With energy consumption vital for life and business, governments often look to fossil fuel subsidies to make energy as affordable as possible.
These subsidies artificially reduce the price of fossil fuels and generally take two forms:
- Production subsidies occur when governments provide tax cuts or direct payments that reduce the cost of producing coal, oil, or gas.
- Consumption subsidies cut fuel prices for the end-user through price controls and other such measures.
Each year, governments around the world pour nearly half a trillion dollars into fossil fuel subsidies. The break down of a decade of fossil fuel consumption subsidies data was provided by the International Energy Agency (IEA).
Breaking down fossil fuel consumption subsidies
Since 2010, governments have spent over $5 trillion in fossil fuel consumption subsidies. The majority of this sum went towards making oil more affordable.
Fossil fuel subsidies fell to a decade low in 2020 as the pandemic hampered fuel consumption and triggered a nosedive in oil prices. However, after two years of straight declines, the IEA estimates that governments around the world spent $440 billion on subsidizing fossil fuel consumption over 2021, representing a 142% rise year-over-year.
Breaking down the subsidies by fuel, oil accounts for 43% or over $2 trillion of all subsidies between 2010 and 2020. Together, oil and electricity generated by fossil fuels received nearly 75% of all subsidies.
Despite growing support for the clean energy transition, the fossil fuel industry reaps the benefits of billions in subsidies annually—but why?
Why do governments subsidize fossil fuels?
High energy prices can have rippling effects throughout an economy.
For consumers, heating and transportation become more expensive. And for producers who use energy and oil as inputs, the cost of goods and services goes up.
Often, governments turn to energy subsidies to keep prices down and encourage economic activity. Therefore, there’s a high cost to removing these subsidies, especially in developing countries where large parts of the population might lack access to affordable energy.
But fossil fuel subsidies can also have detrimental effects. By artificially lowering prices, they can encourage overconsumption of carbon-intense fuels, creating negative externalities through adverse environmental and health impacts. According to the International Renewable Energy Agency, these add up to an amount anywhere between $2.6 to $8.1 trillion globally.
Despite these disadvantages, fossil fuels remain an important part of the global energy mix, with continued support from governments. And with energy prices soaring, 2022 could be another year of billions in fossil fuel subsidies.Fossil Fuels, IEA, Renewables, subsidies