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Finance & Innovation

Fossil Fuel Subsidies Exceed $5 Trillion Annually. Here’s Why

Wind and solar energy often get criticized for receiving government subsidies to become competitive. Implied in that argument, oftentimes, is that fossil fuels don’t need subsidies.

But across the world, fossil fuels subsidies are bigger than those for renewable energy sources, according to an analysis by the International Monetary Fund.

Subsidies are when governments pay to make a good or service cheaper for citizens. There can be water subsidies, dairy subsidies, college tuition subsidies, housing subsidies, and so on.

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Oftentimes, governments subsidize fossil fuels because it’s a fast way to alleviate poverty, according to Ken Gillingham, professor of environment and energy economics at Yale University. In poor countries, for instance, petroleum or kerosene are vital for heating homes, cooking, and traveling. Lowering the costs of fossil fuels allows people to have money for other costs like rent, electricity, and food.

A more effective way at helping people in poverty, Gillingham said, would be to invest in services that build a strong social safety net and by modernizing energy systems.

“The subsidies are really a very inefficient way that these countries have been attempting to alleviate issues of poverty,” Gillingham said. “Countries have fallen into that trap because it seems like a convenient way to help the population.”

But once these subsidies are put in place, they’re hard to get rid of because people come to rely upon them, Gillingham said. Suddenly removing subsidies would make everyday costs too expensive for people.

Keeping these subsidies, however, sets off a chain reaction of economic, social, and political changes that lead to the staggering subsidies recorded by the IMF.  

Even from the start, however, fossil fuel subsidies surpass renewable subsidies. Direct global subsidies for fossil fuels were $333 billion in 2013, compared to $121 billion for renewables, the IMF found.

According to the IMF’s analysis, when the full sense of subsidization is considered — the costs of a particular industry that are assumed by the public — then the disparity becomes staggering.

The IMF defines this broader sense as, “not only supply costs but also (most importantly) environmental costs like global warming and deaths from air pollution and taxes applied to consumer goods in general.”

“The average person may not understand just how substantial global subsidies are and how prevalent they are around the world,” Gillingam told Global Citizen. “They are gigantic.”

The IMF calculated that global fossil fuel subsidies were $4.9 trillion in 2013, and $5.3 trillion in 2015. China, the US, India, and Russia were the biggest subsidizers, but subsidies occur all throughout the world.

Critics of the IMF’s approach say that fossil fuels are still the dominant mode of energy in the world and the benefits they bring help to power economies and lift people out of poverty.

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But the IMF is not calling for a wholesale rejection of fossil fuels — just smarter policies.

Burning fossil fuels have a lot of social costs that aren’t factored into their prices. These include the more than 6.5 million people who die from air pollution annually, the countless health consequences of air pollution, and the damage emissions cause to agriculture and water sources, among other costs.

Coal miner Clean Power PlanImage: AP Photo/David Goldman

Consumers also face higher taxes on consumer goods that go toward paying for the consequences listed above and for direct subsidies in general. These higher taxes, in turn, suppress other parts of the economy because they’re not redirected toward stimulating the economy.  

“By subsidizing fossil fuels, they’re not bearing that tax so in some sense they’re double subsidized relative to everything else,” Gillingham said.

Fossil fuel subsidies also encourage the continued use of fossil fuels, because they make production, distribution, and consumption cheap. This, in turn, discourages investments in energy efficiency measures such as retrofitting buildings, creating sustainable transportation systems, modernizing energy grids, and expanding alternative sources of clean energy.

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The costs of these investment delays add up over time, according to the IMF, especially as infrastructure becomes more outdated.  

Finally, the consequences of climate change are expensive and the greenhouse gas emissions that come from burning fossil fuels are primary drivers of climate change. All around the world, environmental changes from climate change are beginning to cost countries billions of dollars. Everything from rising sea levels to more extreme droughts to the spread of new diseases are projected to bring additional costs to countries in the decades ahead.

Read More: Climate Change Has Already Cost the United States $350 Billion

If fossil fuel subsidies had been ended in 2013 and prices were established at an accurate market value, the report argues, then global carbon emissions would have decreased by 21% during the year.

That essentially means that fossil fuel subsidies are a major obstacle to meaningful climate action around the world. It also means that ending these subsidies could make dealing with climate change much more manageable.

Wind farm that Google gets energy fromImage: Tim Boyles Photography/Google via AP

Ultimately, the IMF wants to show the scale of these subsidies to debunk the myth that fossil fuels operate according to free market principles, but, more importantly, they want to spur meaningful energy reform. The more these costs are recognized, the report argues, the more likely reform is possible.

“It is difficult to think of products that are more harmful to subsidize than fossil fuels,” the report says.

“Energy price reform is difficult,” the report concludes. “But the stakes have never been higher and, if not now, then when?”

Global Citizen campaigns on the Global Goals, which call for investments in renewable energy. You can take action on this issue here.