As the global economy rebounded from the COVID-19 recession in 2021, carbon dioxide (CO2) emissions hit their highest-ever recorded levels. Since CO2 is the primary gas involved in human-induced climate change, this will likely continue to accelerate the catastrophic effects of planetary warming. Hand-in-hand with this rise in fossil fuel use was a resurgence of fossil fuel subsidies—demonstrating the link between the subsidies and fuel use. Combined, subsidies on fossil fuels totaled $440 billion in 2021. Fossil fuel subsidies encourage burning fossil fuels by decreasing the cost of consumption, so they are widely recognized as a barrier to shifting to renewable energy.
What are Fossil Fuel Subsidies?
A subsidy is when a government pays a private entity, directly or indirectly, to further a broader public goal.
- Direct subsidies are a straightforward transfer of money from a government to a private entity.
- Indirect subsidies decrease the cost of fossil fuels without direct payments; they can take the form of tax breaks or favorable loans.
Fossil fuel subsidies are any policy by a government that directly or indirectly pays for the costs of producing or using fossil fuels. This lowers the operating costs for fossil fuel companies and keeps fossil fuels cheaper than their “true” cost for consumers, which would otherwise be set by global markets. Because fuel is cheaper than it would be without subsidies, there is greater use of fossil fuels.
Fossil fuel subsidies can be further classified into two categories: production subsidies and consumption subsidies.
- Production subsidies are those that target the producers of fossil fuels; they can include government funding or support for accessing fossil fuel reserves, extracting resources, and building industrial facilities. They are common in wealthy nations that produce oil.
- Consumption subsidies, on the other hand, target individuals and enterprises that purchase fossil fuels or electricity derived from it. Common examples include capping gas prices or helping pay for energy bills. These are common in developing nations where large populations require cheap fuel for cooking, heating, and transportation.
Fossil fuel subsidization gets more complex, as many wealthy countries with large fossil fuel industries will subsidize the development of infrastructure in developing nations to better extract fossil fuels.
Most economies still largely depend on fossil fuels, so for many governments it makes sense to keep their prices low. Rising costs of gas make it more expensive to travel, work, and power homes, which can negatively impact people’s finances and economic opportunity. Because fossil fuels are so widely used, subsidies on their production and consumption are found in practically every country. Global subsidies currently cost $440 billion, which fluctuates year to year based on individual countries’ policies.
Fossil fuel subsidies by country in 2019, reflecting pre-pandemic levels of demand. Subsidies in general fell sharply in 2020 and rebounded in 2021.
Why are Fossil Fuel Subsidies Considered Harmful?
The main issue associated with fossil fuel subsidies is climate change. Because subsidies make it artificially cheap to produce and buy fossil fuels, they encourage greater use, which leads to increased emissions. Rapid climate change is a serious problem that is believed to cause more severe weather patterns, increased drought, sea level rise, crop failures, and displacement of people; these effects are projected to worsen as temperatures continue to rise at an unnaturally fast rate.
In addition, by encouraging the burning of more fossil fuels these subsidies also contribute to air pollution, a major known cause of human illness and death. Research from Harvard and the UK attributes 1 in 5 air pollution deaths worldwide to fossil fuels, or 1.6 million of the 8 million people killed in 2018.
A more indirect argument put forth by some is that fossil fuel subsidies are not the most efficient use of government money for maximizing social welfare—that is, the billions poured into making fossil fuels cheaper could be better spent in areas like healthcare, education, or even renewable energy. The United Nations notes that more is being spent on fossil fuel subsidies than poverty elimination, and calls for reallocating funds towards more sustainable projects.
Why are Fossil Fuel Subsidies Considered Necessary?
Proponents of fossil fuel subsidies and cautious governments argue that the solution is not as simple as getting rid of them overnight. Fossil fuel subsidies make energy more affordable for many people across the world, particularly in countries with high levels of poverty. Removing them might push some people further into poverty by driving up the cost of living. Because entire economies run on burning fossil fuels for energy, a spike in energy costs when subsidies are dropped could trigger inflation or recession. When gas prices go up, the price of everything else tends to rise as well, because it becomes more expensive for businesses to move goods around and to manufacture products. Removing subsidies quickly can cause a price shock because economies are adjusted to run on artificially low gas prices. An extreme example of this is Kazakhstan, where the removal of consumption subsidies on fuel proved to be the catalyst for violent uprisings after the cost of fuel rose sharply. In general emerging economies are more vulnerable to inflation and economic turmoil, which can be triggered by spikes in the prices of essential commodities like oil and gas.
The most staunch defenders of subsidies are fossil fuel companies themselves, which are able to use their vast wealth and connections to stall government action. For example, over 100 fossil fuel companies sent a combined 500 lobbyists to COP26, the international climate change summit held in 2021, more representatives than any nation present.
Current Action by World Governments
Despite the hundreds of billions of dollars spent annually by governments subsidizing fossil fuels, there has been general acknowledgement that fossil fuel subsidies present a problem for the climate, and many countries have pledged to work towards eliminating them where possible. Every year since 2009, the G7 and G20 nations (groups of leading economies composed of 7 and 20 members, respectively) have committed to phasing out fossil fuel subsidies by 2025. The Glasgow Climate Pact, signed in 2021 after the COP26 conference, calls upon all signatories to “phase-out inefficient fossil fuel subsidies” as part of the plan to limit warming to 1.5 ºC above pre-industrial levels. The UN General Assembly also lists phasing out harmful fossil fuel subsidies as a step towards achieving “sustainable consumption and production patterns”. Despite these pledges, fossil fuel subsidies remain widespread, and their recent resurgence in 2021 from the low levels seen during COVID lockdowns indicates that the debate over how to address these subsidies is ongoing.
