The world is zooming towards a low-carbon future, embracing renewable energy and shunning fossil fuels — at least that’s the impression you’d get if you listen to world leaders talking. But reality says otherwise.
Globally, fossil fuels were subsidized with $5.9 trillion (or 6.8% of GDP) in 2020. In other words, world governments paid this gargantuan sum to make it easy for fossil fuel companies to operate and make profits. In 2021, the figure grew even more, and by 2025, fossil fuel subsidies are expected to grow to 7.4% of global GDP.
Which begs the question: if we really are trying to get rid of fossil fuels, why are we still paying them so much?
Handouts for global warming
There’s a lot of talk about putting a tax on carbon, with many leading economists calling it the most effective way to tackle climate change. But perhaps an easier way to start doing things is to phase out the subsidies the industry receives.
These subsidies come in many shapes and forms. Some can be explicit, like dropping the retail price below a fossil fuel’s supply cost or providing tax breaks on fossil fuels. Some are more indirect, like allowing oil and gas companies to sell the fuel most recently added to their reserves first, as opposed to selling older reserves first under the traditional First In, First Out (FIFO) method, which applies to other types of goods. Allowing companies to claim royalties as tax deductions in different countries is another way of indirectly subsidizing them. Then, of course, there’s the ignoring of all the negative externalities brought by fossil fuel companies: when a company produces a negative impact on the outside (think of a company that produces pollutants), it usually pays a tax, but fossil fuel companies basically get an industry-wide rebate for the greenhouse gas emissions.
Because the subsidies come in so many shapes, it’s hard to estimate their real value, and estimates vary greatly, especially since fossil fuel subsidies are very attractive politically: energy is a key issue in all countries, and access to cheap energy comes as a very visible way of government support. That’s why these subsidies have become pervasive and very hard to estimate and very hard to eliminate.
Environmentally, these subsidies are a disaster, and at least officially, G20 countries have vowed to eliminate “inefficient” fossil fuel subsidies — although they didn’t really define what this means and it’s as vague a commitment as you can imagine.
“I think everyone seems to be basically on the same page that something needs to be done about fossil-fuel subsidies,” Harro van Asselt, a specialist in climate law and policy at the University of Eastern Finland in Joensuu, told Nature. “It’s the discrepancy between the rhetoric and the reality that is starting to bite a little bit. We’re figuring out that it’s incredibly challenging to actually make it happen.”
The problematic assessment of subsidies also lets countries wiggle out of any commitments with ease. The UK, for instance, claims it offers no fossil fuel subsidies whatsoever, although some reports found it to be one of the worst offenders among the developed countries. The subsidy comes in the form of forgoing tax revenue from the use of fossil fuels, which is not a direct subsidy, but it’s a subsidy nonetheless — despite the country’s official claims.
“They reject the idea that they have any inefficient fossil-fuel subsidies,” says Angela Picciariello, senior research officer in climate and sustainability at the Overseas Development Institute in London, for Nature. So “it’s quite hard to engage with them on this”.
Repealing subsidies
Still, some progress has happened.
In large-scale, complex issues like this one, progress can’t come as a singular event, it can only come gradually — and we’re seeing some of that progress.
For instance, in Indonesia, a country with almost 300 million people and a booming oil industry, gasoline, and diesel subsidies were reduced and the money was instead spent on social assistance. Italy and Thailand are also examples of countries that have recently reduced subsidies.
Of course, each country has its own mechanisms to fund fossil fuel subsidies, but other countries have also found ways to cut down on these subsidies. The Philippines, Ghana, and Morocco for instance have also invested in education and health insurance for poor families instead of investing more in subsidies. Even Saudi Arabia and Iran have shown some willingness to reduce support for the fossil fuel industry, although the subsidies are still very large overall.
Economically speaking, fossil fuel subsidies are ‘regressive’ — they benefit the richest more than the poorest (as opposed to ‘progressive’ measures). A recent IMF study of fossil fuel subsidies found that globally, the wealthiest 20% of the population gets a disproportionate 43% from fossil fuel subsidies, while the poorest 20% gets only 7%. The richest 20% get more than the poorest 60%, actually.
