Katerina Swanson
Fossil fuels are an expensive business, both for consumers and the environment. In 2023, fossil fuels cost around $3.12 per million British thermal units (Btu) in the US, with prices varying depending on the source. For example, coal costs $2.36 per million Btu, while petroleum costs $16.53 per million Btu. In 2018, the US government spent $14.8 billion on 78 projects in the petroleum sector. Fossil fuel subsidies have surged to a record $7 trillion, with governments supporting consumers and businesses during the global energy crisis. The environmental costs of fossil fuels are enormous, with local air pollution and global warming causing damage to health and the planet. The economic costs are also high, with rising sea levels and more frequent storms putting cities at risk of costly damage. The US government has taken steps to reduce its dependence on fossil fuels, with initiatives such as the Loan Guarantee Program and the National Energy Technology Lab, but the transition to clean energy will have major implications for communities that rely on fossil fuel revenues.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | USD 1.3 trillion |
| Public financial support for fossil fuels in 2022 | USD 1.7 trillion |
| Fossil fuel subsidies in 2023 | USD 7 trillion |
| US revenues from fossil fuels | USD 138 billion annually |
| US fossil fuel spending between 2010 and 2030 | USD 23 trillion |
| American spending on coal, oil, and natural gas | USD 700 billion to USD 1 trillion annually |
| US fossil energy R&D projects funding between 2010 and 2017 | USD 2.66 billion |
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What You'll Learn
Fossil fuel subsidies surged to a record $7 trillion
Fossil fuel subsidies have surged to a record-high of $7 trillion, according to a report by the International Monetary Fund (IMF). This figure includes both explicit and implicit subsidies, with the former accounting for around $1.3 trillion to $1.7 trillion. The remaining three-quarters of the subsidies come from damages, with 60% attributed to air pollution and climate change. This is a significant increase, with fossil fuel subsidies rising by $2 trillion over the past two years.
Explicit subsidies are the classic definition of subsidies, where governments or organizations provide money to reduce the costs of producing goods or services, thereby keeping prices low for consumers. In the context of fossil fuels, these payments can go towards producers to lower extraction and refining costs or directly to consumers to reduce their purchase costs.
On the other hand, implicit subsidies refer to the societal costs of burning fossil fuels, which are not reflected in market prices. These include local air pollution, damage to human health, and the social costs of road accidents and congestion. While these costs are challenging to monetize, they impose enormous environmental and economic burdens. The IMF estimates that removing explicit and implicit fossil fuel subsidies could prevent 1.6 million premature deaths annually, improve public health, and generate $4.4 trillion in government revenues.
The surge in fossil fuel subsidies can be attributed to governments supporting consumers and businesses during the global spike in energy prices, influenced by the Russia-Ukraine conflict and the economic recovery from the pandemic. However, as the world grapples with the urgent need to curb human-induced climate change, the continuation of these subsidies contradicts efforts to reduce global warming and transition to cleaner energy sources.
As countries strive to limit global warming to 1.5 degrees Celsius, the phase-out of explicit and implicit fossil fuel subsidies becomes imperative. While removing fuel subsidies can be complex, carefully designed and communicated policy reforms can facilitate a transition towards a healthier and more sustainable future.
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$36.15 $55
US federal government fossil fuel revenue
Fossil fuels generate substantial revenue for the US federal government, with a multi-institutional study estimating that between 2015 and 2020, fossil fuels generated approximately $138 billion annually for US localities, states, tribes, and the federal government. However, as the market share of fossil fuels decreases and clean energy gains popularity, the loss of these revenue streams will significantly impact the communities that rely on them.
The primary sources of government revenue from fossil fuels are petroleum product taxes, oil and gas extraction, and coal revenue. Wyoming, North Dakota, Alaska, and New Mexico are the states most dependent on fossil fuel revenues, with over 14% of total state and local revenues derived from fossil fuels, and in Wyoming, this figure exceeds 50%. This revenue is crucial for funding essential services such as schools, public health, and infrastructure.
The US federal government provides substantial funding to the fossil fuel industry, primarily through the Department of Energy (DOE), which administers initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Additionally, the fossil fuel industry benefits from tax breaks and subsidies, such as the Intangible Drilling Costs Deduction, which allows companies to deduct most costs incurred from drilling new domestic wells, and the Master Limited Partnerships structure, which exempts MLPs from corporate income taxes while shareholders pay personal income tax.
While fossil fuels provide significant revenue, the environmental and economic costs associated with their production and use are immense. The combustion of fossil fuels is the leading contributor to global warming, which poses environmental and economic threats, including rising sea levels and more severe storms that could cause costly damage to key cities. Moreover, the undervaluation of fossil fuel externalities disproportionately affects vulnerable communities, particularly minority and low-income populations living near highly polluting facilities.
To address these challenges, the federal government should take actions to reduce dependence on fossil fuels, such as adopting an emissions cap and implementing rules for carbon "offsets." Removing explicit and implicit fossil fuel subsidies could prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and significantly reduce carbon dioxide emissions, contributing to global warming targets.
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Fossil fuel costs for the US electric power industry
Fossil fuels have imposed enormous environmental costs on the planet, with local air pollution and global warming causing damage that is not reflected in the prices of fossil fuels. The cost of fossil fuels in the US electric power industry varies depending on the source used. In 2023, fossil fuels cost about $3.12 per million British thermal units (Btu), with prices ranging from $2.36 per million Btu for coal to $16.53 per million Btu for petroleum. The US electric power sector accounted for about 96% of total US utility-scale electricity generation in 2023, with nearly all of it being sold to other sectors.
