Loading component...
Fossil Fuel Subsidies
Last Updated: April 22, 2026
Climate Change | Fossil Fuel Subsidies
Last Updated: April 22, 2026
Subsidies are intended to protect consumers by keeping prices low, but they come at a substantial cost. Subsidies have sizable fiscal consequences (leading to higher taxes/borrowing or lower spending), promote inefficient allocation of an economy’s resources (hindering growth), encourage pollution (contributing to climate change and premature deaths from local air pollution), and 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 equitable and greener economic growth. Fossil fuel subsidy removal would also reduce energy security concerns related to volatile fossil fuel supplies.
There are two different notions of fossil fuel subsidies. Explicit subsidies occur when the retail price is below a fuel’s supply cost. For a non-tradable product (electricity), the supply cost is the domestic production cost, inclusive of any costs to deliver the energy to the consumer, such as distribution costs and margins. In contrast, for an internationally tradable product (oil), the supply cost is the international price, as this reflects the opportunity cost of consuming the product domestically rather than selling it abroad, plus any costs to deliver the energy to the consumer. For partially traded products (coal, natural gas), supply costs are taken to be 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, but these are modest at the global level.
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) through the release of 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 these 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 switching to more fuel efficient or electric vehicles which do not affect externalities related to vehicle miles travelled.
In the example below, the retail price for diesel is $0.35 per liter, while the supply cost is $0.50 per liter (inclusive of VAT), total external costs are $0.60 per liter, and the standard value-added tax (VAT) rate is 20 percent (with an effective rate of 5 percent since one-quarter of diesel is consumed by households). Thus, the explicit subsidy is $0.15 per liter and the implicit subsidy is $0.63 per liter, split between $0.60 for undercharging of external costs and $0.03 for applying the standard VAT rate to external costs. If national consumption of diesel is 100 million liters, then the explicit subsidy is $15 million, the implicit subsidy is $63 million, and combined subsidy is $78 million.
The below figure shows estimates of current and efficient fuel prices of major fuels for all the Group of Twenty (G20) countries and selected other countries in 2024. Retail prices generally cover the supply costs but rarely environmental costs, with the largest price gaps generally for coal, followed by diesel, gasoline, and natural gas. Coal has the largest external costs due to significant emissions of greenhouse gas and harmful local air pollutants, while road fuel use can result in large congestion and accident costs. Natural gas is relatively less polluting, but also rarely taxed.
In 2024, explicit subsidies were $0.73 trillion, or 0.6 percent of global GDP, with consumer and producer subsidies accounting for 85 and 15 percent of the total, respectively, while implicit subsidies were $6.7 trillion, or 5.8 percent of global GDP. Relative to GDP, explicit subsidies tend to vary over time with international energy prices. Explicit subsidies dropped to 0.5 percent of GDP in 2020 but then rose to 1.3 percent in 2022 as many governments used temporary measures to contain retail price increases during the surge in international energy prices and fixed pricing regimes resulted in larger underpricing. Explicit subsidies are projected to decline slightly over the medium-term, but implicit subsidies increase as the share of fuel consumption in emerging markets (where price gaps are generally larger) continues to climb.
In 2024, local air pollution was the largest component of total (explicit plus implicit) subsidies (accounting for 39 percent of the total global subsidy), followed climate change (32 percent), underpricing for broader externalities from road use (16 percent), explicit subsidies (9 percent), and forgone consumption tax revenue (4 percent). At the fuel and sectoral level, most total subsidies (explicit and implicit combined) come from coal in the power sector, followed by gasoline and diesel used for road transport and industrial coal use.
The Middle East and North Africa (MENA) and Europe and Central Asian (ECA) regions account for the majority of explicit subsidies at 37 and 28 percent, respectively, while most implicit subsidies are in East Asia and Pacific (EAP), North American (NA), and ECA. Subsidies declined most in ECA, MENA, Latin American and the Caribbean (LAC) and Sub-Saharan Africa (SSA) since 2022.
Raising fuel prices to their fully efficient levels reduces projected global fossil fuel CO2 emissions 46 percent below baseline levels in 2035. This reduction is in line with a 1.7 to 1.85 C warming pathway. Globally, around 60 percent of the CO2 reduction comes from reduced use of coal, while 25 and 15 percent respectively are from reductions in consumption of petroleum and natural gas. Removing only explicit subsidies reduces CO2 emissions to 6 percent below the baseline, while a partial price reform that removed explicit subsidies and halves the gap between current and efficient prices reduces emissions 35 percent.
Full price reform raises revenues of $5 trillion, 3.3 percent of global GDP, in 2035 (relative to baseline levels and accounting for revenue losses due to erosion of pre-existing fuel tax bases). Revenue gains vary substantially across regions, largely mirroring the distribution of (explicit and implicit) subsidies. A partial price reform results in about two-thirds of the revenue gain, while explicit subsidy reform leads to revenue of 0.6 percent of GDP.
Subsidizing fuels is an inefficient way to support low-income households, with wealthier households capturing most fuel subsidies. In 2024, of the $289 billion in global explicit fossil fuel subsidies included in the distributional analysis (household survey data is not available for many countries with explicit subsidies), the wealthiest 50 percent of households captured about three quarters of the fuel subsidies. The lowest and highest deciles received $10 and $72 billion, respectively. That is, for every dollar in subsidy received by the poorest 10 percent of households, the wealthiest 10 percent received about seven dollars. However, when expressed as a share of total consumption, explicit and implicit subsidies tend to be neutral in low- and high-income countries and regressive in middle-income countries, although there are differences at the country level. Because of the larger share of subsidies going to wealthy households, only a portion of revenue from subsidy reform is needed to fully compensate lower income households. For instance, 30 percent of revenues fully compensates the bottom half of the income distribution on average, leaving the remainder of revenues available for other government objectives.
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. At COP26-28 in 2021-23, countries agreed to accelerate efforts to phase out inefficient fossil fuel subsidies. 17 countries are members of the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies, which was formed in 2023.
Some countries have succeeded in removing explicit subsidies and/or phasing in taxes and other pricing measures to cover external costs. For example, the EU Emissions Trading Scheme charges power generators and industrial sources for carbon emissions with prices slightly above a warming target-consistent carbon price in 2022. India, Morocco, Saudi Arabia, and Ukraine have (partly) phased out explicit subsidies and, in some cases, introduced taxes. Over 160 countries tax road fuel use.
Still, many countries have had difficulty reforming subsidies despite the potential gains. When reforms are made, prices increase, and this can lead to public opposition. The absence of public support for subsidy reform is in part due to a lack of confidence in government’s ability to compensate the poor and middle class for the higher energy prices they face and trust that the government will use revenue gains productively. Governments are also often concerned that higher energy prices will adversely affect industrial competitiveness and give a short term boost to inflation. 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.
While there is no single recipe for successful subsidy reform, country experiences suggest that the following ingredients are needed:
