Fossil-fuel subsidies hit a staggering $7 trillion last year, reaching record highs as governments worldwide grappled with energy price spikes induced by global events such as Russia’s invasion of Ukraine and the post-pandemic economic recovery. This surge in subsidies, equivalent to 7.1 percent of global GDP, underscores the pressing need for reform as the world strives to limit global warming to 1.5 degrees Celsius.
The Impact of Fossil Fuel Subsidies:
- Fossil fuel subsidies exceed annual spending on education and make up two-thirds of healthcare expenditures globally.
- The World Meteorological Organization’s declaration of July as the hottest month on record highlights the urgency of addressing climate change.
- Explicit subsidies, including undercharging for supply costs, more than doubled to $1.3 trillion, contributing to the overall increase in fossil fuel subsidies.
Environmental Costs and Subsidies:
- Most subsidies are implicit, as environmental costs are often not factored into fossil fuel prices, particularly for coal and diesel.
- Consumers did not pay for over $5 trillion of environmental costs associated with fossil fuel consumption last year.
Benefits of Subsidy Reform:
- Removing explicit and implicit subsidies would prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion.
- Implementing corrective taxes would encourage firms and households to consider environmental costs in consumption and investment decisions, leading to reduced carbon dioxide emissions and cleaner air.
Challenges and Solutions:
- Removing fuel subsidies requires clear and careful policy design and communication, accompanied by measures to compensate vulnerable households for higher energy prices.
- Increased revenues from subsidy reform could be allocated to tax cuts, public goods, and investments in clean energy.
The Way Forward:
- With global energy prices stabilizing and emissions on the rise, there is a critical opportunity to phase out fossil fuel subsidies for a healthier and more sustainable planet.
