Sylvie Willis
Fossil fuels are often subsidized by governments, which reduces the economic incentive to switch to alternative energy sources. The exact amount of these subsidies is difficult to calculate, as they can be defined in different ways, but they are estimated to be in the hundreds of billions of dollars, and perhaps over a trillion. These subsidies have a significant impact on energy prices and consumption, and can also contribute to climate change and adverse health effects. As a result, there have been calls for their removal, but this is a complex issue, as removing subsidies may lead to higher prices for consumers, and there are concerns about energy security.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Fossil fuel subsidies in 2023 | $1.1 trillion |
| Fossil fuel subsidies in 2017 | $5.2 trillion or 6.5% of GDP |
| Explicit subsidies in 2022 | $1.3 trillion to $1.5 trillion |
| Implicit subsidies in 2022 | $5 trillion |
| Percentage of explicit subsidies in 2022 | 18% |
| Percentage of implicit subsidies in 2022 | 82% |
| Projected implicit subsidies in 2030 | 92% |
| Projected fossil fuel subsidies in 2030 | $8.2 trillion |
| US subsidies to the fossil fuel industry | $20 billion per year |
| European Union subsidies | €55 billion per year |
| US federal money spent on energy subsidies on renewables (2016-2022) | 50% |
| US federal money spent on energy subsidies on fossil fuels (2016-2022) | Less than 15% |
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What You'll Learn
Fossil fuel subsidies in 2022
Fossil fuel subsidies have been a significant concern for governments and environmentalists alike. In 2022, global fossil fuel subsidies amounted to a staggering $7 trillion, or 7.1% of the global GDP, according to the International Monetary Fund (IMF). This figure includes both explicit and implicit subsidies, and it reflects a $2 trillion increase since 2020, largely due to surging energy prices.
Explicit subsidies, which are more common in the Middle East and North Africa (MENA), Europe, the Commonwealth of Independent States (CIS), and East Asia and the Pacific (EAP), amounted to $1.3 trillion in 2022. These involve direct payments or undercharging for supply costs, making up 18% of the total subsidy in 2022. On the other hand, implicit subsidies, which occur when environmental and societal costs are not reflected in prices, made up the majority of the global subsidy at 82%. This includes undercharging for local air pollution, climate damage, road transport externalities, and forgone consumption taxes.
The increase in fossil fuel subsidies in 2022 was largely driven by the surge in energy prices caused by the Russia-Ukraine conflict and the economic recovery from the pandemic. As a result, many countries implemented mechanisms to support consumers, such as putting a price cap on gas and electricity, with governments covering the remaining costs. While this provided short-term relief, it also contributed to the significant increase in fossil fuel subsidies.
The implications of these subsidies are far-reaching. Firstly, they reduce the economic incentives to transition to cleaner energy sources. Secondly, they promote inefficient allocation of resources and hinder economic growth. Additionally, they contribute to climate change and local air pollution, leading to premature deaths and adverse health impacts.
There have been efforts to phase out inefficient fossil fuel subsidies, such as the EU Emissions Trading Scheme and the removal of explicit subsidies in countries like India, Morocco, and Saudi Arabia. However, removing fuel subsidies can be challenging, and it requires careful policy design and implementation to ensure vulnerable households are not disproportionately affected.
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Explicit vs. implicit subsidies
Fossil fuel subsidies occur when governments or organisations pay money to reduce the costs of fossil fuels, keeping prices low for consumers. These subsidies are intended to protect consumers from high energy prices, but they come at a significant cost. They can lead to higher taxes, inefficient allocation of resources, increased pollution, and higher energy consumption.
Subsidies can be defined in different ways, such as production, consumption, explicit, or implicit. Explicit subsidies are the classic definition of a subsidy, where the government or organisation makes payments to reduce the costs of goods or services. In the context of fossil fuels, explicit subsidies are when the retail price of fuel is below its supply cost. These subsidies are common in the Middle East, North Africa, Europe, the Commonwealth of Independent States, and East Asia and the Pacific.
