
| Explicit subsidies | $1.3 trillion |
| Implicit subsidies | $5.7 trillion |
| Annual payments to fossil fuel production and consumption | $1.2 to $1.5 trillion |
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What You'll Learn
Fossil fuel subsidies in the US totalled $757 billion in 2022
Fossil fuel subsidies in the US have been a long-standing practice, with a history spanning over a century. In 2022, these subsidies reached a staggering total of $757 billion, according to the International Monetary Fund. This massive figure includes $3 billion in explicit subsidies and a whopping $754 billion in implicit subsidies. The latter refers to the negative externalities, such as health issues and environmental degradation, that are borne by society as a whole rather than the producers.
The US government has provided various forms of financial support to the fossil fuel industry, including federal funding for research and development, project loans, grants, and guarantees. The Department of Energy (DOE) plays a significant role in administering this funding through initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Additionally, tax breaks and societal costs further contribute to the substantial subsidies received by the industry.
While the US has experienced remarkable economic growth due in part to cheap energy, the circumstances surrounding these subsidies have changed. Domestic fossil fuel industries, including coal, oil, and natural gas, are now mature and highly profitable. Moreover, the presence of increasingly competitive clean and renewable energy alternatives underscores the need to reevaluate these subsidies.
Recognizing the urgency to address climate change, there have been efforts to reduce fossil fuel subsidies. The Biden-Harris Administration's FY 2024 budget request, for instance, aims to eliminate 13 fossil fuel tax preferences and credits. These proposed changes are estimated to reduce the federal deficit by approximately $31 billion over ten years. Additionally, modifications to the taxation rules for US oil and gas companies' foreign income could save an additional $66 billion.
As the world grapples with the pressing need to curb global warming and mitigate the impacts of human-induced climate change, the substantial fossil fuel subsidies in the US totalling $757 billion in 2022 highlight the challenges and opportunities in the transition to cleaner energy sources.
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Fossil fuel subsidies surged to a record $7 trillion in 2023
Fossil fuel subsidies have surged to a record-high $7 trillion, according to a report by the International Monetary Fund (IMF). This figure, from 2022, includes both explicit and implicit subsidies across 170 countries. Explicit subsidies, which are direct payments to fossil fuel producers and consumers, amounted to $1.3 trillion (or up to $1.7 trillion, according to some sources). The remaining $5.7 trillion in implicit subsidies reflects the environmental and societal costs of burning fossil fuels, including local air pollution, climate change, road accidents, and congestion. These costs are often not reflected in the prices of fossil fuels, especially coal and diesel, and are thus subsidised by society as a whole.
The surge in fossil fuel subsidies can be attributed to the recent spike in global energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. Governments have supported consumers and businesses by implementing mechanisms such as price caps on gas and electricity to alleviate the burden of rising energy costs. However, this has resulted in a significant increase in subsidies for oil, coal, and natural gas, which are now costing the equivalent of 7.1% of global gross domestic product (GDP). This is more than what governments typically spend on education and healthcare, underscoring the need to curb human-induced climate change.
The high level of fossil fuel subsidies has important implications for the transition to clean energy. Subsidies reduce the economic incentives to switch to low-carbon energy sources, as they artificially lower the prices of fossil fuels. Removing explicit subsidies alone would not be sufficient to address this issue, as the vast majority of subsidies are implicit. To tackle the full $7 trillion in subsidies would require a range of approaches, including clear and careful policy reforms that redistribute income and compensate vulnerable households for higher energy prices.
Phasing out fossil fuel subsidies would bring numerous benefits. According to the IMF, eliminating explicit and implicit fossil fuel subsidies could prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track to meet global warming targets. It would also help to redistribute income, as fuel subsidies disproportionately benefit wealthy households. With global energy prices receding and emissions rising, there is a growing urgency to transition to clean energy and address the climate crisis.
In the United States, there is a long history of government intervention in energy markets, including various tax code subsidies for the fossil fuel industry. While some of these subsidies are a century old, the circumstances that warranted their implementation may no longer exist. Today, the domestic fossil fuel industry is highly profitable, and renewable alternatives are becoming increasingly price-competitive. As such, the U.S. Congress is considering policy mechanisms to reduce the impact of climate change and align with international efforts to cap global warming.
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Fossil fuel subsidies include 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. The United States provides a number of tax subsidies to the fossil fuel industry, with conservative estimates putting US direct subsidies at roughly $20 billion per year, with 20% allocated to coal and 80% to natural gas and crude oil.
These subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. They have sizable fiscal consequences, leading to higher taxes, promote inefficient allocation of resources, and encourage pollution. They also contribute to climate change and premature deaths from local air pollution. Removing subsidies would reduce energy security concerns related to volatile fossil fuel supplies.
There is a long history of government intervention in energy markets, with numerous energy subsidies existing 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 they have contributed to economic growth, the circumstances relevant at the time of their implementation no longer exist. Today, the domestic fossil fuel industry is mature and highly profitable, and renewable alternatives are increasingly price-competitive.
The federal government provides numerous direct and indirect subsidies to the fossil fuel industry. Direct subsidies include special provisions in the tax code to support and reward domestic fossil fuel-related production. Indirect subsidies include provisions aimed at businesses in general, such as the discounted cost of leasing federal lands for fossil fuel extraction. Other sources of federal aid include public assistance programs like the Low-Income Home Energy Assistance Program (LIHEAP), which assists low-income households with heating costs.
In addition to direct and indirect subsidies, the fossil fuel industry receives substantial government funding for research and development. Federal funding is administered through initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. These initiatives provide annual appropriations and grants to maintain the competitiveness of the industry, including efforts to make coal more economical and cleaner.
