Dunleavy: Subsidizing Fossil Fuels Only Enrichens Big Oil

Fossil fuel subsidies are inefficient, fail to achieve policy goals and threaten the environment.

by Hannah Dunleavy | 5/19/23 4:00am

Fossil fuel subsidies are incredibly expensive; in 2020 alone, they cost global governments $5.9 trillion. Yet, these subsidies fail to effectively achieve the policy goal of easing the burden of energy costs. Instead, fossil fuel subsidies enrich the fossil fuel industry and waste public money, while harming public health and the environment. With the catastrophic effects of climate change looming, governments must eliminate the fossil fuel subsidies wreaking havoc on both Earth and the taxpayer’s dime.

These subsidies come in two forms: explicit and implicit. Explicit —  or direct — subsidies are government money that goes directly to fossil fuel production or consumption. That money may be spent on exploration, extraction and development, or it may come in the form of low-cost federal land leases, regulatory exemptions or tax deductions and exemptions. In 2022, global governments spent more than $1.097 trillion on direct fossil fuel subsidies — an all-time high. 

Implicit — or indirect — subsidies are the government costs and spending on infrastructure. They are incurred by the social and environmental costs of fossil fuel production and consumption. For example, fossil-fuel-induced local air pollution costs global governments $2.4 trillion each year due to excess mortality and morbidity, work and school days lost and damaged infrastructure. 

Initially, policymakers hoped fossil fuel subsidies would protect households by preventing fuel price increases that would prevent low-income households from accessing energy. Unfortunately, fossil fuel subsidies are an inequitable, inefficient and wasteful welfare policy that largely benefits higher-income households. According to a 2015 research article from the International Monetary Fund, in low and middle-income countries, the richest 20% of households benefit six times more from fuel price subsidies than the poorest 20% of households. In the United States, 16% of Americans, or 5.2 million households, live in energy poverty, despite the United States’s total expenditure on fossil fuel subsidies and total subsidies per capita being the second highest in the world. American communities of color are 60% more likely to suffer from energy poverty than white Americans.

Reforms do not inevitably lead to restricted energy access. Instead, the reallocation of public funds can expand energy access and improve public well-being. Reform must be conscious of lower-income households and replace the subsidies with policies targeted at helping the most vulnerable. For example, Kenya undertook fossil fuel subsidy reform through subsidizing connection costs instead of energy costs with wild success. Kenya’s plan led to rapid rural electrification and a dramatic increase in electricity access from 16% of the population in 2003 to 71.4% of the population in 2022. Energy access soared without long-term increasing fossil fuel usage, and renewable energy generates over 80% of Kenya’s electricity in 2023. 

Instead of achieving policy goals for the public good, in practice subsidies enrich Big Oil. The world’s five biggest oil companies generated all-time record profits in 2022, totaling more than $199 billion. In 2022, global anxiety over the impact of global inflation and the Russian invasion of Ukraine on energy prices led to soaring explicit fossil fuel subsidies around the world — an example of social welfare and energy security justifying fossil fuel subsidies. Yet, the biggest winners of policies intended to protect the vulnerable were fossil fuel executives and shareholders. The fossil fuel industry argues that large profits are essential to the security of supply, as the excess profits can be reinvested in industry development. However, more than half of 2022’s oil and gas profits went to company shareholders through dividends and stock buy-backs. Additionally, Big Oil backtracked on its previous promises to invest in clean energy, with BP lowering emission cut promises from its initial target of 35% to 40% to its current target of 20% to 30% by 2030. A federal investigation uncovered that Shell’s claims of investing in clean energy were intentionally misrepresented in an official report to be renewables, when, in reality, those “renewable energy investments” went to natural gas. 

Fossil fuel subsidies are an inefficient use of public funds, wasting taxpayers’ money and reducing funding for worthier causes. In 2020, the explicit and implicit fossil fuel subsidies cost the United States $662 billion, around $2,006 per capita. Cutting just two tax breaks for the fossil fuel industry — the intangible drilling costs subsidy and the percentage depletion tax break — could generate $17.9 billion in government revenue over ten years, according to Congress’s non-partisan Joint Committee on Taxation. The Biden Administration’s fiscal year 2024 budget proposes cutting tax subsidies for oil and gas companies, which, by the Administration’s estimates, would save the government $31 billion over ten years. The resulting estimated government revenues could then finance healthcare, education, social security and other social services. Additionally, those savings could be invested into developing and promoting clean energy and energy-efficient technologies, reducing energy costs and decreasing reliance on fossil fuels.

Fossil fuel subsidies also encourage excessive production, overconsumption and inefficient use, leading to severe damage inflicted on the public and the climate. The subsidies block efficient fuel pricing, resulting in a price that does not reflect the true social and environmental costs. Fossil fuel combustion accounts for 73% of total U.S. greenhouse gas emissions, significantly contributing to the increasing severity and frequency of extreme weather events like drought, heatwaves, wildfires, floods, hurricanes and more. Global warming leads to a whole host of problems that harm people — food security, poverty, population relocation and disease prevalence. Efficient fossil fuel pricing would prevent 900,000 local air pollution deaths per year and reduce global carbon dioxide emissions by 36% by 2025, a sufficient cut to keep global warming below 2 degrees Celsius. 

Fossil fuel subsidies are a waste of public money that benefit the fossil fuel industry to the detriment of the public and the environment. Governments must reallocate public funds away from fossil fuel subsidies to invest in social and environmental programs that remediate the harms of the fossil fuel industry and better prepare the world for the perilous future posed by anthropogenic climate change.