Mercedes Mullins
Fossil fuels are an expensive business. In 2022, global fossil fuel subsidies amounted to $7 trillion, according to a report by the International Monetary Fund (IMF). This is a huge amount of money—equivalent to around 7% of global GDP. Fossil fuels are costly to the environment and human health, and they are a leading source of air and water pollution. The economic cost of air pollution in sectors regulated under the Clean Air Act has been estimated at $9 trillion between 1970 and 2000. The production and transport of fossil fuels also result in routine environmental pollution and occasional catastrophic accidents, such as oil spills. The 2010 Deepwater Horizon oil spill cost BP $61.6 billion. Fossil fuel subsidies are projected to grow as developing countries increase their consumption of fossil fuels. However, removing fuel subsidies is not a simple task, and governments must carefully design and implement reforms.
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What You'll Learn
Fossil fuel subsidies cost governments $7 trillion annually
Fossil fuel subsidies have been a significant concern for governments and environmentalists alike. In 2022, these subsidies surged to a record $7 trillion as governments supported consumers and businesses during the global energy price surge caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. This amount is equivalent to 7.1 percent of global gross domestic product (GDP), a substantial sum. The International Monetary Fund (IMF) reported that fossil fuel subsidies amounted to $7 trillion in 2022, including explicit and implicit subsidies.
Explicit subsidies are the classic definition of a subsidy, where governments or organizations provide funds to reduce the costs of producing goods or services, keeping prices low for consumers. These payments can go towards fossil fuel producers, lowering extraction and refining costs, or directly to consumers, allowing them to purchase fossil fuels at a cheaper rate than the market price. In 2022, global explicit subsidies for fossil fuels reached approximately $1.5 trillion, with around 80% going to consumers and the rest supporting production.
On the other hand, implicit subsidies refer to the undercharging of environmental and societal costs associated with burning fossil fuels. These include local air pollution, climate change, road accidents, and congestion. The vast majority of subsidies are implicit, as environmental costs are often not reflected in fossil fuel prices, especially for coal and diesel. Consumers did not pay for over $5 trillion of these environmental costs in 2022, and this number would almost double if the damage to the climate was valued at higher levels.
The removal of explicit subsidies and the imposition of corrective taxes on fossil fuels would lead to increased fuel prices. This, in turn, would encourage firms and households to consider environmental costs when making consumption and investment decisions, potentially reducing global carbon dioxide emissions and improving air quality. 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, providing additional funds for education, healthcare, and clean energy initiatives.
However, removing fuel subsidies is a complex issue. Governments must carefully design and communicate policy reforms to ensure a smooth transition and compensate vulnerable households facing higher energy prices. While the potential benefits of phasing out fossil fuel subsidies are significant, striking a balance between environmental sustainability and social equity is crucial.
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Removing subsidies would save billions in societal costs
Fossil fuel subsidies have surged to a record $7 trillion as governments supported consumers and businesses during the global spike in energy prices. This includes both explicit and implicit subsidies. Explicit subsidies are the classic definition of a subsidy, which is "money that is paid by a government or an organization to reduce the costs of services or of producing goods so that their prices can be kept low". In other words, payments to make fossil fuels cheaper. Implicit subsidies, on the other hand, are costs like negative health impacts and environmental degradation that are borne by society at large rather than producers. The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel.
According to the International Monetary Fund (IMF), fossil fuels account for 85% of all global subsidies. Reducing these subsidies would lower global carbon emissions by 28%, fossil fuel air pollution deaths by 46%, and increase government revenue by 3.8% of GDP. In the United States, fossil fuel subsidies in 2022 totaled $757 billion, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. Conservative estimates put US direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20% allocated to coal and 80% to natural gas and crude oil.
The Biden-Harris Administration's FY 2024 budget request would eliminate 13 fossil fuel tax preferences and credits, such as the tax credit for oil and natural gas extracted from marginal wells. Over 10 years, these proposed changes would reduce the federal deficit by almost $31 billion. In addition, the budget proposes modifications to the taxation rules for the foreign income of US oil and gas companies, which would save another $66 billion, for a total savings of $96.9 billion.
Removing fossil fuel subsidies would save billions in societal costs. For example, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $13 billion in the next ten years. Additionally, 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. Scaling back subsidies would also reduce air pollution, generate revenue, and make a major contribution to slowing climate change.
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Fossil fuels impose environmental and health costs
Fossil fuels impose significant environmental and health costs. The combustion of fossil fuels is the leading contributor to global warming, causing climate change and incurring environmental and social damage. The environmental costs of fossil fuels are often not reflected in their prices, especially for coal and diesel. The burning of fossil fuels emits greenhouse gases, such as carbon dioxide, which trap heat in the Earth's atmosphere. This has led to rising global temperatures, causing large and extended droughts, declining rainfalls, and rising sea levels. The rise in sea levels has resulted in more frequent flooding, destructive storm surges, and saltwater intrusion.
The use of fossil fuels also produces hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury, which are harmful to the environment and human health. Poor air quality increases respiratory ailments like asthma and bronchitis and increases the risk of death from cardiovascular and pulmonary diseases, as well as cancer. It also increases infant mortality, damages the nervous system and the brain, and contributes to psychiatric disorders and diabetes. Globally, fossil fuel pollution is responsible for one in five deaths, with 350,000 premature deaths in the United States in 2018 attributed to fossil fuel-related pollution. The annual cost of the health impacts of fossil fuel-generated electricity in the United States is estimated to be up to $886.5 billion.
