Ameer Randolph
Fossil fuel subsidies are financial support measures provided by governments to reduce the costs of fossil fuel production or consumption. They can take various forms, such as explicit subsidies, which are direct payments or undercharging for supply costs, and implicit subsidies, which include undercharging for environmental costs, externalities like road accidents and congestion, and forgone tax revenues. In 2022, global fossil fuel subsidies reached a record $7 trillion, or 7.1% of global GDP, with China providing the highest amount at $2.2 trillion. These subsidies have significant consequences, including hindering economic growth, contributing to climate change and air pollution, and benefiting higher-income households. Despite calls for a phase-out at COP26 and COP27, fossil fuel subsidies have increased due to rising energy prices and energy security concerns. Removing these subsidies could lead to substantial reductions in global carbon dioxide emissions, improved public health, and increased government revenues.
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What You'll Learn
Fossil fuel subsidies rose to $7 trillion in 2022
Fossil fuel subsidies rose to a record $7 trillion in 2022, according to the International Monetary Fund (IMF). This represents a $2 trillion increase since 2020, driven by the economic recovery from the pandemic and rising energy costs caused by Russia's invasion of Ukraine. The subsidies are intended to protect consumers by keeping prices low but have significant fiscal, economic, and environmental consequences.
The fiscal consequences of fossil fuel subsidies include higher taxes, increased borrowing, or lower spending. They also promote the inefficient allocation of resources, hindering economic growth. Additionally, subsidies encourage pollution, contributing to climate change and premature deaths from local air pollution. Furthermore, they are not well-targeted at the poor, mostly benefiting higher-income households.
The majority of fossil fuel subsidies are implicit, reflecting the undercharging of environmental costs and externalities such as congestion and road accidents. Consumers did not pay for over $5 trillion of environmental costs in 2022, and this number is projected to grow as developing countries increase their consumption of fossil fuels. Explicit subsidies, where the retail price is below the fuel's supply cost, have also more than doubled since 2020, reaching $1.3 trillion in 2022.
Removing fossil fuel subsidies would have multiple benefits. It would reduce air pollution, generate revenue, and slow climate change. Scrapping explicit and implicit subsidies is estimated to prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion. It would also redistribute income, as fuel subsidies primarily benefit richer households. However, removing subsidies can be challenging, and governments must carefully design and communicate reforms to ensure a smooth transition.
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The largest price gaps are for coal, diesel, and gasoline
Fossil fuel subsidies occur when the retail price of a fuel is below its supply cost. They can be decomposed into explicit and implicit subsidies. Explicit subsidies occur when the retail price is below a fuel's supply cost, while implicit subsidies occur when environmental costs are not reflected in prices. The latter is considered the largest contributor to global fossil fuel subsidies.
The largest price gaps between efficient prices and user prices are generally for coal, followed by diesel and gasoline. This is due to the significant emissions of greenhouse gases and harmful local air pollutants produced by coal, as well as the large congestion and accident costs associated with road fuel use. In 2022, 80% of global coal consumption was priced at below half of its efficient level.
The large price gaps for these fossil fuels have significant implications for the environment and public health. By keeping prices low, subsidies encourage pollution and contribute to climate change and premature deaths from local air pollution. It is estimated that removing fossil fuel subsidies would prevent 1.6 million premature deaths annually and put emissions on track to reach global warming targets.
Furthermore, subsidies lead to inefficient allocation of an economy's resources, hindering growth. They also benefit higher-income households more than poor ones, contributing to income inequality. Removing subsidies and using the revenue gain for targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes.
While removing subsidies can be challenging, several countries have successfully phased out explicit subsidies and introduced taxes to cover external costs. These include India, Morocco, Saudi Arabia, and Ukraine. Reforming fossil fuel subsidies is crucial for reducing emissions, improving public health, and promoting a more sustainable and equitable future.
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Removing subsidies can reduce CO2 emissions by 43% in 2030
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, and encourage pollution, contributing to climate change and premature deaths from local air pollution. According to the International Monetary Fund (IMF), fossil fuel subsidies surged to a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020 due to government support and surging energy prices.
The IMF estimates that removing explicit fossil fuel subsidies can reduce global CO2 emissions by 5% by 2030 from business-as-usual levels. This reduction is significant, especially considering that it would be achieved solely by addressing explicit subsidies, which account for only a fraction of the total subsidies. However, the impact of removing subsidies varies between regions, with the largest effects found in oil and gas-exporting countries such as Russia, Latin America, and the Middle East and North Africa.
To achieve the Paris Agreement goal of limiting global warming to 1.5-2 degrees Celsius, a more comprehensive approach is needed. By addressing both explicit and implicit subsidies through comprehensive carbon pricing, the IMF estimates that CO2 emissions can be reduced by up to 43% by 2030. This reduction is in line with the 25-50% reduction in global greenhouse gas emissions needed by 2030 to stay on track with the Paris Agreement targets.
Removing fossil fuel subsidies can also generate significant revenue for governments. The IMF estimates that full price reform can raise revenues of $4.4 trillion in 2030, accounting for 3.6% of global GDP. Additionally, removing subsidies can improve income distribution as they primarily benefit higher-income households. However, it is important to carefully design and implement subsidy removal policies to address potential social justice and economic competitiveness concerns, especially for vulnerable groups that rely on fossil fuel subsidies.
