Fossil fuel subsidies

Fossil fuel subsidies have been described as "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."^[13] Including negative externalities such as health costs results in a much larger total.^[14] Thus by the IMF definition they are far larger than by the OECD and International Energy Agency (IEA) definitions.^[15]

Subsidies for electricity and heat may be taken into account, depending on the share produced by fossil fuels.^[15] Sometimes there are disputes about what definition to use: for example the UK government said in 2021 that it uses the IEA definition and does not subsidize fossil fuels,^[16] but others said the same year that under the OECD definition it does.^[17][18]

Subsidies may be estimated by adding up direct subsidies from government, comparing prices in a country to world market prices, and sometimes attempting to include the cost of damage to human health and the climate.^[19] Setting fossil fuel prices that reflect their true cost would cut global CO₂ emissions by 10% by 2030, according to the IPCC in 2023.^[20] The International Institute for Sustainable Development say that G7 countries should reveal their subsidies every year under Sustainable Development Goal (SDG) indicator 12.c.1 (fossil fuel subsidies).^[21]

The fiscal cost of government support for fossil fuels was 1.1 trillion USD in 2023. Most (90%) of which is related to the consumption of fossil fuels. The fiscal cost of support for residential users was 189 billion USD in 2023, while for manufacturing and other industries it was 103.8 billion USD. The OECD said that "Most of this support lacked systematic targeting towards those in greatest need, raising both equity and efficiency concerns." Economic incentives to decarbonise from fuel taxes, carbon taxes, emissions trading systems (ETSs) and price-reducing support mechanisms - summarised in the net Effective Carbon Rate (Net ECR) - averaged EUR 14.0/tCO2e in 2023. The share of GHG emissions covered by a positive Net ECR was 42%; 27% of GHG emissions are covered by explicit carbon prices (carbon taxes or ETSs).^[22]: 4

The OECD said that "The high fiscal cost of government support for fossil fuels and low Net ECR highlight the challenges of staying on track with net zero commitments in the face of economic and geopolitical pressures. Reforms should focus on better targeting those most in need and phasing out inefficient support for fossil fuels as soon as possible to enable the release of much-needed resources for the net zero transition and help accelerate innovation for energy efficiency. Given the high costs of inaction, governments should reaffirm and implement their SDG commitment to phase out and reform inefficient support to fossil fuels to align fiscal policy with climate goals."^[22]: 4

Subsidies on consumption reduce the price of energy for end consumers, for example the cost of gasoline for car drivers in Iran. This may win votes at elections and some people in government say it helps poorer citizens.

The consensus among economists is that the rich get most absolute benefit from fossil fuel subsidies,^[23] for example the poorest people do not usually own cars. But removing the subsidies may hit poor people via indirect price increases such as food prices, so they get a lot of benefit relative to their total income.^[23] Producers, such as oil companies, say that increasing taxes on them would cause unemployment and reduce national energy security.^[24]

Many economists recommend replacing consumption subsidies with direct payments targeted at poor people or households.^{[23][30][31][32]} The best way to use the money saved will likely require country specific studies.^[33] However phase-out is politically difficult.^[10]

Tax breaks for oil and gas exploration have been in place since at least the early 20th century.^[34]

In 2023, the OECD estimated that coal subsidies amounted to 27.7 billion USD,^[22]: 10 oil to 400 billion USD,^[22]: 9 and gas to 343 billion USD.^[22]: 11

The International Energy Agency estimates that governments subsidised consumption of fossil fuels by US $1 trillion in 2022.^[7] At their meeting in September 2009 the G-20 countries committed to "rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption".^[35] Many say that all fossil fuel subsidies are inefficient.^[36]

The 2010s saw many other countries reducing energy subsidies, for instance in July 2014 Ghana abolished all diesel and gasoline subsidies, whilst in the same month Egypt raised diesel prices 63% as part of a raft of reforms intended to remove subsidies within 5 years.^[37]

In Sept, 2021, the IMF produced a working paper with estimates for the subsidies caused by the gap between the efficient price of fossil fuels and user prices.^[38][39] "Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies, accounting for 42 percent, followed by global warming costs (29 percent), other local externalities such as congestion and road accidents (15 percent), explicit subsidies (8 percent) and foregone consumption tax revenue (6 percent)."^[39] Globally, fossil fuel subsidies were $5.9 trillion which amounts to 6.8% of GDP in 2020 and are expected to rise to 7.4% in 2025.^[40]

The table below shows excerpts from a 2021 IMF study for 20 countries with biggest subsidies. It also shows the biggest component of explicit subsidies, electricity costs, and of implicit subsidies, coal. See these references for complete data:^[41][39][38] (Units are billions of 2021 US dollars.)

• Health and environmental impact of the coal industry
• Fossil fuel divestment
• Phase-out of fossil fuel vehicles