Fossil fuel subsidies

Based on Wikipedia: Fossil fuel subsidies

The Seven Trillion Dollar Question

Here's a number that should stop you cold: seven trillion dollars. That's how much the world spent subsidizing fossil fuels in 2022, according to the International Monetary Fund. To put that in perspective, it's roughly equivalent to the entire gross domestic product of Japan and Germany combined—every single year—flowing toward making coal, oil, and gas cheaper than they would otherwise be.

But wait. You might have heard a different number. The International Energy Agency puts fossil fuel subsidies at around 1.5 trillion dollars. How can two credible institutions be off by a factor of nearly five?

The answer reveals something profound about how we think about costs, who pays them, and what counts as a "subsidy" in the first place.

What Exactly Is a Subsidy?

At its simplest, a subsidy is any government action that makes something cheaper. For fossil fuels, this can take obvious forms: a tax break for oil companies exploring new wells, reduced sales tax on natural gas for home heating, or direct payments to keep gasoline prices low at the pump.

These explicit subsidies—the kind that show up clearly in government budgets—account for the lower estimates you sometimes hear. They're what economists call "direct" subsidies, and they're relatively easy to count. Add up the tax breaks, the grants, the below-market loans to energy companies, and you get something in the neighborhood of that 1.5 trillion dollar figure.

But there's another way to think about subsidies, and it changes everything.

The Hidden Costs We All Pay

Imagine you run a factory. Your production process creates toxic waste, but instead of disposing of it properly, you dump it in the river behind your building. Your products are cheaper because you're not paying for waste disposal—but someone downstream is paying with their health, their ruined fishing grounds, their polluted drinking water.

Economists call these unpaid costs "negative externalities." They're real costs, but they're borne by people other than the ones creating them.

Burning fossil fuels creates enormous negative externalities. Coal plants emit sulfur dioxide, nitrogen oxides, and particulate matter that cause asthma, heart disease, and premature death. Cars and trucks release pollutants that sicken people living near busy roads. And all fossil fuel combustion releases carbon dioxide, driving climate change that threatens agriculture, coastal cities, and ecosystems worldwide.

When the IMF calculates fossil fuel subsidies, they include these external costs. Their reasoning is straightforward: if the price you pay at the gas pump doesn't include the cost of the pollution that gasoline creates, then society is effectively subsidizing your fuel. You're getting a discount, and everyone else is picking up the tab through worse air quality, higher healthcare costs, and a destabilized climate.

This broader definition accounts for the gap between 1.5 trillion and 7 trillion dollars. The explicit subsidies are real enough. But the implicit subsidies—the free pollution, the unpriced carbon—dwarf them.

Breaking Down the Numbers

The IMF's analysis reveals a fascinating hierarchy of hidden costs. The largest single component, accounting for 42 percent of global fossil fuel subsidies, is local air pollution. This isn't about climate change—it's about the particulate matter, the ozone, the toxic chemicals that make urban air hard to breathe and send people to emergency rooms.

Climate change comes second, representing 29 percent of the total. This reflects the damage that carbon emissions cause: more intense hurricanes, rising seas, crop failures, and the countless other consequences of a warming planet.

Other local externalities—traffic congestion, road accidents, noise pollution—make up another 15 percent. These might seem surprising in a discussion of energy subsidies, but they're part of the full cost of our transportation system, which runs primarily on fossil fuels.

The explicit subsidies that governments directly provide? Just 8 percent of the total.

And the revenue that governments give up by not taxing fossil fuels at the same rate as other goods? About 6 percent.

Who Benefits from Cheap Fuel?

Politicians often justify fossil fuel subsidies as helping the poor. And there's a kernel of truth here—low energy prices do help low-income families keep their lights on and their homes warm.

But the data tells a more complicated story.

In absolute terms, wealthy people capture most of the benefits from fossil fuel subsidies. This makes intuitive sense: the poorest families don't own cars, so they don't benefit from gasoline subsidies. They live in smaller homes that require less heating. They consume less energy across the board.

The International Energy Agency puts it bluntly: "High fossil fuel prices hit the poor hardest, but subsidies are rarely well-targeted to protect vulnerable groups and tend to benefit better-off segments of the population."

