Why are they there and what can be done about them?

2023 was the hottest year on record primarily due to the burning of fossil fuels. The planet was 1.48C warmer than pre-industrial levels, just 0.02C away from breaching the 1.5C target agreed in the 2015 Paris Agreement. Subsequently, you might expect that reducing the use of fossil fuels would be near the top of political agendas. 

Unfortunately, it does not seem to be that way. 2022 saw record levels of fossil fuel subsidies and it is estimated that these will continue to rise throughout the 2020s. These subsidies reached $7 trillion in 2022, 7.1% of global GDP, and are projected to rise by another $1 trillion by 2030. This increase in fossil fuel subsidies is despite repeated pledges by world leaders going back to 2009 to end them. In contrast, global spending on renewable energy is expected to be around $1.8 trillion in 2023.

This begs the question: why are fossil fuel subsidies so persistent and is there anything that can be done to reduce them?

What is a fossil fuel subsidy?

A subsidy is a form of financial assistance provided by governments to promote certain behaviours or spending habits. Fossil fuel subsidies cover all government intervention that reduces the costs of supplying and distributing fossil fuels to consumers. The figures also include the costs involved in addressing the problems associated with fossil fuel consumption, such as health issues caused by air pollution. 

Subsidies appear in many forms across the world. For example, China has the highest levels of fossil fuel subsidies, totalling $2.2 trillion in 2022. These include subsidies for building coal power plants to increase their capacity. Chinese oil refineries are also subsidised when global oil prices rise above $130 per barrel to keep domestic oil prices low. The US also has a host of fossil fuel subsidies including tax breaks for oil producers that drill new wells. Indeed, fossil fuel subsidies are ingrained into economies across the world.

Environmental impact of fossil fuel subsidies

These subsidies have several environmental, economic and moral drawbacks. Firstly, they are in direct conflict with the UN’s climate targets and compound the public health and ecological damage associated with global warming. By funding new fossil fuel extraction projects, subsidies are financing  continued environmental degradation. This makes countries’ pledges to take global warming seriously look hollow.

Secondly, subsidising fossil fuels makes little economic sense. Subsidies promote the wasteful use of energy in industry as companies are not paying the full cost of their energy use. This encourages companies to use more energy than required which then creates more emissions. 

Additionally, fossil fuel subsidies use up large amounts of public funds which could be used to achieve other government objectives. The strain on public budgets is likely to grow as countries will have to spend more to tackle the effects of climate change. 

From a moral perspective, fossil fuel subsidies broaden global inequalities.  Despite the environmental damage largely being perpetrated by developed countries, the effects are most severe in developing countries. These countries are less equipped to deal with the effects of climate change, increasing the damage caused by growing emissions in richer countries. Therefore, fossil fuel subsidies are extremely environmentally and economically problematic.

The surge in fossil fuel subsidies in 2022 was largely in response to the Russian invasion of Ukraine. As oil prices rose, governments increased support for households and businesses to counter inflationary pressures. However, with conflict spreading across the Middle East and political instability brewing in the Americas, it is unlikely that fossil fuel markets are going to stabilise anytime soon. The main reason for the projected continued rise in fossil fuel subsidies though is the expected economic and population growth in developing countries. 

Can we reduce fossil fuel dependency?

It is not inevitable that countries’ development will be powered by fossil fuels. In fact, a 2021 report by the International Renewable Energy Agency (IRENA) showed that renewable energy generation is now cheaper than the fossil fuel equivalent. . Alongside strong economic arguments for moving away from fossil fuels, this transition is also essential for countries to meet their climate commitments. Moreover, renewable energy allows developing countries to grow in a more cost-effective and climate-friendly manner. 

Pathways to this transition are beginning to be forged. In 2022, the UK removed VAT on the installation of various energy-saving materials, including solar panels, in residential accommodation. Progress is also being made at an international level. At COP28, a coalition of 10 countries led by the Netherlands agreed to create an inventory of their fossil fuel subsidies and explore the best ways to reduce them. This coalition includes developed and developing countries from the Americas and Europe. It will allow ideas to be trialled and shared in a variety of different national and economic contexts. The hope is that successful ideas can be quickly exported elsewhere.

However, the brightest ray of hope shines from North Africa. In 2012, Morocco relied on fossil fuel exports and spent $6.5 billion subsidising these. By 2016, it had reduced this figure to $1.1 billion, unlocking government funds and allowing it to meet its emissions reduction goal. Furthermore, investment in renewable energy created 26,000 jobs by 2020, a figure which is expected to rise to 500,000 by 2040. By 2019, 34% of Morocco’s energy capacity came from renewable sources. The country is subsequently less vulnerable to fluctuations in global energy prices increasing its energy and economic security. Morocco shows drastic change can be achieved quickly if the political willpower is there. Politicians around the world would do well to follow their example.

2023 has again highlighted the urgent need to reduce our dependence on fossil fuels if we are to remain below the 1.5C target set out in the 2015 Paris Agreement. The continued existence of fossil fuel subsidies is undeniably harming the environment and makes little economic sense. Progress has been made, though not on the scale required.

Policies like the UK’s reduction of VAT on energy-saving materials are promising but not enough to face the challenge climate change poses. The Dutch-led coalition must turn words into action to be meaningful.

This process can be accelerated by looking at what various countries are already doing to reduce their fossil fuel subsidies. Other countries, especially major polluters like China and the US, must accept their responsibility, stop subsidising fossil fuels and invest the money into renewable energy sources instead.