Fossil Fuel Subsidies


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Who Benefits from Fossil Fuel Subsidies

Fossil fuel subsidies are an important policy issue for all countries. Not only do energy subsidies have negative economic and environmental effects, they also mainly benefit the wealthiest households.


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Measuring Fossil Fuel Subsidies

When defining fossil fuel subsidies, it is important to distinguish between consumer and producer subsidies. Within consumer subsidies it is also useful to distinguish between pre-tax and post-tax consumer subsidies since differences in estimates in the literature most often reflect a different focus on these subsidies.


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A Global Picture of Fossil Fuel Subsidies

Pre-tax and Post-tax Energy Subsidies 2010-17Pre-tax subsidies (including pre-tax consumer subsidies and producer subsidies) were estimated at US$305 (0.4 percent of global GDP) in 2015 and estimated to decline to US$295 (0.37 percent of global GDP) in 2017, reflecting both changes in international energy prices and energy subsidy reforms during this period. Post-tax energy subsidies were estimated at $4.7 trillion (6.3 percent of global GDP) in 2015 and at $5.2 trillion (6.5 percent of global GDP) in 2017.

Energy subsidies by component 2015In dollar terms, Emerging and Developing Asia accounts for about 40% of global post-tax subsidies with advanced economies accounting for about one quarter. In percent of GDP, post-tax subsidies are highest in Emerging and Developing Asia, Middle East, North Africa, Afghanistan, and Pakistan and Commonwealth of Independent States (CIS), at over 12 percent of regional GDP. In addition, the vast majority of post-tax subsidies reflect domestic externalities with only about 1/4 from global warming. 

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Consequences of Fossil Fuel Subsidies

Subsidies are intended to protect consumers by keeping prices low. But they also come at a high cost. Subsidies are expensive for governments—and therefore taxpayers—to finance and can hinder governments’ efforts to reduce budget deficits. They also compete with other priority public spending on roads, schools, and healthcare.

All consumers—both rich and poor—benefit from subsidies by paying lower prices. Governments could get more “bang for their buck” by removing or reducing subsidies and targeting the money directly to programs that help only the poor.

Subsidies encourage excessive energy consumption, which accelerates the depletion of natural resources. They also reduce the incentive for investment in energy efficiency and other forms of cleaner energy. By encouraging wasteful use of energy, energy subsidies can also exacerbate the external vulnerability of countries to volatile international energy prices.

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The Benefits of Subsidy Reform

The fiscal, environmental and welfare gains from removing energy subsidies are substantial. At a global level, revenue gains in 2015 were estimated to be about US$2.8 trillion (3.8 percent of global GDP) and US$3.2 trillion (4 percent of global of global GDP) in 2017. These reforms can also generate substantial environmental benefits, such as reductions in CO2 emissions and premature deaths from air pollution.

Fiscal gains by region and product 2015Environmental gains by region and product 2015

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Reform Efforts

In 2009, the Group of 20 advanced and emerging market economies called for a phase out of inefficient fossil fuel subsidies in all countries and reaffirmed this again in 2012.

Despite the potential gains, many countries have had difficulty reforming subsidies. When reforms are made, prices increase, and this has often led to widespread public protests.

The absence of public support for subsidy reform is in part due to a lack of confidence in the ability of governments to shift the resulting budgetary savings to programs that would compensate the poor and middle class for the higher energy prices they face.

This problem is particularly challenging in oil-exporting countries, where subsidies are seen as a mechanism to distribute the benefits of natural resource endowments to their populations and where the capacity to administer targeted social programs is typically limited.

Governments are also often concerned that higher energy prices will contribute to a higher rate of inflation and adversely affect their competitiveness. Subsidy reform can also be complex when it includes efforts to reduce inefficiencies and production costs, as is often the case for the electricity sector.

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A Plan for Reform

While there is no single recipe for successful subsidy reform, country experiences suggest that the following ingredients are needed:

  • - A comprehensive energy sector reform plan with clear long-term objectives with an analysis of the impact of reforms;
  • - Transparent and extensive communication and consultation with stakeholders, including information on the size of subsidies and how they affect the government’s budget;
  • - Price increases that are phased-in over time;
  • - Improving the efficiency in state-owned enterprises to reduce producer subsidies;
  • - Measures to protect the poor through targeted cash or near-cash transfers or, if this option is not feasible, a focus on existing targeted programs that can be expanded quickly; and
  • - Institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.