Global Fossil Fuel Subsidies Skyrocket To $7 Trillion

Yves here. Many sites, including this one, criticized UK and EU energy subsidies last year as contradicting their climate change goals. Recall that after electricity prices spiked last year, many countries introduced broad-based subsidies, which is tantamount to supporting overconsumption.

Note the IEA earlier highlighted a big increases in fossil fuel subsidies, but they came up with a much lower total that the IMF:

Prices for fossil fuels were extraordinarily high and volatile in 2022 as energy markets grappled with the strains caused by Russia’s invasion of Ukraine – in particular the sharp cuts in Russian natural gas deliveries to Europe. In many countries, though, the prices actually paid by consumers for these fuels remained at a much lower level. A range of policy interventions insulated consumers from ballooning prices, but with the adverse effect of keeping fossil fuels artificially competitive with low-emissions alternatives. In 2022, subsidies worldwide for fossil fuel consumption skyrocketed to more than USD 1 trillion, according to the IEA’s latest estimate, by far the largest annual value ever seen.

The IEA has been tracking fossil fuel subsidies for many years, examining instances where consumer prices are less than the market value of the fuel itself (adjusted for transport costs and VAT, as applicable). Our first estimates for 2022 show that subsidies for natural gas and electricity consumption more than doubled compared with 2021, while oil subsidies rose by around 85%. The subsidies are mainly concentrated in emerging market and developing economies, and more than half were in fossil-fuel exporting countries.

As the story below explains, the IMF included undercharging for fossil fuel externalities like global warming and pollution.

By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice

• BP’s CEO Bernard Looney and even the most pro-transition governments believe investing in immediate energy needs, like oil and gas, is essential, leading to record subsidies in 2022.
• The IMF report indicates that the majority of the $7 trillion in subsidies is “undercharging for global warming and local air pollution,” while climate think tank IISD criticizes the G20 for record-breaking state support for the fossil fuel industry.
• The IMF suggests that full fossil fuel price reform could reduce global CO2 emissions significantly but faces challenges from governments wary of public backlash due to increased living costs.

This weekend, the chief executive of BP, Bernard Looney, said that the world needs to invest in more oil and gas production.

Just two years ago, such a statement from Looney would have caused a shock. The then-new CEO of the supermajor had wholeheartedly embraced the energy transition and had big plans for BP’s expansion into virtually every facet of it.

Things have changed. Now, Looney says, “We need to invest in today’s energy system responsibly,” while also keeping the transition going, per a Reuters report from Saturday.

He is by far not the only one with the belief that investment in securing the immediate energy needs of the global population is a smart investment. In fact, even the most pro-transition governments share this belief. And that’s why subsidies in oil and gas hit a record in 2022.

The news came from the International Monetary Fund, which said in a new report that global subsidies for oil and gas had hit an all-time high of $7 trillion in 2022. Of this, the fund said, 18% was direct subsidies. These direct subsidies represented a twofold increase over 2012.

The rest, however, the bulk of what the IMF called fossil fuel subsidies, was actually “undercharging for global warming and local air pollution,” and not actual government support for oil and gas.

Interestingly, the IMF report comes out just days after another organization, the International Institute for Sustainable Development, a climate think tank, slammed the G20 for failing to end oil and gas subsidies despite pledges made at the COP26 two years ago.

The IISD said it had calculated that the world’s 20 largest economies had spent a record-breaking $1.4 trillion on state support for the coal, oil and gas industry in 2022. The author of the calculations, Tara Laan, said, “These figures are a stark reminder of the massive amounts of public money G20 governments continue to pour into fossil fuels–despite the increasingly devastating impacts of climate change.”

In fairness, the jump in direct oil and gas subsidies last year came in response to the energy crunch that began in Europe in late 2021, worsened sharply after Russia’s invasion of Ukraine and the resulting sanctions, and later reverberated around the globe.

That was the year when even the German government—the poster boy of the energy transition—began subsidizing fuels to avoid an even worse standard of living crisis than it already had on its hands. All European governments did the same. That is how global subsidies for coal, oil, and gas soared to all-time highs.

The more interesting element of the IMF report, however, is the conclusion that some $5 trillion of the total it estimated for global hydrocarbon subsidies is in the form of unpaid compensation for harm done by hydrocarbon use.

According to the fund, it is the affordability of hydrocarbons that is the problem. And this affordability is supported by direct subsidies. The solution to this problem is price reform.

“Full fossil fuel price reform would reduce global carbon dioxide emissions to an estimated 43 percent below baseline levels in 2030 (in line with keeping global warming to 1.5-2oC), while raising revenues worth 3.6 percent of global GDP and preventing 1.6 million local air pollution deaths per year.”

In other words, the IMF proposes that governments make hydrocarbons too expensive to use in order to remedy the harm they do to the environment and people, and to reach Paris Agreement temperature goals.

Indeed, the IMF believes all forms of subsidies for the industry need to go. “We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets.”

Government revenues would certainly spike if all state support for oil, gas, and coal is removed. The trouble is that they would only spike for a short time before the effect of higher energy prices spreads everywhere and purchasing power drops off a cliff. That, after all, is why European governments subsidized fuels last year amid galloping inflation, soaring energy prices, and increasingly agitated populations.

It’s a tricky situation, and not everyone agrees that the solution lies in shrinking the supply of oil and gas by making them less affordable. In fact, some are of the opinion that the main object of governments’ attention should be the demand side of the energy equation.

The EU recently hosted a conference on what proponents call “degrowth” and what ultimately comes to people learning to make do with less of everything, including energy. There have been tentative calls for lower consumption in the U.S. and Canada, too, with the latest such call not really tentative at all, coming from the editorial board of the Globe and Mail.

“As long as people keep buying fossil fuels, climate-heating emissions will continue,” the G&M editorial board wrote. “The real solution is reducing demand – and that’s where governments may be able to make the biggest difference.”