The cost of fossil fuels in the US electric power industry is influenced by various factors, including the type of fuel, region, and market conditions. For example, the price of petroleum, which includes various kinds of oil, can fluctuate significantly and is more volatile compared to coal, which has remained relatively stable. The US is a large producer of domestic natural gas, which contributes to notably lower prices compared to Europe and Japan. However, the competition between coal and natural gas for electricity production is complex and involves delivered prices, emission costs, fuel supply contracts, and fuel markets.
The US government provides substantial funding for the fossil fuel industry, particularly through the Department of Energy (DOE), to maintain its competitiveness. This includes initiatives such as the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Additionally, federal funding has focused on efforts to make coal more economical and cleaner, despite the declining prices of natural gas and renewable energy.
The fossil fuel industry also receives indirect subsidies through tax breaks and favourable structures, such as Master Limited Partnerships (MLPs), which exempt them from corporate income taxes. These subsidies have surged to a record $7 trillion, with governments supporting consumers and businesses during the energy price spike caused by the Ukraine war and post-pandemic economic recovery. Removing these subsidies would reduce global carbon dioxide emissions, improve health, and generate additional government revenues of $4.4 trillion.
While the US federal government and many states, tribes, and localities benefit financially from fossil fuels, the revenue is expected to decline as clean energy development gains momentum. The transition away from fossil fuels will have significant implications for communities dependent on this industry, and decision-makers must work towards solutions to support a just transition.
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Fossil fuel expenditures
The high cost of fossil fuels has both environmental and economic implications. Fossil fuel combustion is a leading contributor to global warming, causing damage to the environment and human health. The economic costs of fossil fuel use can be significant, with potential massive economic damage due to rising sea levels and more severe storms. For example, a 2008 study estimated that high-intensity hurricanes could cause up to $422 billion in damages in specific states between 2025 and 2100.
Additionally, fossil fuel expenditures are influenced by government subsidies and tax policies. In 2023, fossil fuel subsidies surged to a record $7 trillion globally as governments supported consumers and businesses during the energy price spike caused by the Ukraine conflict and post-pandemic economic recovery. These subsidies have environmental implications, as the costs of local air pollution and global warming damage are often not reflected in fossil fuel prices. Removing these subsidies could significantly reduce carbon emissions and improve health outcomes, but it is a complex process that requires careful policy design and implementation.
The transition away from fossil fuels towards clean energy sources is essential for mitigating environmental and economic costs. However, it also presents fiscal challenges, especially for communities heavily reliant on revenues from fossil fuel industries. To facilitate this transition, governments can implement policies such as emissions caps, strict rules for carbon offsets, and investments in renewable energy sources.
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Fossil fuel combustion's environmental impact
Fossil fuels, formed from the decomposition of carbon-based organisms over millions of years, are currently the world's primary energy source, supplying around 80% of the world's energy. The burning of fossil fuels releases large amounts of carbon dioxide, a greenhouse gas, into the atmosphere. This carbon had been removed from the atmosphere and oceans by the organisms as they grew, and its return is causing global warming.
The combustion of fossil fuels has severe environmental impacts. It is the primary cause of climate change, altering the Earth's ecosystems and causing human and environmental health problems. The average global temperature has already increased by 1°C, and global temperatures passed the critical 1.5°C milestone in 2024. The IPCC warns that fossil fuel emissions must be halved within 11 years if global warming is to be limited to 1.5°C above pre-industrial levels. The Paris Agreement of 2015 committed the world's governments to reducing carbon emissions, but we are currently on track to produce far more than our limit by 2030.
The environmental costs of fossil fuels are enormous, with local air pollution and damage from global warming being the most significant. Fossil fuel combustion by-products include a myriad of toxic air pollutants, which have a disproportionately heavy impact on children's health. The World Health Organization (WHO) estimates that more than 40% of environmentally related diseases and more than 88% of the burden of climate change are borne by children under 5, despite this age group constituting only 10% of the global population. The combustion of fossil fuels also causes ocean ecosystem damage, with numerous oil spills in recent years having devastating consequences.
The economic costs of fossil fuels are also significant. American consumers and businesses spend roughly $700 billion to $1 trillion each year on fossil fuels and suffer the incalculable costs of pollution from fossil fuels through damage to health and the environment. Fossil fuel expenditures are projected to surpass $1 trillion by 2030, with rising fossil fuel expenditures affecting all 50 states. A 2008 study estimated that high-intensity hurricanes caused by climate change could cost Atlantic and Gulf Coast states up to $422 billion in damages between 2025 and 2100.
To address these issues, governments should remove explicit subsidies, impose corrective taxes, and implement policies to reduce emissions and invest in renewable energy sources. Removing subsidies and imposing taxes would encourage firms and households to consider environmental costs and lead to 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 raise government revenues by $4.4 trillion.
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Frequently asked questions
In 2022, governments spent a record-high of USD 1.7 trillion on fossil fuels. This includes USD 1.3 trillion in fossil fuel subsidies, USD 350 billion in investments by state-owned enterprises in G20 countries, and USD 22 billion in lending from public financial institutions by G7 countries and multilateral development banks.
For every dollar that an American household spends each year, about 10 cents go towards the purchase of energy, with most of that money spent on fossil fuels. American consumers and businesses spend roughly USD 700 billion to USD 1 trillion each year on coal, oil, and natural gas.
Fossil fuel use imposes massive environmental and economic costs. The economic cost of air pollution in sectors regulated under the Clean Air Act was estimated at USD 9 trillion between 1970 and 2000. The costs of fossil fuel use also include pollution-induced early mortality, illness, healthcare costs, and lost productivity.
Phasing out fossil fuel subsidies would have several benefits. It would reduce global carbon emissions, decrease air pollution deaths, increase government revenues, and redistribute income. Scrapping explicit and implicit fossil fuel subsidies would also prevent 1.6 million premature deaths annually and put emissions on track towards reaching global warming targets.
