Why Are You Paying To Subsidize The Fossil Fuel Industry?

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How much are you willing to subsidize the government and prop up the fossil fuel industry? Governments across the world now spend a total of $2.6 trillion per year on subsidies that harm the environment, jeopardizing global climate and biodiversity targets. The public should not be paying at the pump for increasing the profits of the fossil fuel industry.

Whether you know it or not, if you live in the US, you experience the benefits of subsidizing the fossil fuel industry every time you fill up your gas tank. The US government subsidizes the price of gas heavily. But there’s good news. Raising fuel prices to their fully efficient levels reduces projected global fossil fuel CO2 emissions 43% below baseline levels in 2030 or 34% below 2019 emissions.

Are you willing to pay with your wallet for such drops in carbon emissions?

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut, as explained by Investopedia. In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.

They protect consumers by keeping prices low but can also have severe repercussions. Subsidies:

have sizable fiscal consequences — they can lead to higher taxes, borrowing, or lower spending;
really appeal to private interests — they’re the ones reaping the gains;
promote inefficient allocation of an economy’s resources — and they often stymie growth;
encourage pollution — they contribute to climate change and premature deaths from local air pollution; and,
benefit high income households generally — leaving the poor to take on the majority of the burden.

The consequence of these subsidies is rather obvious, says Ending Fossil Fuel Subsidies author, Neil McCullough.

“Consumers faced with cheaper fossil fuel will consume more of it and producers – given the opportunity for higher profits – will produce more of it. The result is more production, more consumption, more pollution, and more climate change. So why do governments continue to do it?”

Governments want to keep the price of energy low, that’s why. It’s good for politicians’ public images and continued reelections. Burning fossil fuels causes immense harm to the environment.

Right now, there are few mechanisms to compensate for the harm that fossil fuels cause, but the need to stop subsidizing the fossil fuel energy industry is one very profound answer. Its impacts extend well beyond individual political careers.

The Actual Costs of Subsidizing Fossil Fuels

The research group Earth Track conducted an investigation into reforming environmentally harmful subsidies. While compiling adequate data is and will likely continue to be an ongoing challenge, the researchers determined that there is $1050 billion in fossil fuel subsidies annually. This number was seen as a quite volatile yet year-to-year trend.

Rapid and large subsidy increases that followed Russia’s invasion of Ukraine have now eased, but governments’ willingness to subsidize the fossil fuel industry highlights the challenge of sustaining policies that support decarbonization and habitat protection.

Subsidy removal from fossil fuels is currently a tandem policy to carbon pricing to redirect investment and reduce pollution and GHG emissions. Earth Track found:

residual gaps in credit and risk;
support from state, provincial, and municipal governments outside of OECD countries;
below-market terms on mineral leases and state-owned enterprises;
subsidies to energy stockpiling and security; and,
subsidies to carbon capture and sequestration.

Earth Track report co-author Doug Koplow told Common Dreams that other research into the actual cost of fossil fuel industry subsidies has typically included more externalities “rather than just fiscal subsidies.” Koplow emphasized the importance of cross-sector analysis, arguing that sectors, such as agriculture, are too often looked at in isolation. “It is the combined effect of subsidies to these sectors that compound to drive loss of nature and biodiversity resources,” he explained.

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What Would It Take to Remove Fossil Fuel Subsidizing?

Removing fossil fuel subsidies is crucial not only for reducing CO2 emissions and making carbon pricing more effective but also for redirecting government funds to move valuable and noble endeavors. Such a strong step can promote sustainable and equitable outcomes such as using the revenue gain for better targeted social spending, reductions in inefficient taxes, and productive investments. A successful subsidy reform could thrive if a combination of elements were to be integrated, according to the IMF:

a comprehensive energy sector reform plan with clear long-term objectives with an analysis of the impact of reforms;
transparent and extensive communication and consultation with stakeholders, including information on the size of subsidies and how they affect the government’s budget;
price increases that are phased-in;
improving the efficiency in state-owned enterprises to reduce producer subsidies;
measures to protect the poor through targeted cash or near-cash transfers or, if this option is not feasible, a focus on existing targeted programs that can be expanded quickly; and,
institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.

Carbon Capture for Enhanced Oil Recovery is a Taxpayer-Sponsored Joke

Dismayed by Big Oil’s billions of dollars in profits, US Rep. Ro Khanna is reintroducing legislation to end distribution of billions in taxpayer dollars back to companies that inject captured carbon dioxide into wells to extract more climate-wrecking oil.

Khanna argues that the fossil fuel industry receives over $20.5 billion in taxpayer dollars every year while driving a global climate crisis.

The End Polluter Welfare for Enhanced Oil Recovery Act (EOR) will eliminate the subsidy for captured carbon used for enhanced oil recovery, which only leads to more fossil fuel extraction and does nothing to mitigate climate change.” Khanna’s press release states that the legislation “would reform one of the largest and most egregious domestic fossil fuel subsidies, The Tax Credit for Carbon Sequestration (Section 45Q).” After the credit was expanded in the 2022 IRA, as much as 83% of captured carbon dioxide was used for EOR while oil and gas company profits soared 160% above pre-pandemic levels.

Sierra Club is supporting Khanna’s bill, as are 350.org, Alliance for Affordable Energy, Center for Biological Diversity, Center for International Environmental Law, Climate Justice Alliance, Environment America, Friends of the Earth, Greenpeace USA, Oil Change International, Our Revolution, Oxfam America, Progressive Democrats of America, US PIRG, and Zero Hour.