Subsidies for fossil fuels doubled in 2021 and continue to increase

Annual support for fossil fuels doubled in 2021 to nearly USD 700 billion, slowing progress towards global community climate goals, according to a new analysis by the Organization for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA). Economic recovery contributed to the increase in subsidies and it will rise even more in 2022 due to the current energy crisis and high fuel prices.

The world’s major economies have sharply increased support last year for the production and consumption of coal, oil, and natural gas. New data show that overall government support for fossil fuels in 51 countries worldwide amounted to USD 697.2 billion, compared to USD 362.4 billion in 2020.

Many countries are struggling to balance longstanding pledges to phase out inefficient fossil fuel subsidies with efforts to protect households from rising energy prices, OECD and IAE said in a statement.

Subsidies increase as energy prices rose with the rebound of the global economy in 2021. Most of the support went to reducing prices paid by consumers.

Most of the support went to reducing prices paid by consumers

Consumption subsidies are anticipated to rise even higher in 2022 due to the war in Ukraine and higher energy prices. Governments are raising subsidies for fossil fuels to protect citizens, but the result is that the industry is making huge profits.

The OECD and IEA provided estimates of public subsidies for fossil fuels that include OECD member states, the Group of 20 (G20) major economies and the European Union, and 33 other main energy producers and consumers, representing a total of 85% of the world’s total energy supply.

Support for fossil fuel producers

Total fossil fuel support in G20 rose to USD 190 billion in 2021 from USD 147 billion. 

Support for fossil fuel producers rose almost 50% to a record USD 64 billion or 17% above the level registered for 2019.

Support for producers in G20 rose to USD 64 billion in 2021

The OECD’s analysis compiled budgetary transfers and tax benefits related to the production and use of coal, oil, gas, and other petroleum products for G20.

The document shows the subsidies have partly offset producers’ losses from domestic price controls last year. Global energy prices surged in late 2021.

As the energy crisis continues, oil companies are making record profits. The combined gains for the first quarter of 2022 are close to USD 100 billion. 

Recently, United Nations Secretary-General António Guterres urged governments to tax extra profit in the oil and gas sector and use the funds to support the most vulnerable in the energy crisis.

Consumption subsidies

The IEA pointed out the prices paid by domestic consumers are kept artificially low using measures such as direct price regulation, pricing formulas, border controls or taxes, and domestic purchase or supply mandates.

Prices paid by consumers are kept artificially low

Analyzing the situation in 42 economies, the IEA said consumer support more than tripled to USD 531 billion in 2021 due to the surge in energy prices.

Subsidies for consumers amounted to USD 531 billion

According to Eurostat’s preliminary data, fossil fuels again became the leading source of power generation in the European Union last year, after being briefly overtaken by renewables in 2020.

Fossil fuels in the G20 and the EU are still more subsidies than renewables.

Phasing out of subsidies

Most of the developed economies continue to provide significant support to the fossil fuel sector, applying measures such as tax breaks, finance, direct infrastructure investments, and exemptions from environmental requirements.

OECD and IEA pointed out that public funding needs to be redirected towards the development of low-carbon alternatives

OECD and IEA have consistently called for phasing out of what they call inefficient fossil fuel support. Both agencies stressed that public funding needs to be redirected towards the development of low-carbon alternatives alongside improvements in energy security and energy efficiency.

New @OECD and @IEA data show that in 2021, as energy prices rose with the rebound of the global economy, overall government #FossilFuel subsidies in 51 economies worldwide almost doubled, from $362.4bn in 2020 to $697.2bn in 2021.

➡️ https://t.co/J9Lz02VpKw pic.twitter.com/JVMsMNORMW

— Mathias Cormann (@MathiasCormann) August 29, 2022

“We need to adopt measures which protect consumers from the extreme impacts of shifting market and geopolitical forces in a way that helps keep us on track to carbon neutrality as well as energy security and affordability,” said OECD Secretary-General Mathias Cormann.

Subsidies intended to support low-income households often favor wealthier households that use more fuel and energy. Such subsidies should be replaced by targeted forms of support, the analysis shows.

“Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuel prices,” IEA Executive Director Fatih Birol said.

Birol: Increasing investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis

He pointed out that increasing investment in clean energy technologies and infrastructure is the only lasting solution to the global energy crisis, and the best way to reduce the exposure of consumers to high fuel costs.

Government interventions reduce fossil fuel prices for consumers. Market interventions also maintain some form of social peace. However, the fossil fuel industry benefits the most.

At the same time, progress toward climate goals is slowing down. But it will come on the agenda with the increasing presence of climate catastrophes.