Sixteen years ago, the G7 made a commitment to phase out “inefficient” fossil fuel subsidies. Nine years ago, leaders agreed to do this by 2025. Time flies, and we’ve arrived at the G7 deadline.
So where are we now? By the numbers, the G7 is on course to miss its phase-out deadline. In 2023, the latest year for which estimates are available, G7 members’ fossil fuel subsidies hit a record high of USD 282 billion. By comparison, in 2016, G7 fossil fuel subsidies were USD 71 billion (in 2023 real terms).
This surge was triggered by Russia’s invasion of Ukraine in early 2022, as fossil fuel subsidies correlate with energy prices (usually positively for consumer subsidies and negatively for producer subsidies). As global fuel prices soared, governments introduced measures to shield consumers. In Europe, this support primarily went to gas, while Japan and Canada both increased petroleum subsidies for consumers; U.S. fossil fuel subsidy levels have remained unchanged.
The geopolitical outlook is not promising. United States President Donald Trump has pledged to increase fossil fuel supply, and Russia’s invasion of Ukraine continues to drive energy security concerns — two factors contributing to energy market volatility and used to justify the high levels of fossil fuel subsidies.
On the positive side, fossil fuel subsidy reform is an issue that resonates across the political spectrum, as evidenced by G7 and G20 statements every year since 2009. This reform speaks to values like government efficiency, fiscal responsibility, and environmental conservation.
This article explores trends in G7 members’ fossil fuel subsidies, recent actions by G7 members to phase out these subsidies, and recommendations for G7 leaders for 2025 and beyond to make meaningful progress.
Trends in G7 Countries’ Fossil Fuel Subsidies
In 2023, total G7 fossil fuel subsidies rose by more than USD 40 billion above 2022 levels, which in turn were a large increase over preceding years (Figure 1). These increases were driven by countries’ responses to the energy crisis brought on by Russia’s invasion of Ukraine. The 2023 increase was led by Germany, whose fossil fuel subsidies rose from USD 18 billion to USD 83 billion year-on-year due to its price brakes on gas, heat, and electricity.
In 2023, Germany had the highest fossil fuel subsidies among G7 members (USD 83 billion), followed by Japan (USD 70 billion), France (USD 38 billion), Italy (USD 35 billion), the United Kingdom (USD 34 billion), the United States (USD 17.8 billion), and finally Canada (USD 3.4 billion) (Figure 3). Germany and Japan, respectively, also had the highest fossil fuel subsidies as a proportion of GDP.
There are three groups of beneficiaries of fossil fuel subsidies: consumers, producers, and general services.
In all G7 countries, consumer subsidies dominated in 2023, as in previous years, averaging 88% across the bloc (Figure 2). Consumer subsidies are those targeted at reducing the cost of energy to households and businesses (e.g., in the transport or power-generating sectors), mainly through government controls on fossil fuels or power prices. While consumer subsidies reduce prices for consumers, in so doing, they also ensure demand does not spike downwards for producers.
Although all countries except France and Italy had some producer subsidies, these were significant as a proportion of total subsidy volume in three of them: Canada (18%), the United Kingdom (11%), and the United States (30%) (Figure 3). Producer subsidies are those aimed at reducing the cost of producing fossil fuels. If delivered at the exploration and development stage, producer subsidies make “zombie energy” reserves commercially viable, thereby also pushing down energy prices for consumers.
Although producer subsidies are smaller by value than consumer subsidies, their impact on markets and emission s is large because they crowd in private sector investment to new fossil fuel supply projects that will stay in place for decades, locking in carbon for a long time. Notably, 2023 United States producer subsidies rose steadily to 76% above 2020 levels, driven mostly by increased tax expenditure under state-level measures in West Virginia, Alaska, and Texas.
General services subsidies were much smaller across all G7 countries. General services subsidies are measures that create enabling conditions for the fossil fuel sector, e.g., government funding for fossil fuel sector-wide research and development, public support for construction of fossil fuel transport infrastructure, or inherited liability payments for fossil fuel pollution as well as payments to assume occupational health, retirement, and accident liabilities for workers and retirees.
Increases in direct budget transfers for fossil fuels dominated the large rises in subsidies in 2022 and 2023 (Figure 4). Large increases in such transfers occurred in France, Germany, Japan, and the United Kingdom and included, for instance, funds for power generators or public transport companies for purchases of fuel at higher market prices.
The higher total subsidy levels in 2022 and 2023 were primarily for natural gas, followed by petroleum and, to a lesser extent, end-use electricity generated from fossil fuels (Figure 5).