So reducing fossil fuel subsidies is also seen as a move to reduce income inequality — not just directly, by investing the money into education or social programs, but also indirectly. Subsidies soared as the world’s economy rebounded from the pandemic, but most of the subsidies still went to reduce the price paid by consumers. This means that larger, more affluent households get a larger tax rebate.
“Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuel prices,” said Fatih Birol, the director of the International Energy Agency, which produced the analysis with the OECD.
“A surge in investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis and the best way to reduce the exposure of consumers to high fuel costs,” said Birol.
To make things even more problematic, the subsidies keep coming in as the companies make record profits. In the last 50 years, the oil and gas sector has made an average of $1tn a year in pure profit for the last 50 years. Large parts of this sum were invested into delaying action on the climate crisis. After the pandemic, profits boomed as the fossil fuel industry took advantage of the energy crisis. In the first half 0f 2020 alone, five large oil companies (BP, Shell, ExxonMobil, Chevron, and Total) made adjusted profits of nearly $100 B. For comparison, that’s the exact same sum that underdeveloped nations were promised to deal with the climate crisis by 2020 — but that sum was never delivered.
Big hurdles along the way
There are two main big hurdles in the way of phasing out fossil fuel subsidies.
The first is that the fossil fuel industry puts big money into sponsoring policies they like. Several studies have found that the oil and gas industry rewards lawmakers who oppose environmental protections. The industry also invests in sowing disinformation and doubt about climate action, and the results work: climate action has been greatly delayed, and even now, it’s still slow. The industry won’t give up on such a large chunk of subsidies without a fight, despite greenwashing.
The second one is more legitimate. Billions of people around the world still don’t have access to modern forms of energy. It’s estimated that ever 2 in 5 people on the face of the planet don’t even have access to modern energy for cooking and instead, have to use wood, crop waste, coal, or dried dung, which is greatly affecting their health (in addition to causing other obvious problems). Getting renewable sources of energy to all these people would be ideal, but it’s unlikely to happen anytime soon. Sure, some places will be able to jumpstart from energy poverty straight to renewables, but that won’t be the case everywhere — and it’s much harder to argue against energy subsidies for the world’s poorest. Realistically, many of these people will transition into using natural gas soon.
But that’s not where the subsidy cut has to come from. The subsidy cut should come from the industrialized, oil-rich countries. The largest subsidy shares come from China, the US, Russia, India, and Japan, in that order. If fossil fuel subsidies were cut, renewables would surge even more as they become more cost-effective by comparison, which would doubly tackle the climate crisis.
Ultimately, the clean energy revolution will happen. It’s inevitable, and we’re seeing the growth of renewable energy year after year. Renewable energy is expanding faster than ever and already, solar, wind, and other renewables make up close to 15% of the world’s electricity mix. Hydro and nuclear power, two other low-carbon sources, make up another 27% globally.
The problem is not that fossil fuel subsidies will stop this energy revolution, it’s that they can delay it up to a point where catastrophic climate damage becomes inevitable — and it often does so at the expense of the world’s poorest. The subsidies make it harder for renewable energy sources to be competitive because they don’t just have to be cheaper than fossil fuels, they have to be cheaper than fossil fuels and subsidies. We’re essentially paying companies to keep on pumping fossil fuels.
The end goal is to transition to a zero-carbon future that enables sustainable development for all our society. That’s a mammoth challenge. But a lower-hanging fruit would be to at least stop paying companies to extract and sell fossil fuels. It’s something we can do right now.
Many economists recommend replacing the subsidies with other schemes that can help poor people or households, particularly through systems like vouchers, which could help tackle climate change while helping the less fortunate.
Delivering energy subsidies through price controls is a very inefficient policy tool to protect the poor, yet, increases in the price of energy products can have a sizeable impact on lower-income households. So, what can policymakers do to solve this dilemma?
“Direct cash transfers or vouchers have been found to be a much more effective policy tool for protecting poor and vulnerable households from the negative welfare impacts of rising energy costs,” conclude the authors of a recent study on phasing out fossil fuel subsidies.”
At any rate, if we are truly committed to addressing climate change, continuing to pay companies for producing emissions is something we need to rethink as soon as possible.