While removing fossil fuel subsidies is a crucial step in reducing CO2 emissions and mitigating climate change, it should be complemented with other mitigation policies such as carbon pricing and green subsidies to ensure a smooth transition to a low-carbon economy.
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China's fossil fuel subsidies were the highest in the world
Fossil fuel subsidies are financial support from governments that make fossil fuels like oil, gas, and coal cheaper to produce or buy. In 2022, global fossil fuel subsidies amounted to about $7 trillion, or 7.1% of global GDP, according to an IMF working paper. This figure reflects a $2 trillion increase since 2020, driven by surging energy prices and government support in response to the Ukraine crisis and the economic rebound from the COVID-19 pandemic.
Nearly half of the global fuel subsidies in 2022 were extended in East Asia and the Pacific. China contributed the most to global fuel subsidies, with more than $2.2 trillion, followed by the US at $757 billion, Russia at $421 billion, India at $346 billion, and Japan at $310 billion. China's high contribution to fossil fuel subsidies is influenced by its energy policies and government support for the energy sector. China has various subsidies in place for the production and consumption of fossil fuels, including coal, oil, and natural gas.
While China leads in absolute terms, Qatar has the highest fossil fuel subsidies on a per capita basis. The IMF advocates for fuel price reform and non-pricing policy mechanisms, such as emission standards and clean technology subsidies, to address the environmental and fiscal impacts of fossil fuel subsidies. Removing fossil fuel subsidies can reduce air pollution, generate revenue, and contribute to slowing climate change by reducing global carbon dioxide emissions.
China has recognized the need to transition to a low-carbon economy and has committed to phasing out inefficient fossil fuel subsidies as a G20 and APEC member. The country has taken important steps towards reducing fossil fuel subsidies, including undertaking a voluntary review of its subsidies and identifying subsidies to phase out, which has been applauded internationally. China also provides subsidies to incentivize the development of renewable energy technologies.
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The IMF attributes societal costs to fossil fuels
Fossil fuel subsidies have been on the rise, totalling $7 trillion in 2022, or 7.1% of global GDP. This is more than governments spend annually on education and almost two-thirds of what they spend on healthcare. These subsidies are expected to decline in the near term as energy price support policies are reversed and international prices fall. However, they are projected to rise again to $8.2 trillion by 2030 as the share of fuel consumption in emerging markets increases.
The International Monetary Fund (IMF) attributes societal costs to fossil fuels, including local air pollution, climate change, road accidents, and congestion. These costs are referred to as "externalities" or "implicit costs" and are not always reflected in market prices. The IMF estimates that removing explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually and reduce global carbon dioxide emissions by 43% below baseline levels in 2030, bringing emissions closer to the Paris Agreement goal of limiting global warming to 1.5-2 degrees Celsius.
While explicit subsidies are direct payments to fossil fuel producers or consumers, implicit subsidies are harder to quantify. They include undercharging for environmental costs, such as the impact of local air pollution and global warming, as well as forgone consumption taxes. According to the IMF, consumers did not pay for over $5 trillion of environmental costs in 2022. This number would almost double if the damage to the climate was valued at levels suggested by some studies.
The IMF's estimates of implicit costs are based on assumptions about damages from pollution and climate change. These costs are sensitive to the methodology used and can vary widely. For example, the social cost of carbon, which represents the economic damages from emitting one additional ton of carbon dioxide into the atmosphere, has a wide range of values in the academic literature.
Removing fossil fuel subsidies and using the revenue for targeted social spending, reducing inefficient taxes, and investing in productive areas can promote sustainable and equitable outcomes. It would also reduce energy security concerns related to volatile fossil fuel supplies. However, removing fuel subsidies can be challenging, and governments must carefully design and communicate reforms as part of a comprehensive policy package.
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Frequently asked questions
Fossil fuel subsidies are incentives given to reduce the costs of fossil fuels, making them cheaper for consumers.
Fossil fuel subsidies can be classified into two main types: explicit subsidies and implicit subsidies. Explicit subsidies are direct payments to fossil fuel producers or consumers, while implicit subsidies refer to the external costs associated with fossil fuel use, such as environmental and social impacts.
Fossil fuel subsidies are significant, amounting to $7 trillion globally in 2022, according to the International Monetary Fund (IMF). This figure has increased by $2 trillion since 2020 and represents about 7% of global GDP.
China had the highest fossil fuel subsidies in 2022, totalling $2.2 trillion or 12.5% of its GDP. The United States and other countries also provide substantial subsidies, but the details vary due to different accounting methods.
Fossil fuel subsidies have negative fiscal, economic, and environmental consequences. They lead to higher taxes or government borrowing, hinder economic growth, contribute to pollution and climate change, and disproportionately benefit higher-income households. Removing fossil fuel subsidies could reduce emissions, improve public health, generate revenue, and help achieve global warming targets. However, it is a complex process that requires careful policy implementation to manage potential impacts on consumers.