However, the breakdown of subsidies for different fuel types varied considerably among countries (Figure 6). Natural gas subsidies dominated in most countries, accounting for half to two-thirds of all subsidies in Germany, France, the United States, Italy, and the United Kingdom. In Japan and Canada, petroleum subsidies dominated (72% and 83% respectively). As seen in Figure 5, coal subsidies have steadily declined since 2010. Figure 6 shows that coal subsidies were higher than negligible only in Germany and the United States (3.1% and 8.1%, respectively).
The most significant measures behind these dynamics were those meant to combat rising energy price levels. For instance, France’s natural gas subsidies more than tripled in 2023 compared with 2022, to USD 24.9 billion, owing to its temporary cap on regulated retail gas prices. Italian natural gas subsidies nearly quadrupled in 2022–2023 relative to 2021 levels, to USD 19.3 billion in 2023, due to several measures.
Japan saw large year-on-year increases in both natural gas subsidies and end-use electricity subsidies, from negligible volumes to USD 11.7 billion and USD 6.8 billion respectively in 2023, due to measures to mitigate gas and electricity prices. Canada’s petroleum subsidies have increased by 2.2 times since 2019, mostly due to provincial-level measures in Ontario, Quebec, and Alberta. Finally, the United Kingdom’s largest share of subsidies was to natural gas, at USD 17.8 billion, a decrease from the previous year’s USD 35.5 billion but still well above 2021’s USD 8.7 billion.
Supporting People Rather than Fossil Fuels
It did not have to be this way. The energy crisis of 2022–2023 did not necessarily have to lead to such a huge increase in fossil fuel consumption subsidies. And, looking to the future, despite progress on rolling out renewables, households and businesses in the G7 are still exposed to the volatility of global fossil fuel prices.
Although the ultimate solution is to electrify everything with renewables, in the transition, governments have alternative policy options to fossil fuel subsidies that address social and economic issues, but without encouraging fossil fuel use.
For instance, instead of capping prices for gas, electricity, and heat during the energy crisis, some G7 governments could instead have provided direct financial support to households through tax cuts or social protection programs, allowing them to decide whether to spend the money on higher fossil fuel prices or use it to adopt energy-efficient alternatives like heat pumps and insulation.
In general, governments can also offer rebates to households and businesses to encourage investment in more efficient equipment. Governments can also ramp up support for renewable energy generation, storage, and integration, which offer a long-term solution to price volatility and energy security.
Several G7 countries are already using cash transfers for vulnerable groups, which were often scaled during the energy price crisis. For example, in Germany, there is a housing benefit, which includes an energy component, granted to low-income households. Meanwhile, France has energy cheques, and Italy has a social bonus for economic hardship.
What Have G7 Members Done to Meet Their Commitment?
The energy price crisis is not an exception to the overall trend in G7 members’ fossil fuel subsidies. As seen in Figure 1, fossil fuel subsidies across the bloc have not meaningfully reduced since the commitment was made in 2009. Rather, and especially since 2018, they have increased.
Some G7 countries have taken steps forward.
Since the G7 commitment was adopted, Canada reformed nine federal subsidies. Separately, Canada has published a self-review assessment framework and guidelines to identify and avoid creating new “inefficient” fossil fuel subsidies.
France has mandated, via the Public Finance Programming Act, that the ratio between “unfavourable expenditures,” which include fossil fuel subsidies, and “favourable” or “mixed” expenditures must fall by 30%.
Italy has an annually published catalogue of environmentally harmful subsidies, and its Ministry of Environment produces proposals for their phase-out every year. In 2021, it eliminated five fossil fuel subsidies, which amounted to savings of EUR 105.9 million. As part of its recovery and resilience plan, the government committed to reducing environmentally harmful subsidies by at least EUR 2 billion in 2026 and to defining the timetable for a further reduction of environmentally harmful subsidies by at least EUR 3.5 billion by 2030 in legislation. In the context of the G20 commitment to phase out fossil fuel subsidies, some G7 countries (the United States, Italy, and Germany) have published peer reviews.
In 2023–2024, G7 governments rationalized or put an end to some of the emergency measures that were introduced in early 2022 and are captured by the 2023 fossil fuel subsidy estimates. At the same time, some schemes proved to be difficult to remove, e.g., the cut in fuel duty rates in the United Kingdom.
Canada, France, and the United Kingdom are members of the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies (COFFIS), a coalition launched at the 28th UN Climate Change Conference (COP 28) that is working to remove fossil fuel subsidies both collectively and through domestic action. Other G7 countries should follow suit.
