According to the International Energy Agency (IEA), worldwide subsidies for fossil fuel consumption increased dramatically in 2022, surpassing $1 trillion for the first time.
This surge in subsidies was caused by energy market turbulence, which led to international fuel prices soaring well above what many consumers paid. Consumption subsidies are energy price cuts for consumers, for example setting fixed prices of retail gasoline.
The 2022 subsidies, driven by the global energy crisis resulting from Russia's invasion of Ukraine, were twice the levels seen in 2021 and almost five times those in 2020. This is according to the IEA in a just published report, Fossil Fuel Consumption Subsidies 2022.
However, the IEA found that the government measures taken to protect consumers were not well-targeted, and although they may have helped to alleviate the impact of skyrocketing costs, they artificially maintained the competitiveness of fossil fuels compared with low-emissions alternatives.
The finding of the report underlines the problem of governments dealing with high fuel inflation, while still trying to encourage the energy transition. The fossil fuel spending by world governments in 2022 – not just consumption subsidies but total spending – was more than twice the total investment in renewable energy sources, according to BloombergNEF.
These rising consumption subsidies indeed contrast sharply with the Glasgow Climate Pact, which called for countries to phase out inefficient fossil fuel subsidies while providing targeted support to the poorest and most vulnerable.
The November 2021 Glasgow Climate Pact effectively proposed to accelerate efforts to close the 2030 emissions gap by asking countries to align their commitments with Paris Agreement goals and with a just transition to net zero, according to the World Resources Institute.
The pact called on countries to “phase out … inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable”.
The IEA found that oil subsidies grew by around 85%, while natural gas and electricity consumption subsidies more than doubled. As noted in the latest IEA’s World Energy Outlook, high fossil fuel prices were the main reason for upward pressure on global electricity prices, accounting for 90% of the rise in the average costs of electricity generation worldwide. Natural gas alone accounted for more than 50%.
The IEA only looked at consumption subsidies and did not account for production subsidies, such as tax breaks or direct payments that reduce the cost of producing fossil fuels.
As long ago as 2020, before the current rise in consumption subsidies, the International Monetary Fund (IMF) found that global fossil fuel subsidies were $5.9 trillion, or 6.8% of GDP, and were expected to climb to 7.4% of GDP in 2025 as the share of fuel consumption in emerging markets – where price gaps are generally larger – continued to rise. Just 8% of the 2020 subsidy reflected undercharging for supply costs (explicit subsidies) and 9% for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).
The IEA has been monitoring fossil fuel subsidies for many years, identifying situations where consumers pay less than the market price of fuel. Preliminary estimates for 2022 indicated that oil subsidies increased by around 85%, while subsidies for natural gas and electricity consumption more than doubled, said the new report.
Governments worldwide implemented various measures to mitigate the worst effects of the energy crisis, such as fixing end-user tariffs, capping fuel or electricity price increases, and introducing price ceilings. However, many subsidy reform programmes were interrupted, and some countries extended existing subsidies.
Nearly all of the consumption subsidies identified were found in emerging and developing economies, with over half in fossil-fuel exporting countries. While most interventions in advanced economies did not meet the definition of fossil fuel consumption subsidies, they were still a significant drain on fiscal resources, with over $500bn in extra spending committed to reducing energy bills in 2022.
The IEA logged various ways of fixing prices or capping price increases.
The Peruvian government decided in April 2022 to temporarily include a number of transport fuels in the State Fuel Price Stabilisation Fund to reduce the rise in prices. Thailand introduced a diesel price cap of THB30 ($0.85) per litre.
El Salvador introduced price caps for gasoline and diesel products. Egypt extended the period for subsidising electricity, while it had previously been planning to stop doing so by the end of the fiscal year 2021-2022.
France enacted a ‘tariff shield’ that initially froze electricity and gas retail tariffs for households and then limited the possibility for increases in price.
Exemptions from various taxes and levies were common. The South African government froze the general fuel levy on petrol and diesel from February 2022, and reduced it by ZAR1.50 ($0.9) per litre from April to June 2022.
Guyana removed the excise tax on gasoline and diesel in March. The United Kingdom cut fuel duty, and Belgium reduced the VAT on electricity bills from 21% to 6%.
Easing payment terms or banning disconnections were also in evidence. Japan eased gas and electricity payment terms for those struggling to pay. In Spain, a “vital minimum supply” obligation for utilities was enacted from September 2021, ensuring vulnerable households unable to pay their electricity bills would still get supplied for a period of 10 months.
In some countries, compensation mechanisms have been adopted for different affected groups of consumers, including households, businesses and industrial consumers. In India, the Pradhan Mantri Ujjwala Yojana subsidy scheme, which supports access to liquefied petroleum gas (LPG) for the poorest segments of the population, saw its cost reach $820mn.
In Germany, the government implemented several additional payments to help vulnerable communities pay their heating bills (households on housing benefits, apprentices and students with student loans). In South Korea, vouchers for energy expenses – including electricity, gas, LPG and heating – were provided to around 1.2mn vulnerable households in 2022, and the voucher amounts were raised twice during the year.
Phasing out fossil fuel subsidies is crucial for a successful clean energy transition, as emphasised in the Glasgow Climate Pact, stressed the IEA. However, the current global energy crisis highlights the political challenges involved in doing so.
Although high and volatile fossil fuel prices emphasise the unsustainability of the current energy system and underscore the benefits of energy transitions, the volatility comes with significant economic and social costs. High fossil fuel prices hit the poor the hardest, but subsidies tend to benefit the better-off, making effective targeting essential.
Well-designed policies should prevent fuel supply from getting too far out of step with demand, with resources deployed to provide lasting protection against volatile fuel prices. This means anchoring market-based prices in a broader suite of policies and measures that enable households and industries to make cleaner energy choices. High-efficiency and low-emissions equipment and services must be readily available, and poorer consumers need support to manage their upfront costs.
Governments should focus on structural changes that reduce fossil fuel demand, rather than emergency relief when fuel prices rise, concluded the IEA.