Why countries struggle to eliminate fossil fuel subsidies | Explained Premium

There are various reasons fossil fuel subsidies are hard to eliminate. Many subsidies directly affect the costs that fossil fuel producers face, so reducing subsidies tends to increase prices for consumers. Because fossil fuels touch nearly every economic sector, rising fuel costs elevate prices for countless goods and services.

Fossil fuels are the leading driver of climate change, yet they are still heavily subsidised by governments around the world.

Although many countries have explicitly promised to reduce fossil fuel subsidies to combat climate change, this has proven difficult to accomplish. As a result, fossil fuels remain relatively inexpensive, and their use and greenhouse gas emissions continue to grow.

I work in environmental and energy law and have studied the fossil fuel sector for years. Here’s how fossil fuel subsidies work and why they’re so stubborn.

A subsidy is a financial benefit given by a government to an entity or industry. Some subsidies are relatively obvious, such as publicly funded crop insurance or research grants to help pharmaceutical companies develop new drugs.

Others are less visible. A tariff on an imported product, for example, can subsidise domestic manufacturers of that product. More controversially, some would argue that when a government fails to make an industry pay for damage it causes, such as air or water pollution, that also amounts to a subsidy.

Subsidies, especially in this broader sense, are widespread throughout the global economy. Many industries receive benefits through public policies that are denied to other industries in the same jurisdiction, such as tax breaks, relaxed regulations or trade supports.

Governments employ subsidies for political and practical reasons. Politically, subsidies are useful for striking bargains or shoring up political support. In democracies, they can mollify constituencies otherwise unwilling to agree to a policy change. The 2022 Inflation Reduction Act, for example, squeaked through Congress by subsidizing both renewable energy and oil and gas production.