The first commitment undertaken by COFFIS members was to publish national inventories of fossil fuel subsidies by COP 29. France did this as part of its 2024 Green Budget, while Canada has not yet (and the United Kingdom still has time until COP 30 since it joined at COP 29).
Related Articles: How the UNFCCC Can Tackle Fossil Fuel Subsidies at COP28 and Beyond | Hurting People and Hurting the Planet: Fossil Fuel Subsidies | How Canada Ended Fossil Fuel Subsidies | The Cost of Fossil Fuel Reliance | Are the G7 Countries Sabotaging Their Own Climate Efforts?
All G7 countries except Japan are members of the Clean Energy Transition Partnership (CETP), the group of 41 countries that have committed to end international public finance for fossil fuels and instead scale up support for clean energy. Japan also made a similar commitment as part of the 2022 G7 Leaders’ Communique, reaffirmed in 2023 and 2024.
As international public finance is partially a form of subsidy, this commitment is relevant for an overall assessment of G7 members’ fossil fuel subsidies. CETP members have successfully reduced their overall international public support for fossil fuels by up to USD 13 billion, an 80% reduction from pre-CETP levels. However, this is a small volume in comparison to total fossil fuel subsidy levels.
Apart from reforming subsidies for fossil fuels, some G7 nations have ramped up subsidies for renewable energy. For instance, the United States increased its renewable energy subsidies from USD 10.9 billion in 2020 to USD 40.6 billion in 2023. British renewable energy subsidies increased from USD 6 billion in 2020 to 7.6 billion in 2023.
Other countries’ renewable energy subsidies remained steady: Germany’s were around USD 43 billion each year from 2020 to 2023, Italy’s were around USD 17 billion, while France’s remained steady at around USD 9 billion. However, others are backsliding. Following a high of USD 22 billion in 2022, Japan’s renewable energy subsidies dropped to USD 10.9 billion in 2023.
What Should G7 Commitment on Fossil Fuel Subsidy Reform Look Like in 2025?
The timeline that the G7 countries gave themselves runs out this year. There will be tough choices about redefining this commitment under Canada’s presidency this year (or the following year under France’s presidency). Either way, G7 governments should maintain the urgency of their commitment with a clear timeline and scope.
Geopolitics and market forces have also created a new window of opportunity for subsidy reform. Oil prices just crashed, with crude falling to below USD 60 per barrel — the lowest prices since 2021. And the best time for reforming consumer fossil fuel subsidies is when oil prices are low. The G7 should embrace this opportunity to phase out their consumption subsidies.
At the same time, the G7 needs to resist the asks for more producer subsidies that typically emerge from the industry during low oil price periods. In particular, subsidies for new fossil fuel exploration and development are incompatible with the commitment made by all countries at COP 29 in 2023 on “transitioning away from fossil fuels in energy systems” because the science is clear that there is no room for new oil and gas production under a 1.5° C-compatible pathway or other pathways seeking to keep as close as possible to 1.5° C.
In the G7, producer subsidies accounted for USD 11.4 billion in 2023. Producer subsidies do nothing to tackle energy poverty, as any cost reductions are spread across all industrial and household consumers, not just the vulnerable.
To date, G7’s progress on delivering the commitment has been, among other factors, also hindered by its vagueness: the qualifier “inefficient” and even the varying definitions of the term “subsidy” have been used as loopholes and justifications for inaction. The qualifier “inefficient” should be dropped. Instead, each G7 member should be required to create a national action plan for phasing out their fossil fuel subsidies.
The G7 should also expand its existing commitment to ending international finance for fossil fuels to its domestic finance.
If G7 governments are serious about helping each other create political momentum for reforms by a joint commitment, they should also get into specifics and break the commitment into actionable policy steps. They can learn from the approach recently adopted in the Agreement on Climate Change, Trade and Sustainability (ACCTS) by Costa Rica, Iceland, New Zealand, and Switzerland, and prohibit all subsidies to coal and to fossil fuel production as incompatible with climate action.
Fossil fuel subsidy reform is tough for governments, but it’s tougher for governments, society, and the planet not to implement it.
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This article was originally published by the International Institute for Sustainable Development (IISD) and is republished here as part of an editorial collaboration with the IISD. It was authored by Natalie Jones, Jonas Kuehl, Ivetta Gerasimchuk, Nhat Do .
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com — In the Cover Photo: Oil rig graveyard near Inverness, Scotland. Cover Photo Credit: Joiseyshowaa.