On the other hand, implicit subsidies refer to the undercharging of environmental costs and general consumption taxes. Implicit subsidies occur when the opportunity cost of pricing domestic energy below market levels is considered. They are common in countries that produce their own fossil fuels but also import a portion of their consumption. The majority of fossil fuel subsidies are implicit, as environmental costs are often not reflected in prices, especially for coal and diesel.
The distinction between explicit and implicit subsidies is important because it influences the estimated value of fossil fuel subsidies. For example, global fossil fuel subsidies were estimated to be $7 trillion in 2022, but this includes both explicit and implicit subsidies. When looking at explicit subsidies alone, the estimate is much lower, at around $1.5 trillion in 2022.
Removing explicit and implicit fossil fuel subsidies is crucial for reducing global carbon dioxide emissions and addressing climate change. It is estimated that eliminating these subsidies could prevent 1.6 million premature deaths annually, raise government revenues, and help achieve global warming targets. However, removing subsidies can be challenging, as it may lead to higher energy prices for consumers, especially those in lower-income households. Therefore, it must be done carefully and accompanied by measures to compensate vulnerable households and cut taxes on work and investment.
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Environmental costs
Fossil fuel subsidies have significant environmental costs, which are often not reflected in their prices. The burning of fossil fuels causes local air pollution, which has severe impacts on human health and the environment. It also contributes to climate change, leading to further environmental and social damage. The International Monetary Fund (IMF) attributes additional societal costs to fossil fuels, including road accidents and congestion. These indirect costs, often referred to as "externalities", are not typically included in market prices.
The environmental costs of fossil fuels are substantial, with consumers failing to pay for over $5 trillion of these costs in a single year. This figure would almost double if the damage to the climate was valued at levels suggested by recent studies. The IMF estimates that fossil fuel subsidies were $7 trillion or 7.1% of global GDP in 2022, reflecting a $2 trillion increase since 2020 due to surging energy prices. Of this $7 trillion, $1.3 trillion was attributed to explicit subsidies, while the remaining $5.7 trillion was comprised of implicit subsidies, reflecting the undercharging for environmental costs and forgone consumption taxes.
The underpricing of local air pollution costs and climate damage are the largest contributors to global fossil fuel subsidies, accounting for about 30% each. This is followed by explicit subsidies (18%), broader road transport externalities such as congestion and accidents (17%), and forgone consumption tax revenue (5%). The vast majority of subsidies are implicit, particularly for coal and diesel, as environmental costs are rarely included in their pricing.
The removal of fossil fuel subsidies would have significant environmental benefits. It would reduce global carbon dioxide emissions, improve air quality, and lead to fewer cases of lung and heart disease. Additionally, it would raise government revenues, allowing for better targeted social spending and investments in sustainable and equitable outcomes. The phase-out of explicit subsidies and the introduction of corrective taxes would encourage consumers and firms to consider environmental costs in their decision-making, further reducing the environmental impact of fossil fuel consumption.
While some countries have successfully phased out explicit subsidies and introduced taxes, many others have faced challenges in reforming their subsidy programs. However, with global energy prices receding and emissions rising, it is crucial to accelerate the transition to cleaner energy sources and address the environmental costs associated with fossil fuels.
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Subsidies by region
Fossil fuel subsidies are defined as any government action that lowers the cost of fossil fuel energy production, raises the prices 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 come at a high cost. They have sizable fiscal costs, promote inefficient allocation of an economy's resources, encourage pollution, and are not well-targeted at the poor.
Explicit subsidies occur when the retail price is below a fuel's supply cost and are found in the Middle East and North Africa (MENA), Europe, the Commonwealth of Independent States (CIS), and East Asia and the Pacific (EAP). Total subsidies (explicit plus implicit) are predominantly found in the EAP. Relative to regional GDP, total subsidies for Europe and North America are the smallest at about 3%, while subsidies are 23% of regional GDP in CIS and 19%, 10%, and 10% in MENA, South Asia, and EAP, respectively.