That said, removing subsidies can still hurt poor families disproportionately in relative terms. When gasoline prices rise, food prices often follow—trucks run on diesel, after all. A poor family spending half their income on food will feel that price increase far more acutely than a wealthy family spending ten percent.

This creates a genuine policy dilemma. The subsidies are inefficient and environmentally destructive, but removing them carelessly can harm the people least able to absorb the impact.

The Alternative: Targeted Support

Most economists who study this issue recommend the same basic approach: replace broad fossil fuel subsidies with direct cash transfers to people who need help.

The logic is simple. If you want to help poor families afford heating, you can either subsidize everyone's natural gas—which means most of the money goes to people who don't need it—or you can give money directly to the families who struggle to pay their bills.

Direct transfers are more efficient. They put the money where it's needed instead of spreading it across the entire population. They allow energy prices to reflect true costs, which encourages conservation and makes clean alternatives more competitive. And they give recipients the freedom to spend the support however helps them most—maybe on heating, but maybe on food or medicine or rent.

Iran offers a fascinating example of what happens when subsidies persist unchecked. Under President Rouhani, Iranian fossil fuel subsidies grew to over 15 percent of the country's entire gross domestic product—sixteen percent of all energy subsidies on Earth, concentrated in a single country with less than 1.2 percent of the world's population.

The consequences have been predictable. Energy consumption has become extraordinarily wasteful. Budget deficits have ballooned. And perhaps most remarkably, the price differential between Iran and its neighbors has created a thriving smuggling industry, with billions of dollars worth of cheap Iranian fuel flowing illegally across borders each year.

The Politics of Pain

If the economics are so clear, why do fossil fuel subsidies persist?

Voters like cheap energy. Politicians who raise fuel prices tend to face angry constituents. And the benefits of subsidies are concentrated and immediate—cheap gas today!—while the costs are diffuse and delayed—worse air quality, higher healthcare costs, climate damage that unfolds over decades.

The G20 countries, which represent the world's largest economies, have repeatedly pledged to phase out "inefficient" fossil fuel subsidies. The first commitment came in 2009. Nearly fifteen years later, subsidies remain stubbornly in place.

Some progress has happened. Ghana eliminated all diesel and gasoline subsidies in 2014. Egypt raised diesel prices by 63 percent the same year as part of a five-year reform plan. Various countries have taken smaller steps in the right direction.

But the overall trend has been discouraging. The fiscal cost of government support for fossil fuels hit 1.1 trillion dollars in 2023—and that's just the explicit, on-budget subsidies, not the far larger implicit ones.

The Climate Arithmetic

Here's a striking calculation from the Intergovernmental Panel on Climate Change, the world's leading authority on climate science: if fossil fuel prices reflected their true costs—including the damage from carbon emissions—global carbon dioxide emissions would fall by 10 percent by 2030.

Ten percent might not sound revolutionary. But in the context of climate policy, it's enormous. Countries negotiate for years to achieve emission reductions of a few percentage points. Getting ten percent just by pricing fossil fuels accurately would be a major step toward limiting warming.

The current situation is almost absurd when you step back and look at it. The world has agreed that climate change is an urgent threat. Governments have pledged to reach net-zero emissions. And yet those same governments continue to spend trillions of dollars making the problem worse—explicitly through direct subsidies, and implicitly by allowing fossil fuels to be burned without paying for the damage they cause.

A Tale of Three Giants

Looking at individual countries reveals the scale of the challenge.

Russia holds the world's largest natural gas reserves—27 percent of the global total—along with the second-largest coal reserves and the eighth-largest oil reserves. Unsurprisingly, Russia subsidizes fossil fuels heavily, with about 60 percent going to natural gas and the remainder to electricity and oil extraction. Russian authorities know these subsidies are economically costly, but they fear the social unrest that might follow if energy prices rose significantly. In a country where cold winters can kill, cheap heating is more than a convenience.

Saudi Arabia presents a different picture. Most of the kingdom's energy subsidies are implicit rather than explicit. The government doesn't write checks to energy consumers—it simply sells domestic oil at prices below what it could get on the world market. This isn't a direct budget expense, but it represents foregone revenue that could otherwise fund schools, hospitals, or diversification away from oil dependency. Recent reforms have begun addressing this, with domestic energy prices rising significantly in 2018.

