Global fossil fuel subsidies surged to a record $7 trillion in 2022 – $2 trillion more than in 2020, the International Monetary Fund (IMF) has said in its 2023 report on fuel subsidy trends.

The increase comes despite the mounting damage being caused by climate change, and clear scientific evidence that phasing out subsidies would save millions of lives in the near term from air pollution, as well as from extreme weather over time.

The whopping $2 trillion subsidy increase over the past two years came as governments raced to protect consumers from the spike in energy prices caused by Russia’s invasion of Ukraine. The return of global consumption to pre-pandemic levels also contributed to the rise, the IMF said.

“As the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1% of global gross domestic product,” IMF researchers said in a press release accompanying the publication of the report.

“That’s more than governments spend annually on education (4.3% of global income) and about two-thirds of what they spend on healthcare (10.9%).”

Direct tax breaks for fossil fuel production and use more than doubled

Explicit subsidies, which are direct payments or tax breaks to fossil fuel producers or consumers, have more than doubled since 2020 to reach $1.3 trillion. However, these subsidies still only make up 18% of the total, and are expected to decline as energy prices stabilise and the global economy continues its recovery from the pandemic, the IMF said.

The remaining 82% of fossil fuel subsidies are implicit, meaning they are not directly paid by governments. Instead, they take the form of undercharging for the environmental and health costs of fossil fuels, such as the damage caused by air pollution and climate change.

Underpricing for local air pollution and global warming accounted for nearly 60% of global fossil fuel subsidies in 2022, according to the report. These implicit subsidies are projected to grow in the coming years as developing countries increase their consumption of fossil fuels to match that of advanced economies, the IMF said.

Record government spending on fossil fuel subsidies is the support beam holding up the “pervasive underpricing” of fossil fuels around the world, the IMF said, with some 80% of coal and 27% of natural gas sold at below half their real cost. 

This underpricing leads to excessive consumption and emissions, which contribute to global warming and impact health. The report estimates that properly pricing fossil fuels would avert 1.6 million premature deaths from air pollution by 2030.

The International Monetary Fund (IMF) estimates that governments subsidized $5 trillion in environmental costs for fossil fuels last year. However, the report’s authors noted that other methodologies find much higher numbers. 

A recent study published in Nature put the total cost of fossil fuel subsidies at around $12 trillion, nearly doubling the IMF’s $7 billion estimate. If the numbers from the Nature study are correct, then governments spent more money on fossil fuel subsidies than on healthcare globally last year. 

Eliminating subsidies could slash carbon emissions by one third by 2030

The IMF estimates that eliminating subsidies and imposing corrective taxes that incorporate the cost of health and environmental costs of burning oil, gas and coal would slash global carbon emissions by 34% by 2030, just 12% shy of the target set by the United Nations to keep global warming below 1.5 degrees Celsius and achieve net zero by 2050.

The report found that fully reforming fossil fuel prices would also raise substantial revenues, worth about 3.6% of global gross domestic product (GDP).

Green investment push shows subsidies work – but must change direction

The role played by subsidies in encouraging the burning of fossil fuels has long been recognised by scientists, governments and international organisations. G20 governments committed themselves to eliminating inefficient fossil fuel subsidies all the way back in 2009 and reiterated this commitment a decade later at COP26 in Glasgow in 2021.

But these words ring hollow as G20 countries continue to lead the way in providing fossil fuel subsidies globally. China is by far the biggest contributor, with $2.2 trillion in subsidies, followed by the United States with $760 billion, followed by Russia with $420 billion, India with $350 billion and the European Union with $310 billion.

The World Bank said in July that these “toxic” subsidies are wreaking “environmental havoc” and called for the trillions of dollars subsidising fossil fuels to be redirected towards climate action.

The United States, China and the European Union, meanwhile, have put in place massive subsidy packages to incentivise green investments.

The Inflation Reduction Act passed by the Biden administration has made $369 billion in funding and incentives for clean energy projects in the country, leading to a windfall of nearly $300 billion in new green investments – from battery semiconductor manufacturing plants to solar and wind farms – in the United States in 2022.

The European Union is working on its own green finance package to lure similar investments to the bloc. China, which already has a sizeable edge in critical sectors of the green economy such as EV batteries, rare earth and critical mineral processing, and solar panels, is also in on the green race.

The race for green energy supremacy is already reshaping the global economy. Reworking the financing of fossil fuels on a similar scale might do the same.

Image Credits: Chris LeBoutillier.