Subsidies at what cost?
Shedding light on state support for fossil fuel consumption
Many governments subsidise the production and consumption of fossil fuels in their domestic markets. Subsidies can take the form of direct or indirect financial contributions by a government to fossil fuel companies. They support the cost of production of oil, natural gas or coal, reducing the prices paid for these commodities by domestic consumers.
The scale of subsidies is substantial. According to the IMF, fossil fuel subsidies amounted to an estimated USD 5.2 trillion or 6.5% of global GDP in 2017. At this level, subsidies can slow down efforts to reduce carbon emissions by keeping the cost of fossil fuels low and making it more difficult for cleaner sources of energy to compete.
With increasing public attention on carbon emissions and the energy transition, understanding the full cost of state support for fossil fuel consumption is critical for the public’s oversight of government efforts to curb pollution. Yet it can be challenging to account for the actual costs of fossil fuel production and consumption. Subsidies may be covered by budget allocations, where their full cost is recorded in the national budget. In many cases however, subsidies are funded separately through state-owned enterprises (SOEs).
Disclosures and public debate around fossil fuel subsidies are important for citizens to understand the trade-offs associated with government strategies related to the fossil fuel industry, and the impacts of those trade-offs on public finances and carbon emissions. In an energy transition scenario that reduces the profit margins on extractive projects, the cost of fossil fuel subsidies may increase as a share of the profits of SOEs, thereby becoming more challenging to sustain over time.
This brief outlines the different types of fossil fuel subsidies, the EITI’s requirements on quasi-fiscal subsidies and examples of related disclosures from EITI implementing countries.