The global energy crisis pushed fossil fuel consumption subsidies to an all-time high in 2022

Fossil fuel subsidies hit record levels in 2022

In 2022, global subsidies for fossil fuel consumption exceeded USD 1 trillion for the first time, marking a significant increase. This surge was a result of disruptions in energy markets that led to international fuel prices surpassing the actual costs paid by many consumers. The unprecedented subsidies in 2022 were double those of 2021, which were already almost five times higher than the levels recorded in 2020. This jump was particularly pronounced due to the global energy crisis triggered by Russia's invasion of Ukraine.

The IEA has long advocated removing or at least reducing fossil fuel subsidies because they distort markets, send the wrong price signals to users, widen fiscal deficits in developing economies and discourage the adoption of cleaner renewable energies. Their expansion is particularly worrying at a time when we should be redoubling efforts to cut wasteful consumption and accelerate clean energy transitions. Reforming prices is a political challenge, but it is also economically and environmentally vital. In 2022, Russia was the largest single provider of fossil fuel subsidy payments, followed by Iran and China.

Fossil fuel consumption subsidies globally rose above USD 1 trillion for the first time in 2022

Fossil fuel consumption subsidies worldwide soared in 2022, rising above USD 1 trillion for the first time, according to new IEA estimates, as turmoil in energy markets sent fuel prices in international markets well above what was actually paid by many consumers.

Last year’s record subsidies – amid the global energy crisis triggered by Russia’s invasion of Ukraine – were double their 2021 levels, which were already almost five times those seen in 2020.

These escalating outlays were in sharp contrast with the Glasqow Climate Pate, which in November 2021 called on countries to “phase-out … inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable”. Our analysis shows that many of these government measures were not well targeted, and while they may have partially protected customers from skyrocketing costs, they artificially maintained fossil fuels' competitiveness versus low-emissions alternatives.

For many years, the IEA has monitored subsidies for fossil fuels, evaluating situations in which consumers pay less than the market price of the fuel itself. According to our preliminary estimates for 2022,oil subsidies increased by around 85% while natural gas and electricity consumption subsidies more than doubled. As noted in the World Energy Outlook, high fossil fuel prices were the main reason for upward pressure on global electricity prices, accounting for 90% of the rise in the average costs of electricity generation worldwide (natural gas alone for more than 50%).

Governments took a variety of measures to protect consumers from the worst effects of the energy crisis. The most common, as usual, was simply to fix end-user tariffs, or to cap fuel or electricity price increases. For example, the Peruvian government decided in April 2022 to temporarily include a number of transport fuels in the State Fuel Price Stabilization Fund to curb the rise in prices. Many advanced European economies limited consumer exposure to the full impact of spiralling natural gas prices. Thailand introduced a price cap of THB 30 (USD 0.85) per litre of diesel. Some successful subsidy reform programmes were interrupted: Egypt, for example, extended electricity subsidies, which it had previously planned to phase out by the end of the 2021-2022 fiscal year.

Almost all of the consumption subsidies that we found with our price-qap methodoloqy. were in emerging and developing economies. More than half were in fossil-fuel exporting countries.

But measures to limit the effect of price volatility were much more widespread, notably in Europe. Most interventions in advanced economies did not meet our definition of fossil fuel consumption subsidies, because average end-user prices remained above market-based values. But they were nonetheless a significant drain on fiscal resources. The IEA’s tracking suggests that more than USD 500 billion in extra spending was committed to reduce energy bills in 2022, mainly in advanced economies; this is addition to the fossil fuel consumption subsidies identified elsewhere.

These measures included exemptions from various taxes and levies, compensation mechanisms for different affected groups of consumers, efforts to ease payment terms or to put a moratorium on disconnections for non-payment. Many utilities and other energy companies, as well as energy-intensive industries received additional support to manage higher fuel-related costs, especially for gas and electricity.

Lessons for phasing out fossil fuel consumption subsidies

Phasing out fossil fuel subsidies is a fundamental ingredient of successful clean energy transitions, as underscored in the Glasgow Climate Pact. However, today’s global energy crisis has also highlighted the political challenges of doing so. Russia’s invasion of Ukraine caused the crisis, but 2022’s subsidy jump brings some broader lessons on the need for orderly and people-centred transitions.

Periods of high and volatile fossil fuel prices drive home the unsustainability of today’s energy system and underscore the benefits of energy transitions, but these episodes come with significant economic and social cost. High fossil fuel prices are no substitute for consistent climate policies.

During an energy crisis, government commitments to phasing out subsidies are overshadowed by the priority to protect consumers. The resulting government actions reduce hardship but also weaken incentives for consumers to save or to switch to alternative sources of energy, and use up public funds that could be spent in other areas, including on clean energy transitions.

High fossil fuel prices hit the poor hardest but subsidies are rarely well-targeted, and as a result tend to benefit the better-off. Effective targeting to protect vulnerable groups requires investments in better data collection and in setting up effective cash transfer mechanisms.

But well-designed policies should avoid fuel supply getting too far out of step with demand in the first place. Resources are best deployed to provide lasting protection against volatile fuel prices. This means anchoring market-based prices in a broader suite of policies and measures that enable households and industries to make cleaner energy choices. High-efficiency and low-emissions equipment and services need to be readily available, and poorer consumers need support to manage their upfront costs. It is far better for governments to spend time and money on structural changes that bring down fossil fuel demand, rather than on emergency relief when fuel prices go up.