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Fossil fuel subsidies can hinder renewable energy growth
Fossil fuel subsidies have been a long-standing feature of the US tax code, promoting the production of cheap and abundant energy sources such as coal, oil, and natural gas. While these subsidies have contributed to unparalleled economic growth over the past century, their continued existence in the face of mature and highly profitable fossil fuel industries and increasingly competitive renewable alternatives is questionable. The persistence of these subsidies can hinder the transition to renewable energy sources in several ways.
Firstly, fossil fuel subsidies can distort energy markets by providing a price advantage to fossil fuels over renewables. This discourages investment in renewable energy technologies and creates a disincentive for consumers to switch to cleaner energy sources. By artificially lowering the cost of fossil fuels, subsidies make them more attractive to consumers, perpetuating their reliance on these energy sources. This was recognised by Pablo Duenas-Martinez, a research scientist at the MIT Energy Initiative, who stated that fossil fuel subsidies provide "a wrong price signal to the consumer", leading to "inefficient behaviour".
Secondly, fossil fuel subsidies can divert much-needed financial resources away from renewable energy initiatives. In 2022, global fossil fuel subsidies amounted to $7 trillion, or 7.1% of global GDP. This represents a significant allocation of funds that could otherwise be invested in renewable energy research, development, and deployment. Redirecting these subsidies towards renewable energy sources would accelerate the transition to a cleaner energy landscape.
Moreover, fossil fuel subsidies have significant societal and environmental costs that are often overlooked. The burning of fossil fuels contributes to local air pollution, climate change, and adverse health impacts. These negative externalities are estimated to have totalled $5.3 trillion globally in 2015 alone. By subsidising fossil fuels, governments are effectively subsidising these detrimental impacts, hindering progress towards addressing climate change and improving public health.
Additionally, fossil fuel subsidies can create policy inertia and resistance to change. Given the long history of these subsidies, removing or reforming them can be politically challenging. Governments may be concerned about the potential for higher energy prices to contribute to inflation and social unrest. However, this inertia comes at the cost of delaying the transition to renewable energy sources and mitigating climate change.
Finally, fossil fuel subsidies can undermine international efforts to address climate change. Despite the growing urgency to reduce greenhouse gas emissions, fossil fuels received 70% of energy subsidies worldwide in 2017, compared to only 20% for renewables. This imbalance perpetuates the dominance of fossil fuels in the energy sector and slows down the adoption of renewable alternatives.
In conclusion, fossil fuel subsidies can hinder renewable energy growth by creating market distortions, diverting financial resources, causing societal and environmental harm, generating policy inertia, and undermining international climate efforts. To accelerate the transition to renewable energy, it is essential to phase out these subsidies and redirect support towards renewable alternatives.
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Fossil fuel subsidies are a major contributor to climate change
Fossil fuel subsidies are a significant contributor to climate change. In 2022, global fossil fuel subsidies were estimated to be $7 trillion, or 7.1% of global GDP. This figure reflects a $2 trillion increase since 2020, largely attributed to government support for surging energy prices. The subsidies are expected to decrease as energy price support policies are phased out and international prices stabilise. However, they are projected to rise again, reaching $8.2 trillion by 2030 as the consumption of fossil fuels in emerging markets increases.
The majority of fossil fuel subsidies are implicit, as they do not reflect the environmental and societal costs of burning fossil fuels. These costs include local air pollution, global warming, social costs of road accidents and congestion. The IMF estimates that consumers did not pay for over $5 trillion in environmental costs in 2022, and this figure would almost double if the damage to the climate was valued at levels suggested by recent studies. Removing these implicit subsidies would reduce air pollution, generate revenue, and significantly contribute to mitigating climate change.
In the United States, there is a long history of government intervention in energy markets through subsidies to promote the production and consumption of fossil fuels. While these subsidies contributed to economic growth, many of them have become outdated as renewable energy sources become more price-competitive. The federal government continues to provide funding for fossil fuel research and development, with a particular focus on making coal more economical and cleaner through technologies like Carbon Capture and Storage (CCS).
To address climate change, a transition to low-carbon energy sources is necessary. However, fossil fuel subsidies reduce the economic incentives for this transition. Removing explicit subsidies and imposing corrective taxes on fossil fuels would increase fuel prices, encouraging firms and households to consider environmental costs and potentially leading to a reduction in global carbon dioxide emissions.
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Frequently asked questions
Estimates for fossil fuel subsidies in the US vary, ranging from $10 billion to $7 trillion. The Biden-Harris Administration’s FY 2024 budget request would have eliminated 13 fossil fuel tax preferences and credits, saving $96.9 billion over ten years.
Fossil fuel subsidies are government incentives to promote or subsidize the production of cheap and abundant fossil energy. They can take the form of explicit subsidies, such as direct payments, or implicit subsidies, such as the negative health and environmental impacts of burning fossil fuels.
Fossil fuel subsidies have existed for over a century in the US, and while the circumstances relevant at the time of their implementation no longer exist, mature domestic fossil fuel industries remain highly profitable. Fossil fuel industries also benefit from artificially low lease prices and royalty rates when extracting resources on federal land.
Fossil fuel subsidies hinder renewable energy growth and cost taxpayers billions. Scaling back subsidies would reduce air pollution, generate revenue, and contribute to slowing climate change.
In addition to the Biden-Harris Administration’s FY 2024 budget request, the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and current Congressional proposals all aim to reduce fossil fuel subsidies.