The extraction, transportation, and refining of fossil fuels also carry risks of oil spills, which can harm communities and wildlife, destroy habitats, erode shorelines, and result in beach, park, and fishery closures. The 2010 BP Deepwater Horizon oil spill, the largest in history, released 134 million gallons of oil into the Gulf of Mexico, killing 11 people and countless animals and plants. It cost BP $65 billion in penalties and cleanup costs.
The true price of carbon and other pollutants is not reflected in the actual cost of fossil fuels. Removing fossil fuel subsidies could generate $35 billion in taxpayer savings over the next ten years and prevent 1.6 million premature deaths annually.
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Renewable energy is cheaper than fossil fuels
Fossil fuels are non-renewable resources that have formed over millions of years from the remains of dead plants and animals. They are used to generate energy for various purposes, including electricity generation, transportation, and industrial processes. While the use of fossil fuels has been prevalent worldwide due to their high energy density and ease of extraction, it is important to recognize that they come with significant costs that are often not reflected in their market prices. These costs include environmental, societal, and health impacts, which economists refer to as externalities.
In recent years, there has been a growing recognition that renewable energy sources, such as wind, solar, and hydropower, offer a more sustainable and cost-effective alternative to fossil fuels. According to a report by the International Renewable Energy Agency (IRENA), more than 90% of new renewable energy projects are now cheaper than fossil fuels. This shift towards renewable energy is driven by several factors, including technological advancements, policy interventions, and increasing public awareness about the importance of addressing climate change.
One of the key advantages of renewable energy is its declining costs. For example, the global average cost of electricity from onshore wind power fell to 3.3 cents per kilowatt-hour in 2024, 3% less than the previous year. Solar energy has also become increasingly competitive, with prices dropping significantly. Solar energy is now 41% cheaper than fossil fuels, whereas just a few years ago, it was four times more expensive. Offshore wind energy is another affordable option, with costs 53% lower than fossil fuels.
The transition to renewable energy offers significant economic benefits. According to Professor Geoffrey Heal of Columbia Business School, the current business model of utility companies results in exorbitantly high electricity bills for consumers. By transitioning to renewable energy, the price of electricity can be closer to its marginal cost, providing cost savings for both providers and consumers. Additionally, the development and deployment of renewable energy technologies create new job opportunities and drive economic growth.
Furthermore, addressing the externalities associated with fossil fuels can lead to substantial cost savings. For instance, removing fossil fuel subsidies, which amounted to a record $7 trillion in 2022, could save taxpayers billions of dollars while reducing environmental and health impacts. These subsidies artificially lower the prices of fossil fuels by providing direct payments or reducing production and consumption costs. By eliminating these subsidies and imposing corrective taxes, fuel prices would better reflect their true costs, encouraging a shift towards cleaner and more sustainable energy sources.
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Fossil fuel use causes global warming and climate change
Fossil fuels, including oil, natural gas, and coal, have been used to generate energy since the invention of the first coal-fired steam engines in the 1700s. The burning of fossil fuels releases carbon dioxide (CO2) and other greenhouse gases, such as nitrous oxide (N2O), into the atmosphere. While airborne particles from fossil fuels, such as soot, can increase the reflectivity of the atmosphere and have a slight cooling effect, the net effect of burning fossil fuels is warming. This is because the cooling effect is small compared to the heating caused by the greenhouse effect, and greenhouse gases remain in the atmosphere for much longer than airborne particles.
The greenhouse effect refers to the re-radiation of heat in the atmosphere, which slows heat loss to space. About 90% of the heat radiated from the Earth's surface is absorbed by greenhouse gases and re-radiated, causing the Earth's average air temperatures to increase. The burning of fossil fuels has significantly intensified the greenhouse effect, contributing to global warming and climate change.
The effects of burning fossil fuels are far-reaching, impacting both human and environmental health. For example, the carbon dioxide released from burning fossil fuels accumulates in the atmosphere and dissolves in the ocean, leading to ocean acidification. Additionally, the social costs of burning fossil fuels include environmental and health costs, such as local air pollution, damage from global warming, and the social impacts of road accidents and congestion. These costs are often not reflected in the market prices of fossil fuels and are referred to as externalities.
The true cost of fossil fuels is significant, and the subsidies provided to the fossil fuel industry further distort the picture. Fossil fuel subsidies amounted to a staggering $7 trillion in 2022, according to the International Monetary Fund (IMF). These subsidies are implicit and explicit, with the majority being implicit as they do not reflect the environmental and societal costs of burning fossil fuels. Removing these subsidies could prevent 1.6 million premature deaths annually, improve health and quality of life for many, and generate trillions of dollars in government revenue.
In conclusion, the burning of fossil fuels is a primary driver of global warming and climate change, causing environmental degradation, health issues, and social impacts. Addressing the externalities and phasing out subsidies for the fossil fuel industry are crucial steps towards mitigating the impacts of climate change and transitioning to a more sustainable future.
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Frequently asked questions
Fossil fuels don't save money, they cost money. Fossil fuel subsidies surged to a record $7 trillion last year, which is more than governments spend annually on education. This money could be reallocated to invest in a new energy future.
Fossil fuels impose massive environmental and economic costs. The economic cost of air pollution in sectors regulated under the Clean Air Act has been estimated at $9 trillion between 1970 and 2000. The production and transport of fossil fuels also result in routine pollution of the environment and occasional catastrophic accidents, such as oil spills.
Burning fossil fuels causes air pollution, which is responsible for nine million deaths per year. The health costs of air pollution from burning fossil fuels top $8 billion per day globally. These health effects disproportionately affect communities of color and low-income communities.
Transitioning to clean energy could prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion. Clean energy is also cheaper than fossil fuels, with onshore wind and solar costing as little as $0.04 per kilowatt-hour (kWh), while fossil fuels can cost up to $0.22 per kWh.
