Fossil fuel subsidies

• 1. Defining The Subsidy Scope

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  In 2022, the International Monetary Fund calculated that fossil fuel subsidies reached $1.5 trillion under a narrow definition. A broader calculation including negative externalities like air pollution and climate change pushed that figure to $7 trillion. These numbers represent government actions that lower production costs or reduce prices paid by consumers. Some support comes as tax breaks on natural gas for residential heating. Others appear as tax incentives for oil exploration companies. The scope changes depending on whether analysts count only direct payments or include the cost of burning gasoline and diesel.

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• 2. Measuring Global Fiscal Costs

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  The fiscal cost of government support for fossil fuels hit $1.1 trillion in 2023 according to OECD data. Most of this amount relates to consumption rather than production. Residential users received $189 billion in support while manufacturing industries received $103.8 billion. The International Energy Agency estimated global consumption subsidies at $1 trillion in 2022. In 2020, total global subsidies reached $5.9 trillion, which equaled 6.8% of global GDP. Experts project this share will rise to 7.4% by 2025 if current trends continue. Setting prices to reflect true costs could cut global CO2 emissions by 10% by 2030.

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• 3. Health And Environmental Impact

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  Subsidies are estimated to cause hundreds of thousands of deaths from air pollution each year. Underpricing local air pollution accounts for 42 percent of all global fossil fuel subsidies. Global warming costs make up another 29 percent of the total figure. Other local externalities like congestion and road accidents contribute 15 percent. Explicit subsidies account for only 8 percent of the total value. Foregone consumption tax revenue represents just 6 percent. Removing these subsidies would save the carbon budget and help limit climate change. Policy researchers estimate that substantially more money is spent on fossil fuel subsidies than on environmentally harmful agricultural or water subsidies.

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• 4. Economic Inequality And Equity

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  The consensus among economists is that wealthy people receive most absolute benefits from fossil fuel subsidies. Poorer citizens do not usually own cars so they miss out on direct savings. However removing subsidies may hit poor people via indirect price increases such as food prices. The International Energy Agency states that high fossil fuel prices hit the poor hardest but subsidies rarely protect vulnerable groups effectively. They tend to benefit better-off segments of the population instead. Producers argue that increasing taxes would cause unemployment and reduce national energy security. Governments say subsidies shield citizens from international price variations even if the targeting remains inefficient.

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• 5. Political Barriers To Reform

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  Despite G20 countries pledging to phase out inefficient fossil fuel subsidies, many continue due to voter demand. Some governments maintain support for reasons of energy security rather than economic efficiency. Setting fossil fuel prices that reflect their true cost would cut global CO2 emissions by 10% by 2030 according to IPCC data in 2023. Yet reforms remain politically difficult because they risk social unrest. Russia faces potential social unrest if it eliminates energy subsidies despite holding the world's third-largest subsidy volume. Many economists recommend replacing consumption subsidies with direct payments targeted at poor households instead.

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• 6. Case Studies Of Major Nations

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  China spent $2,203 billion on total fossil fuel subsidies in 2020 according to IMF data. The United States provided $662 billion while Russia contributed $522 billion. Iran became the world's largest subsidizer of energy prices under President Rouhani with over 15 percent of its GDP going to subsidies in 2019. Libya held the highest subsidy percentage of GDP in 2020 at 17.5 percent. Canada spent a greater proportion of its GDP on fiscal support for oil and gas production than any other G7 country between 2015 and 2016. In 2018 the Canadian federal government announced $1.6 billion in financial support for the oil and gas sector including loans from Export Development Canada.

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