Governments Spending $7 Trillion Annually To Subsidize Fossil Fuels

At COP29 in Baku, rich and poor nations have gathered to fund mitigating climate change to keep it from running rampant. The call is for dedicating $1 trillion US annually to fight global warming with much of it coming in the form of grants and investments from the richest countries, business organizations and billionaires on the planet. The richest countries and the fossil fuel industries they support are the prime sources of atmospheric carbon pollution. The International Monetary Fund calculates the industry receives up to $7 trillion in annual subsidies from these rich countries.

One trillion dollars is not a trivial amount and 7 trillion is a lot more. The former is less than 1% of global GDP. The latter is more than pocket change for Western governments used to moving a trillion through the global economy daily.

Compared to 7 trillion, spending a trillion annually doesn’t sound like much. The problem isn’t that the money is not there. The problem is how to make the polluters part with it. For rich nations, a trillion represents a small portion of their wealth. The reluctance to pay leaves all of us frogs sitting in a slowly heating pot on the stovetop that is Earth. Time is not on our side to lick climate change.

Is $1 trillion affordable? Yes! Are there mechanisms and funding tools that can be used to distribute the money where it is needed the most which is the Developing World where the brunt of increasing extreme weather events are wreaking havoc? Yes! Can new tax schemes and levies be created to raise the trillion each year? Yes! So what’s stopping the world and its wealthiest from paying the price?

When I say the world’s wealthiest, I’m not just talking about nations but businesses and individual billionaires who can make up a good portion of the trillion needed each year through wealth surtaxes, the ending of fossil fuel subsidies, producers paying an escalating pollution surcharge, and through carbon pricing.

Fossil fuel companies get subsidized today at every stage of operations, from exploration to production, distribution, and consumption. In 2022, those subsidies exceeded $1.5 trillion when Russia’s invasion of Ukraine triggered a short-lived global energy crisis. Before that subsidies over the previous decade varied between $400 and $800 billion. This year direct or explicit subsidies have totalled $620 billion which the International Energy Agency (IEA) describes “as a roadblock on the path to cleaner and more secure energy systems.”

Explicit Versus Implicit Subsidies

What are explicit subsidies?

• In the U.S. oil and gas companies can deduct a percentage of their gross income from sales as an expense to encourage domestic production and allow companies to recover their capital costs.
• Companies claim intangible drilling costs including exploration and development wages and materials.
• Then there are government direct payments, grants, below-market-rate loans and loan guarantees, and liability caps in case of fossil fuel exploration and production accidents.

What are implicit subsidies?

• The price at the pump consumers pay represents a significant fossil fuel subsidy. It doesn’t account for the carbon emissions produced and their societal and economic impacts.
• The price doesn’t account for healthcare costs caused by air pollution.
• The price doesn’t account for costs engendered by traffic congestion, accidents, lost productivity, and the additional need to expand road infrastructure.

Implicit subsidies, states the IMF exceed explicit subsidies by multiples. It uses an example of how subsidies get reflected in the retail price of gasoline. The IMF uses $0.30 per litre in its at-the-pump retail delivery price. (It should be noted that here in this part of Canada,  gasoline costs five times that). The $0.30 doesn’t reflect actual supply costs that include value-added and excise taxes which more than doubles the retail price to $0.75. Making up this number is $0.20 per litre representing explicit subsidies the government pays to fossil fuel providers. The balance is implicit subsidies that the public ultimately pays for through taxes and government spending. If the national consumption of gasoline under this example amounts to 100 million litres, then the total subsidies approximate $475 million ($100 million explicit and $375 million implicit).

How Countries Are Tackling Subsidies

Canada is one of several countries trying to end fossil fuel subsidies. In 2023 it created an assessment framework to stop new subsidies and to begin eliminating existing ones. It has put an escalating price on carbon that consumers pay mostly at the pump as a consumption tax. To offset the consumption tax, the government offers rebate payments twice a year to Canadian homes and families. Technically this is a subsidy not directed at the producers but rather at consumers.

Other countries include several members of the European Union, Indonesia, India, Nigeria, Bangladesh and Sri Lanka. The vast majority of remaining countries have yet to address the subsidy issue including China which spent $2.2 trillion in 2020 on fossil fuel subsidies mostly aimed at coal producers.

The second biggest carbon polluter, the United States continues to tiptoe through the subsidy issue. Presidential executive orders have been almost the only way to get by Congressional resistance to eliminating fossil fuel subsidies. In 2023, the U.S. paid out $757 billion to the industry including tax breaks and preferential pricing on oil and gas leases.

The G7 countries have roadmaps to phase out fossil fuel subsidies by 2025. Within the G20 and OECD countries, the phase-out targets are between 2027 and 2030. Developing countries have varying subsidy phase-out targets. As in Canada, the phasing out of subsidies should be accompanied by programs to protect those with the least means from the sticker shock of higher fuel prices.

Today, every dollar we spend to subsidize fossil fuels makes the global economy more dependent on oil, gas and coal. These three fossil fuels are the biggest contributors to global carbon emissions, 89% of the total in 2018.

Every dollar spent on subsidies facilitates the retention and even the expansion of fossil fuel infrastructure locking us into continued use of these carbon-polluting forms of energy.

Every dollar spent on subsidies contributes to 7 million premature deaths annually from respiratory and cardiovascular diseases attributed to poor air quality.

Every dollar spent on subsidies contributes to $5.2 trillion in environmental damage to our planet annually.