China's situation reflects its unique priorities. The country's leaders view energy security as a paramount concern, justifying subsidies for coal, oil, and natural gas production and consumption. Given China's massive population and rapid industrialization, the absolute dollar amounts involved are staggering.

The Canadian Contradiction

Canada offers a case study in the gap between climate rhetoric and energy policy.

The Canadian federal government has repeatedly committed to phasing out fossil fuel subsidies. It has positioned itself as a climate leader on the world stage. And yet a 2018 analysis found that Canada spent a greater share of its gross domestic product on fiscal support for oil and gas production than any other G7 country.

The mechanisms are various: tax breaks for exploration and production, financing from Export Development Canada for oil and gas companies, provincial exemptions for agricultural fuel use and natural gas heating.

When the Canadian government announced 1.6 billion dollars in support for the oil and gas sector in 2018, officials insisted this wasn't really a subsidy. "These are commercial loans, made available on commercial terms," the Minister of Natural Resources explained. Critics noted that making special financing available specifically to oil and gas companies—especially "higher risk" ones—certainly looked like preferential treatment.

A particularly damning detail emerged when Canada's Office of the Auditor-General attempted to audit the country's fossil fuel subsidies in 2017. They found that Finance Canada simply wouldn't provide much of the data they needed. The subsidies weren't just problematic—they were opaque.

Health in the Balance

Beyond climate change, beyond economic efficiency, there's a more immediate cost to fossil fuel subsidies: human lives.

Burning coal, oil, and gas releases pollutants that kill people. Not metaphorically, not eventually, but literally and now. The particulate matter from power plants and vehicles lodges in lungs and causes heart attacks. The ground-level ozone formed from vehicle exhaust triggers asthma attacks and damages respiratory systems. The toxic metals in coal smoke accumulate in bodies over time.

Estimates suggest that subsidies for fossil fuels—by making these fuels artificially cheap and encouraging their use—cause hundreds of thousands of deaths from air pollution every year.

Think about that for a moment. These deaths don't make headlines the way a plane crash or a natural disaster would. They happen one at a time, in hospitals and homes, attributed to heart disease or lung cancer or chronic respiratory illness. But they trace back, at least in part, to policies that keep fossil fuels cheap.

The Path Forward

The Organisation for Economic Co-operation and Development, known as the OECD, has been tracking government support for fossil fuels and carbon pricing mechanisms. Their findings are sobering.

The effective carbon rate—a measure that combines carbon taxes, emissions trading systems, and other pricing mechanisms—averaged about 14 euros per ton of carbon dioxide equivalent in 2023. That's far below what most economists consider necessary to drive meaningful decarbonization.

Only 42 percent of greenhouse gas emissions face any positive carbon price at all. The majority of emissions are either unpriced or, in effect, subsidized.

The OECD's recommendation is blunt: governments should "focus on better targeting those most in need and phasing out inefficient support for fossil fuels as soon as possible." The money saved could fund the transition to clean energy, support innovation in energy efficiency, and help the workers and communities that currently depend on fossil fuel industries.

This isn't about ideology or environmental purity. It's about basic economic efficiency. We're spending trillions of dollars to make a problem worse—a problem that will cost even more to address the longer we wait.

The Optimist's Case

For all the discouraging numbers, there are reasons for hope.

Clean energy costs have fallen dramatically. Solar electricity is now cheaper than coal in most of the world. Electric vehicles are approaching price parity with gasoline cars. Battery storage is making renewable energy practical even when the sun isn't shining and the wind isn't blowing.

These technological shifts mean that ending fossil fuel subsidies wouldn't just reduce carbon emissions—it would accelerate a transition that's already underway. Remove the artificial advantages that fossil fuels enjoy, and clean alternatives become even more competitive.

The political landscape is shifting too. Young voters increasingly prioritize climate action. Companies face pressure from investors and customers to reduce their carbon footprints. Cities and states are setting their own climate targets even when national governments lag.

The seven trillion dollar question isn't whether fossil fuel subsidies will end. It's how long we'll wait, how much damage we'll accept, and whether we'll manage the transition thoughtfully enough to protect the people who depend on these industries today.

The answer to that question is still being written. And it will be written not just in parliaments and climate summits, but in the choices that voters, consumers, and investors make every day about what kind of energy future they're willing to pay for—and which hidden costs they're no longer willing to ignore.