Fossil Fuel Subsidies Surged to Record $7 Trillion

IMF Blog, August 24, 2023

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The IMF blog article by Simon Black, Ian Parry, and Nate Vernon-Lin, published August 24, 2023, reports that fossil-fuel subsidies surged to a record $7 trillion in the prior year.
The surge is attributed to governments supporting consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the pandemic.
Subsidies for oil, coal and natural gas are reported as costing the equivalent of 7.1 percent of global gross domestic product.

Total fossil-fuel subsidies: $7 trillion.
Subsidies as a share of global income: 7.1 percent of global gross domestic product.
Comparisons with public spending:
- Education spending: 4.3 percent of global income.
- Healthcare spending: 10.9 percent of global income.
Change over two years: fossil-fuel subsidies rose by $2 trillion over the past two years.
Explicit subsidies (undercharging for supply costs): more than doubled to $1.3 trillion.
Implicit subsidies (undercharging for environmental costs and forgone consumption taxes): the vast majority of the $7 trillion; consumers did not pay for over $5 trillion of environmental costs last year.
Health and fiscal impacts of removing subsidies (IMF estimates):
- Premature deaths prevented annually: 1.6 million.
- Government revenues raised: $4.4 trillion.

The IMF’s baseline values for environmental costs equate global warming costs to the emissions price needed to meet Paris Agreement temperature goals.
The IMF notes that valuing climate damage at levels found in a recent study published in Nature would nearly double the implicit-subsidy estimate.
Implicit subsidies are projected to grow as developing countries increase their consumption of fossil fuels toward levels of advanced economies, reflecting higher-polluting power plants, factories, vehicles, and denser populations near pollution sources.

Consuming fossil fuels imposes environmental costs mostly from local air pollution and damage from global warming.
Removing explicit and implicit fossil-fuel subsidies is estimated to:
- Cut global carbon-dioxide emissions significantly (IMF phrasing).
- Produce cleaner air and reduce lung and heart disease (IMF phrasing).
- Help put emissions on track toward reaching global warming targets (IMF phrasing).

Remove explicit subsidies and impose corrective taxes so fuel prices reflect supply and environmental costs, prompting firms and households to consider environmental costs in consumption and investment decisions (IMF phrasing).
Design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package.
Use a portion of increased revenues to compensate vulnerable households for higher energy prices.
Use the remaining revenues to:
- Cut taxes on work and investment.
- Fund public goods such as education, healthcare, and clean energy.