April 11, 2022
A September 2021 working paper by the International Monetary Fund (IMF) found that globally the fossil fuel industry received $5.9 trillion in subsidies the previous year, which works out to $11 million per minute, as reported on by The Guardian and Treehugger in October 2021. The $5.9 trillion in fossil fuel subsidies represent about 6.8 percent of global GDP, with this figure projected to rise to $6.4 trillion by 2025, or 7.4 percent of global GDP. Explicit subsidies account for 8 percent of this figure, while implicit subsidies, including not charging for damages caused by air pollution (42 percent), global warming (29 percent), costs borne from local externalities such as traffic collisions and congestion (15 percent), and forgoing tax revenue (6 percent), contribute the vast majority at 92 percent. Fossil fuel companies do not have to pay for the damages their product causes, making fossil fuels artificially cheaper and leaving taxpayers to cover the environmental costs.
The analysis found fossil fuels are underpriced, which leads to higher consumption, which in turn means more greenhouse gas emissions that accelerate climate change and other environmental problems, “including losses to human life from local air pollution and excessive and road congestion and accidents.”
Pricing fossil fuels to cover both their supply and environmental costs—in other words, not subsidizing the industry—would mean that fossil fuels are priced at what the IMF paper called their efficient price. In fact, currently no government prices all fossil fuels at their “efficient” price such that the price is high enough to cover both the fuel’s supply and environmental costs. An estimated 99 percent of coal, 52 percent of road diesel, 47 percent of natural gas, and 18 percent of gasoline are priced at less than half of their efficient prices.
The benefits that fossil fuel companies enjoy include direct subsidies that reduce prices (8%) and tax exemptions (6%), as well as indirect subsidies due to the economic costs of lives caused by air pollution (42%) and extreme weather events caused by global warming (29%), as well as congestion and road accidents (15%).
The IMF said scrapping subsidies could help prevent nearly 1 million annual deaths from air pollution alone.
Adding these costs to fuel prices would lead to less fossil fuel consumption, which in turn could help the world slash carbon emissions by almost a third and provide governments with additional revenues that could potentially be invested in clean energy.
These subsidies are not evenly distributed across the globe. Just five countries, the United States, Russia, India, China, and Japan, are responsible for two-thirds of global fossil fuel subsidies. In the United States continued subsidies increase the profitability of new oil and gas wells by more than fifty percent, with nearly all of the subsidy going to excess profits. Were the US Congress to stop providing tax breaks to the fossil fuel industry, the drilling of new oil wells would decrease by about 25 percent, Treehugger reported.
The IMF paper that spurred this independent reporting explains that ”underpricing of fossil fuels is still pervasive across countries and is often substantial.” If underpricing were to cease by 2025, deaths attributable to fossil fuel air pollution would drop by 32 percent, saving about a million lives per year, and carbon dioxide emissions would decrease 36 percent, which would cause global warming to remain under 1.5 degrees Celsius. Moreover, the globe would experience net economic benefits of 2.1 percent of global GDP.
“Too little revenue is raised from fuel taxes, implying other taxes or government deficits must be higher or public spending lower,” says the report.
Despite efforts to invest in renewable energy and decarbonize the transportation sector, the IMF found that fossil fuel subsidies have increased in recent years and the organization forecasts that they will continue increasing, even though G7 nations had previously agreed to scrap fossil fuel subsidies by 2025.
The IMF estimates that the U.S. government will provide approximately $730 billion in direct and indirect subsidies to fossil fuel companies this year, a figure that is expected to increase to $850 billion by 2025.2 EU lawmakers last month voted to continue providing subsidies to fossil fuel companies until at least 2027.
President Joe Biden has called for an end to fossil fuel subsidies but many Republicans—as well as Democrats representing fossil fuel states, including Joe Manchin—are fighting for the subsidies to continue.
A study by the Stockholm Environment Institute and Earth Track published in July found that U.S. subsidies and exemptions to environmental regulations “could increase the profitability of new oil and gas fields by more than 50% over the next decade.” The authors found most of the subsidies translated into higher profits for fossil fuel companies, especially when crude oil prices are high, as is the case now.
Because subsidies significantly reduce production costs, fossil fuel companies drill more wells than they would otherwise, which triggers a vicious circle that leads to higher production, higher consumption, and higher emissions.
Indeed, the Biden administration is on track to issue the highest number of drilling permits on U.S. public lands since 2008.
The fossil fuel industry has lobbied for subsidies to continue. The American Exploration & Production Council last month told E&E News that if the U.S. Congress were to slash tax breaks the industry “would reduce newly drilled wells by about 25 percent.”
Eliminating fossil fuel subsidies can lead to higher fuel and electricity prices, which could trigger protests, and even riots, but countries including El Salvador, Indonesia, and India have successfully scraped fuel subsidies in the past without igniting protests.
To avoid social unrest, the IMF recommends “a comprehensive strategy, for example with measures to assist low-income households, displaced workers, trade-exposed firms/regions, and the use of revenues from price reform to boost the economy in an equitable way.”
The subsidies come on top of the funding that many countries give to fossil fuel companies. According to Oil Change International, G20 nations provide at least three times as much public finance for fossil fuels ($77 billion) as for clean energy ($28 billion) every year.
Meanwhile, data gathered by the Energy Policy Tracker, a website that tracks energy investments, indicates that economic recovery packages from G20 nations have earmarked $311 billion for fossil fuel companies and $278 billion for clean energy.
As of mid-April 2022, no corporate news outlets have reported on this story, though a few industry publications such as Power Technology have covered it.
Sources:
Damian Carrington, “Fossil Fuel Industry Gets Subsidies of $11M a Minute, IMF Finds,” The Guardian, October 15, 2021.
Eduardo Garcia, “Fossil Fuel Companies Receive $11 Million a Minute in Subsidies, New Report Reveals,” TreeHugger, October 21, 2021.
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