Fuel subsidy is a government intervention that provides a benefit or preference for fossil fuel production or consumption relative to alternatives. It is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers. Fuel subsidies can be tax breaks on consumption, such as a lower sales tax on natural gas for residential heating, or subsidies on production, such as tax breaks on exploration for oil.
Explicit subsidies occur when the retail price is below a fuels supply cost. For a non-tradable product (e.g., 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. Implicit subsidies occur when the price paid by consumers is below the opportunity cost of the government providing the good or service, including the environmental and health costs associated with its production and consumption.
Fossil fuel subsidies have been described as "any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by energy consumers". They can have negative externalities such as health costs, which results in a much larger total. Thus, by the IMF definition, they are far larger than by the OECD and International Energy Agency (IEA) definitions.
Globally, fossil fuel subsidies were $7 trillion or 7.1 percent of GDP in 2022, reflecting a $2 trillion increase since 2020 due to government support from surging energy prices. Subsidies are expected to decline in the near-term as energy price support policies are unwound and international prices fall, but then rise to $8.2 trillion by 2030 as the share of fuel consumption in emerging markets (where price gaps are generally larger) continues to climb.
Removing subsidies and using the revenue gain for better targeted social spending, reductions in inefficient taxes, and productive investments can promote sustainable and equitable outcomes. Fossil fuel subsidy removal would also reduce energy security concerns related to volatile fossil fuel supplies. Scrapping explicit and implicit fossil fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones. However, removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscores the benefits. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy.
