Sylvie Willis
Fossil fuel subsidies are government interventions that provide benefits or preferences for fossil fuel production or consumption. They can take the form of direct transfers of funds, preferential tax treatments, or price support to lower fuel prices below market price. Fossil fuel subsidies have been estimated to range from hundreds of billions to $7 trillion globally in 2022, reflecting a $2 trillion increase since 2020 due to surging energy prices. These subsidies are intended to protect consumers by keeping prices low but have significant fiscal, economic, and environmental consequences. They contribute to inefficient resource allocation, hinder growth, encourage pollution, and benefit higher-income households. The removal of fossil fuel subsidies is expected to reduce energy security concerns, lower global carbon emissions, and promote sustainable and equitable outcomes.
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What You'll Learn
Fossil fuel subsidies are government interventions
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. While the United States has enjoyed unparalleled economic growth over the past 100 years, largely due to cheap energy, 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. Additionally, many clean and renewable alternatives exist, which have become increasingly price-competitive with traditional fossil fuels.
The United States provides numerous tax subsidies to the fossil fuel industry, including direct subsidies to corporations and other tax benefits. 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. European Union subsidies are estimated to total €55 billion annually. Historically, subsidies granted to the fossil fuel industry were designed to lower the cost of fossil fuel production and incentivize new domestic energy sources. Today, US taxpayer dollars continue to fund many fossil fuel subsidies that are outdated but remain embedded within the tax code.
Fossil fuel subsidies have significant fiscal consequences, leading to higher taxes, increased borrowing, or lower spending. They also promote the inefficient allocation of an economy's resources, hindering growth, and encourage pollution, contributing to climate change and premature deaths from local air pollution. Underpricing for local air pollution costs and climate damage are the largest contributors to global fossil fuel subsidies, accounting for about 30% each. Removing fossil fuel subsidies would reduce the health risks of air pollution and greatly reduce global carbon emissions, helping to limit climate change.
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They lower costs for consumers
Fossil fuel subsidies are 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. They are intended to protect consumers by keeping prices low.
There are many kinds of fossil fuel subsidies, including:
- Direct subsidies to corporations
- Tax breaks on consumption, such as a lower sales tax on natural gas for residential heating
- Subsidies on production, such as tax breaks on oil exploration
- Free or cheap negative externalities, such as air pollution or climate change due to burning gasoline, diesel, and jet fuel
- Public assistance, such as the Low-Income Home Energy Assistance Program (LIHEAP), which assists low-income households with heating costs
The largest subsidizers of fossil fuels are China, the United States, and Russia. In 2017, the latest International Monetary Fund (IMF) report estimated that 6.5% of global GDP ($5.2 trillion) was spent on fossil fuel subsidies (including negative externalities). This was a half-trillion-dollar increase since 2015. According to the IMF, reducing these subsidies "would have lowered global carbon emissions by 28 percent and fossil fuel air pollution deaths by 46 percent, and increased government revenue by 3.8 percent of GDP."
While fossil fuel subsidies are intended to protect consumers by keeping prices low, 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. Removing fossil fuel subsidies and using the revenue gain for better-targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes.
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They have negative environmental impacts
Fossil fuel subsidies are 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 can take the form of tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks on oil exploration. They may also be free or cheap negative externalities, such as air pollution or climate change due to burning gasoline, diesel, and jet fuel.
Fossil fuel subsidies have significant negative environmental impacts. Firstly, they contribute to climate change by encouraging the use of fossil fuels, which emit greenhouse gases like carbon dioxide that trap heat in the Earth's atmosphere. This leads to global warming and ocean acidification, as the ocean absorbs a quarter of the carbon dioxide emitted from fossil fuels. Secondly, the extraction and refining of fossil fuels can result in landscape degradation, the risk of spills, and other unintentional environmental damage. For example, coal mining operations can cause permanent damage to landscapes and produce large amounts of toxic coal ash, which contaminates groundwater. Fossil fuel subsidies also promote inefficient allocation of an economy's resources, hindering growth and contributing to energy insecurity.
The burning of fossil fuels produces hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury. These pollutants have harmful effects on both the environment and human health. They can cause acid rain, eutrophication (excessive nutrients that reduce oxygen levels and harm aquatic ecosystems), damage to crops and forests, and harm to wildlife. Additionally, water pollution can occur from oil spills and fracking fluids, as the resulting wastewater can contaminate groundwater and drinking water with toxic substances.
The negative environmental impacts of fossil fuel subsidies disproportionately affect vulnerable communities, particularly minority and low-income populations. These communities are more likely to live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries, increasing their exposure to air and water pollution. Additionally, the health risks associated with air pollution from fossil fuels can lead to premature deaths and contribute to a higher cancer risk in these vulnerable areas.
Removing fossil fuel subsidies is essential to reducing their negative environmental impacts. By eliminating these subsidies, global carbon emissions can be significantly reduced, helping to limit climate change. Removing subsidies can also encourage the development and adoption of renewable and cleaner energy alternatives, promoting sustainable and equitable outcomes. Additionally, the savings generated from removing fossil fuel subsidies can be used for better-targeted social spending and investments in innovative energy efficiency technologies.
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They can be direct or indirect
Fossil fuel subsidies are government interventions that provide benefits for fossil fuel production or consumption. They can be direct or indirect. Direct subsidies are those that are specifically designed to support and reward domestic fossil fuel-related production, such as explicit subsidies that follow the classic definition of a subsidy: "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". These direct payments can go to fossil fuel producers, lowering the costs of extraction and refining, or to consumers, allowing them to purchase fossil fuels at a reduced price. In the United States, these direct subsidies to the fossil fuel industry are estimated at around $20 billion per year, with 20% allocated to coal and 80% to natural gas and crude oil.
Indirect subsidies, on the other hand, are provisions in the tax code aimed at businesses in general and are not exclusive to the fossil fuel industry. An example of an indirect subsidy is the discounted cost of leasing federal lands for fossil fuel extraction. While direct subsidies are relatively easier to quantify, establishing an exact amount associated with indirect subsidies is more challenging.
Both direct and indirect subsidies can take various forms, including tax breaks, preferential tax treatment, or price support. Tax breaks can be applied to consumption, such as lower sales tax on natural gas for residential heating, or to production, such as tax breaks on the exploration for oil. Price support mechanisms can include capping the price of gas and electricity, with governments covering the remaining costs to ensure households pay a rate that is cheaper than the market price.
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They are a barrier to renewable energy
Fossil fuel subsidies are 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. They can take the form of direct subsidies to corporations, tax breaks on consumption, or subsidies on production. For example, the US provides tax subsidies to the fossil fuel industry to encourage domestic energy production, with 80% of these subsidies allocated to natural gas and crude oil.
Fossil fuel subsidies are a barrier to renewable energy for several reasons:
- They provide a wrong price signal to the consumer, removing the incentive to use cleaner energy. When consumers do not face the real price of energy, they tend to consume more, promoting inefficient behaviour and contributing to climate change.
- They encourage excess energy use, making countries more vulnerable to variations in international energy prices.
- They can lead to higher taxes or lower government spending in other areas, hindering growth and efficient allocation of resources.
- They contribute to climate change and premature deaths from local air pollution.
- They benefit higher-income households and are not well-targeted at protecting vulnerable groups.
- They can cause unemployment and reduce national energy security if taxes on fossil fuel companies are increased.
According to the International Renewable Energy Agency, government support for fossil fuels still reigned as of 2017, garnering 70% of energy subsidies worldwide, with only 20% for renewables. However, it is important to note that renewable energy technologies are becoming increasingly price-competitive with fossil fuels, and heavy subsidies for solar panels and onshore wind farms have helped accomplish this goal.
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Frequently asked questions
Fossil fuel subsidies are government interventions that provide benefits for fossil fuel production or consumption relative to alternatives. They can take the form of direct transfers of funds, preferential tax treatments, or price support to lower fuel prices below market price.
Fossil fuel subsidies have a range of impacts. They can strain government budgets, distort energy markets, and cause environmental harm by working against efforts to curb climate change. They also contribute to local pollution problems, further damaging human health and the environment. Additionally, they can perpetuate older technologies and carbon-intensive modes of production.
Fossil fuel subsidies can include tax breaks on consumption, such as lower sales tax on natural gas for residential heating. They can also be subsidies on production, such as tax breaks on oil exploration. Some countries subsidize electricity or gas prices, making them more affordable for consumers. Other examples include the Low-Income Home Energy Assistance Program (LIHEAP) in the US and explicit subsidies in the Middle East and North Africa (MENA) region.
