Government support for fossil fuels reached at least USD 1.5 trillion in 2023. This is the second highest annual total on record after 2022, when Russia’s invasion of Ukraine triggered a global fossil fuel price crisis.
The latest data on fossil fuel subsidies, capital investment by state-owned energy companies, and international public finance shows financial flows are far from aligned with low-carbon and resilient development (Figures 1–3).
There is a huge opportunity to redirect this money for the benefit of people and planet.
- Fossil fuel subsidies to consumers, producers, and general services: data for 2023 covers 83 economies as estimated by the International Energy Agency (IEA) and the Organisation of Petroleum Exporting Countries (OECD). Until 2022, this data is complemented by International Monetary Fund (IMF) estimates of fossil fuel subsidies in the rest of the world. The 2022 figure has been revised up from USD 1.5 trillion previously estimated to USD 1.7 trillion in real term, based on more precise data from IEA and the OECD.
- State owned enterprise (SOE) investment: USD 368 billion in 2023 as estimated by IISD.
- International public finance: Estimated at USD 29 billion in 2023, based on average of 2020-22 figures from Oil Change International, as published on EnergyFinance.org.
Regulated consumer prices
The largest component of support to fossil fuels was subsidies for consumption, at USD 1 trillion. Despite falling oil and gas prices, many measures put in place to ease the impact of high fuel costs on households and businesses in 2021 and 2022 continued into 2023.
It can be challenging to remove subsidies when people rely on fossil fuels to get around or heat their homes. However, untargeted fuel subsidies mainly benefit wealthy individuals, who use more energy. Ending these subsidies and redirecting funds to targeted social protection can reduce poverty and inequality, cut air pollution, and level the playing field for clean technology.
Ultimately, clean energy can cut household bills and reduce exposure to fossil fuel price swings, but this depends on upfront investment reaching those who need it.
Fossil fuel lock-in
Alarmingly, around one third (USD 447 billion) of the support locks in new fossil fuel production through subsidies (USD 36 billion), capital spending by state-owned companies (USD 368 billion), and international public finance (USD 29 billion). This is likely to be an underestimate for two reasons. First, domestic public finance is not included. Second, while the dataset includes producer support estimates for such large producers as Argentina, Australia, Brazil, Canada, China, Norway, the United Kingdom, and the United States, it has blind spots on others such as Iraq, Iran, Kuwait, Russia, the United Arab Emirates, and Venezuela.
The science is clear: there is no room for new fossil fuel projects under a 1.5°C global warming limit. Existing oil and gas fields, if fully exploited, would burn through the entire carbon budget for a 50% chance of limiting warming to 1.5°C.
No government can claim to be a climate leader while backing fossil fuel expansion through public subsidies and investments. Instead, they should make the industry pay its fair share of taxes and channel investment into accelerating the rollout of clean energy.
Unmet pledges
Countries have agreed at the G7, the G20, and UN climate talks to phase out “inefficient” fossil fuel subsidies. While there have been pockets of progress, we have not seen a downward trend in the sums involved.
The onus is on wealthy countries to lead the way with reforms, because of their historic responsibility for climate pollution and greater resources to invest in the transition.
Accordingly, the G7 set a deadline for its fossil fuel subsidy phase-out commitment: 2025. The updated Fossil Fuel Subsidy Tracker shows that they are far from meeting it. G7 countries provided at least USD 282 billion of fossil fuel subsidies in 2023, nearly three times the amount in 2020. Subsidies continued to rise last year despite a decrease in the international oil price.
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Germany’s measures to shield industries and households from high international gas prices explain much of that increase. Its fossil fuel subsidies grew by USD 64 billion from 2022 to 2023, to become the second highest in the world, after Russia and before Iran.
Japan, the Netherlands, and France were also among the top 10 subsidizers of 2023.
More broadly the 23 developed countries responsible under the UN climate convention for providing climate finance to the developing world spent USD 378 billion supporting fossil fuels. When other countries the World Bank classifies as “high income” are included, the figure is USD 508 billion (Figure 4).
This puts into context the pact at last month’s COP 29 summit to mobilize USD 300 billion a year in climate finance by 2035. It shows that public money is available but flowing in the wrong direction. Some of the fiscal space freed up by fossil fuel subsidy reform could be used to meet those climate finance commitments.
Walking the talk
There are initiatives to turn high-level pledges into action. For example, the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies (COFFIS) launched at the 2023 climate conference in Dubai with 12 countries (later joined by four more) promising to publish national inventories of fossil fuel subsidies, create domestic subsidy phase-out implementation plans, and work together to overcome international barriers to reform. The Agreement on Climate Change, Trade and Sustainability signed between four countries last month advances the issue through legally binding trade disciplines. Such initiatives need to deliver and inspire more countries to join.
Emerging market and developing economies also provide large amounts of government support for fossil fuels, mostly by capping retail prices below international prices.
Subsidy reform offers a tremendous opportunity for these governments to free up budget for other priorities. India, for instance, cut subsidies to oil and gas by 76% between fiscal years 2014 and 2017, thanks to reforms coupled with decreasing international oil prices. During the same period, government support to renewable energy grew almost sixfold, from INR 2,608 crore (USD 431 million) in FY 2014 to INR 15,040 crore (USD 2.2 billion). Fuel taxes were also ramped up, creating the fiscal space for India to connect every household to electricity, among other development actions.
At the international level, shifting financial flows from fossil fuels to clean energy is set to come under focus in 2025. Talks under “Article 2.1(c)” are mandated to reach a decision at COP 30 climate talks in Belem, Brazil, potentially paving the way for a substantive agreement on the issue. This should include agreeing to immediately stop subsidies for fossil fuel expansion, end public finance to fossil fuels, pivot state-owned enterprises to clean energy, and support people not fuels.
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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.
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — Cover Photo Credit: Aron Razif.
