Fossil Fuel Subsidies
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Definitions and measurement
- The publication distinguishes two notions of fossil fuel subsidies:
- Explicit subsidies: occur when the retail price is below a fuel’s supply cost. For non-tradable products (electricity) the supply cost is the domestic production cost inclusive of delivery costs and margins. For internationally tradable products (oil) the supply cost is the international price plus delivery costs. For partially traded products (coal, natural gas) supply costs are the weighted average of domestic production costs and international prices. Supply costs include VAT when fuels are consumed by households. Explicit subsidies also include direct support to producers, such as accelerated depreciation.
- Implicit subsidies: occur when the retail price fails to include external costs, inclusive of the standard consumption tax. External costs include contributions to climate change through greenhouse gas emissions, local health damages (primarily premature deaths) from harmful local pollutants like fine particulates, and traffic congestion, accident, and road damage externalities associated with the use of road fuels.
- Getting energy prices right involves reflecting adverse effects on society in prices to the extent they are not priced through other policies like congestion tolls, and applying general consumption taxes when fuels are consumed by households. For road fuels, downward adjustments to efficient taxes are made to account for switching to more fuel efficient or electric vehicles which do not affect externalities related to vehicle miles travelled.
Fiscal, economic, and environmental consequences
- Subsidies have sizable fiscal consequences, leading to higher taxes, higher borrowing, or lower spending.
- Subsidies promote inefficient allocation of an economy’s resources, hindering growth.
- Subsidies encourage pollution, contributing to climate change and premature deaths from local air pollution.
- Subsidies are not well targeted at the poor, mostly benefiting wealthier households.
- Removing subsidies and using the revenue gain for better targeted social spending, reductions in distortionary taxes, and productive investments can promote sustainable and equitable outcomes and greener economic growth.
- Fossil fuel subsidy removal would also reduce energy security concerns related to volatile fossil fuel supplies.
Illustrative diesel example (numeric breakdown)
- Retail price for diesel: $0.35 per liter
- Supply cost (inclusive of VAT): $0.50 per liter
- Total external costs: $0.60 per liter
- Standard VAT rate: 20 percent (with an effective rate of 5 percent since one-quarter of diesel is consumed by households)
- Explicit subsidy: $0.15 per liter (supply cost minus retail price)
- Implicit subsidy: $0.63 per liter, split between:
- $0.60 per liter for undercharging of external costs
- $0.03 per liter for applying the standard VAT rate to external costs
- If national consumption of diesel is 100 million liters:
- Explicit subsidy: $15 million
- Implicit subsidy: $63 million
- Combined subsidy: $78 million
2024 global estimates and composition
- Explicit subsidies in 2024: $0.73 trillion, or 0.6 percent of global GDP
- Consumer subsidies account for 85 percent of explicit subsidies
- Producer subsidies account for 15 percent of explicit subsidies
- Implicit subsidies in 2024: $6.7 trillion, or 5.8 percent of global GDP
- Evolution of explicit subsidies over time:
- Dropped to 0.5 percent of GDP in 2020
- Rose to 1.3 percent of GDP in 2022 due to temporary government measures and fixed pricing regimes during the surge in international energy prices
- Projected to decline slightly over the medium-term, while implicit subsidies increase as the share of fuel consumption in emerging markets continues to climb
- 2024 decomposition of total (explicit plus implicit) subsidies by policy externality:
- Local air pollution: 39 percent of the total global subsidy
- Climate change: 32 percent
- Underpricing for broader externalities from road use: 16 percent
- Explicit subsidies: 9 percent
- Forgone consumption tax revenue: 4 percent
- By fuel and sector: most total subsidies come from coal in the power sector, followed by gasoline and diesel used for road transport and industrial coal use.
- Retail prices generally cover supply costs but rarely environmental costs; largest price gaps are generally for coal, followed by diesel, gasoline, and natural gas. Coal has the largest external costs; natural gas is relatively less polluting and also rarely taxed.
Regional patterns and recent trends
- Regions accounting for the majority of explicit subsidies:
- Middle East and North Africa (MENA): 37 percent of explicit subsidies
- Europe and Central Asia (ECA): 28 percent of explicit subsidies
- Regions with the largest implicit subsidies include East Asia and Pacific (EAP), North American (NA), and ECA.
- Subsidies declined most since 2022 in ECA, MENA, Latin American and the Caribbean (LAC), and Sub-Saharan Africa (SSA).
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