The International Energy Agency estimates that governments subsidized the consumption of fossil fuels by $1 trillion in 2022, with global explicit subsidies for fossil fuels amounting to around $1.5 trillion in 2022. This is a vast sum, equivalent to around 1.5% of global GDP. Most of these explicit subsidies (around 80%) went to consumers, with the rest going into fossil fuel production.
In 2022, the price of gas increased by up to 400%, and many countries implemented mechanisms to support consumers, such as putting a price cap on gas and electricity. Fossil fuel subsidies surged to a record $7 trillion, with governments supporting consumers and businesses during the global spike in energy prices caused by Russia's invasion of Ukraine and the economic recovery from the pandemic. These subsidies are expected to decline as energy price support policies are unwound and international prices fall.
Removing fossil fuel subsidies would reduce energy security concerns related to volatile fossil fuel supplies and help limit climate change. However, removing subsidies can be tricky, and governments must carefully design, communicate, and implement reforms as part of a comprehensive policy package.
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Impact of removing subsidies
Fossil fuel subsidies are intended to protect consumers by keeping prices low. However, they come at a substantial cost. They have sizable fiscal consequences, promote inefficient allocation of an economy's resources, encourage pollution, and are not well-targeted at the poor. According to the International Monetary Fund, subsidies cost $7 trillion in 2022, reflecting a $2 trillion increase since 2020. This amount is more than what governments spend annually on education.
Removing fossil fuel subsidies would have a significant impact on reducing global carbon dioxide emissions and addressing climate change. It is estimated that removing subsidies could reduce emissions by 37 Gt CO2 between 2017 and 2025, or by 43% below baseline levels in 2030. This reduction is crucial to meeting the Paris Agreement goal of limiting global warming to 1.5-2 degrees Celsius. Additionally, removing subsidies would improve air quality, reduce lung and heart diseases, and generate revenue for governments.
However, removing fossil fuel subsidies could also have potential negative consequences. Firstly, it may not strongly stimulate the growth of renewable energy sources by 2030, as fossil fuels would still be cheaper in many places. Secondly, removing subsidies may disproportionately impact lower-income households, as they benefit from the lower prices that subsidies provide. Therefore, any removal of subsidies should be accompanied by measures to protect vulnerable populations, such as redirecting fiscal savings to social protection programs.
Several countries and organizations have taken steps towards removing fossil fuel subsidies. For example, the EU Emissions Trading Scheme forces power plants and industrial sources to pay for carbon emissions. Countries like India, Morocco, Saudi Arabia, and Ukraine have phased out explicit subsidies and introduced taxes. Additionally, over 160 countries tax road transportation use. These efforts demonstrate a global recognition of the need to transition away from fossil fuels and promote sustainable and equitable outcomes.
Overall, the impact of removing fossil fuel subsidies is complex and far-reaching. While it has the potential to significantly reduce emissions and address climate change, it must be carefully managed to ensure a just transition that protects vulnerable communities and promotes the adoption of renewable energy sources.
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Frequently asked questions
There is no standard unit of measurement for the amount of subsidy that fossil fuels receive. However, in 2022, global explicit subsidies for fossil fuels amounted to around $1.5 trillion. This is equivalent to around 1.5% of the global gross domestic product (GDP).
Fossil fuel subsidies can take various forms, including tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks for oil exploration.
Governments provide fossil fuel subsidies to make energy more affordable for their citizens, especially low-income households. Additionally, energy is a significant driver of economies, and governments aim to protect consumers from spikes in energy prices, which can impact the economy.
Fossil fuel subsidies have negative environmental, climate, and public health impacts. They contribute to air pollution, increase carbon emissions, and accelerate climate change. Additionally, they provide a wrong price signal to consumers, reducing the incentive to transition to cleaner energy sources.
