Fossil fuels are the primary drivers of climate change, yet they continue to receive substantial government subsidies worldwide, slowing down efforts to reduce global emissions. Despite international commitments to eliminate these subsidies and curb the impacts of climate change, progress has been sluggish. These subsidies artificially lower the cost of fossil fuels, fueling consumption and greenhouse gas emissions. As someone with years of experience in environmental and energy law, I’ve analyzed how these subsidies work and why they’re so hard to dismantle.
What Are Fossil Fuel Subsidies?
A subsidy is a government financial support provided to a specific industry or sector. Some subsidies are straightforward, such as agricultural subsidies or research grants, while others are less visible. For example, tariffs on imported goods can indirectly subsidize domestic industries. More controversially, some argue that governments implicitly subsidize industries by failing to hold them accountable for environmental damages, like air and water pollution. These subsidies are deeply embedded across the global economy, benefiting industries through tax breaks, relaxed regulations, and trade advantages.
Governments justify these subsidies for a variety of reasons. Politically, they can be powerful tools to gain political support and appease groups resistant to policy changes. In democracies, subsidies can ease the transition to new policies. For example, the 2022 Inflation Reduction Act in the U.S. simultaneously supported renewable energy and oil and gas production. Practically, subsidies can help foster emerging sectors, attract businesses, or bail out struggling industries, such as the 2008 auto industry bailout. However, some subsidies, like those for petroleum, date back to the Great Depression, and their original purposes may no longer apply.
The Many Forms of Fossil Fuel Subsidies
Global fossil fuel subsidies appear in several forms:
- Price Controls: In countries like Saudi Arabia and Indonesia, fuel prices are kept artificially low, with governments compensating state-owned energy companies for the losses. This lowers costs for consumers.
- Tax Breaks: In the U.S., substantial tax deductions for oil companies’ drilling expenses provide significant financial support to the industry.
- Underpriced Permits: Governments may charge below-market rates for permits to extract fossil fuels, effectively subsidizing the cost of extraction.
- Tax Evasion: Failure to fully collect taxes from fossil fuel companies can be considered a form of hidden subsidy.
Estimating the Cost: The Trillion-Dollar Question
The value of global fossil fuel subsidies is difficult to estimate. The OECD pegged it at approximately US$1.5 trillion in 2022, while the IMF put the figure over $7 trillion. The difference lies in whether external environmental costs—such as global warming, air pollution, traffic congestion, and road damage—are included. The IMF includes these as implicit subsidies, while the OECD does not. Regardless, the impact on global fuel prices is clear, with gas prices varying dramatically from cents in subsidized countries to several dollars in nations where taxes offset subsidies.
Global Pledges: Promises vs. Action
World leaders acknowledge that fossil fuel subsidies hinder climate efforts. Organizations like the G20 and APEC have promised to phase out inefficient subsidies. Additionally, the Friends of Fossil Fuel Subsidy Reform group was established to foster global political consensus. However, progress remains minimal. Between 2003 and 2015, a study of 157 countries showed little progress in reducing subsidies, with the OECD noting that global subsidies nearly doubled in 2021 and 2022.
Why Are Fossil Fuel Subsidies So Hard to Eliminate?
Several factors contribute to the persistence of these subsidies:
- Increased Consumer Prices: Cutting subsidies directly raises energy costs, impacting both producers and consumers, potentially causing prices to rise for a variety of goods and services.
- Inflationary Pressure: Reforming subsidies can have inflationary effects across the economy.
- Regressive Effects: Reducing subsidies may disproportionately affect low-income households, forcing them to allocate more of their income to energy costs.
- Political Challenges: Even in countries with strong climate policies, reducing subsidies can be politically unpopular and destabilizing.
The surge in fossil fuel subsidies after the Russian invasion of Ukraine is a clear example of how governments prioritize affordable energy over climate goals. This highlights the ongoing challenge of balancing these competing priorities.
Opportunities for Reform Amid Crisis
Despite the challenges, economists argue that higher fossil fuel prices can drive down demand, reducing emissions. Price spikes can thus present an opportunity for subsidy reform. As prices stabilize, the IMF suggests that governments can implement policies addressing the carbon and pollution costs without significantly increasing energy prices. Achieving this delicate balance will be crucial in the fight against climate change, requiring strong political will and innovative policy solutions.
