Propping up fossil fuels

Support for fossil fuels almost doubled in 2021, slowing progress toward international climate goals

Katie Hill - Editor-in-Chief, My Green Pod

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Published: 2 September 2022

This Article was Written by: Katie Hill - My Green Pod

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Major economies sharply increased support for the production and consumption of coal, oil and natural gas in 2021, with many countries struggling to balance longstanding pledges to phase out inefficient fossil fuel subsidies with efforts to protect households from surging energy prices.

These are the worrying findings of new analysis released by the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA).

Subsidised fossil fuels

The OECD and IEA data show that overall government support for fossil fuels in 51 countries
almost doubled to $697.2 billion in 2021, from $362.4 billion in 2020, as energy prices soared with the rebound of the global economy.

Consumption subsidies are anticipated to rise even further in 2022 due to higher fuel prices and energy use.

‘Russia’s war of aggression against Ukraine has caused sharp increases in energy prices and undermined energy security. Significant increases in fossil fuel subsidies encourage wasteful consumption though, while not necessarily reaching low-income households.

‘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.’

MATHIAS CORMANN
OECD secretary-general

Financing fossil fuels

The OECD and IEA produce complementary databases that provide estimates of different forms of government support for fossil fuels.

The current OECD-IEA combined estimates cover 51 major economies, spanning the OECD, G20 and 33 other major energy producing and consuming economies, representing around 85% of the world’s total energy supply.

OECD analysis of budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products in G20 economies showed total fossil fuel support rose to $190 billion in 2021 from $147 billion in 2020.

Support for producers reached levels not previously seen in OECD tracking efforts, at $64 billion in 2021 – up by almost 50% year-on-year, and 17% above 2019 levels.

Those subsidies have partly offset producer losses from domestic price controls as global energy prices surged in late 2021. The estimate of consumer support reached $115 billion, up from $93 billion in 2020.

‘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. A surge in investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis and the best way to reduce the exposure of consumers to high fuel costs.’

FATIH BIROL
IEA executive director

Redirecting funding

The IEA produces estimates of fossil fuel subsidies by comparing prices on international markets and prices paid by domestic consumers that are kept artificially low using measures like direct price regulation, pricing formulas, border controls or taxes and domestic purchase or supply mandates.

Covering 42 economies, the IEA finds that consumer support increased to $531 billion in 2021, more than triple the 2020 level, driven by the surge in energy prices.

The OECD and IEA have consistently called for the phasing out of inefficient fossil fuel support and redirection of public funding toward the development of low-carbon alternatives alongside improvements in energy security and energy efficiency.

Subsidies intended to support low-income households often tend to favour wealthier households that use more fuel and energy and should therefore be replaced with more targeted forms of support.

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