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Fossil fuels are the , yet they are still heavily subsidized by governments around the world.

Although many countries have explicitly to combat climate change, this has proven difficult to accomplish. As a result, fossil fuels remain relatively inexpensive, and their use and greenhouse gas emissions .

I work in and have studied the fossil fuel sector for years. Here's how fossil fuel subsidies work and why they're so stubborn.

What is a subsidy?

A subsidy is a financial benefit given by a government to an entity or industry. Some subsidies are relatively obvious, such as or develop new drugs.

Others are less visible. A , for example, can subsidize domestic manufacturers of that product. More controversially, some would argue that when a government it causes, such as air or water pollution, that also amounts to a subsidy.

Subsidies, especially in this broader sense, are widespread throughout the global economy. Many industries receive benefits through public policies that are denied to other industries in the same jurisdiction, such as , relaxed regulations or trade supports.

Governments employ subsidies for political and practical reasons. Politically, subsidies are useful for striking bargains or shoring up political support. In democracies, they can mollify constituencies otherwise unwilling to agree to a policy change. The 2022 Inflation Reduction Act, for example, squeaked through Congress by .

Practically, subsidies can boost a promising young industry such as , attract business to a community or help a mature sector survive an economic downturn, as the did in 2008. Of course, policies can outlive their original purpose; some of today's petroleum subsidies can be .

How are fossil fuels subsidized?

Fossil fuel subsidies take many forms around the world. For example:

• In , fuel prices are set by the government rather than the market; subsidize the price citizens pay for gasoline. The cost to state-owned oil producers there is offset by oil exports, which dwarf domestic consumption.

• also caps energy prices, then compensates state-owned energy companies for the losses they bear.

• In the United States, oil companies can for a large portion of their drilling costs.

, such as when governments underprice permits to mine or drill for fossil fuels or fail to collect all the taxes owed by fossil fuel producers.

Estimates of the total value of global fossil fuel subsidies vary considerably depending on whether analysts use a broad or narrow definition. The Organization for Economic Cooperation and Development, or OECD, to be about US$1.5 trillion in 2022. Tche a number over four times higher, about $7 trillion.

Why do estimates of fossil fuel subsidies vary so dramatically?

Analysts whether subsidy tabulations should include environmental damage from the extraction and use of fossil fuels that is not incorporated into the fuel's price. The IMF treats the costs of global warming, local air pollution and even traffic congestion and road damage as implicit subsidies because fossil fuel companies don't pay to remedy these problems. The .

But whichever definition is applied, the combined effect of national policies on fossil fuel prices paid by consumers is dramatic.

Oil, for example, is traded on a global market, but the price per gallon of around the world, from about 10 cents in Iran, Libya and Venezuela—where it is heavily subsidized—to over $7 in Hong Kong, the Netherlands and much of Scandinavia, where fuel taxes counteract subsidies.

What is the world doing about fossil fuel subsidies?

Global leaders have acknowledged that subsidies for fossil fuels undermine efforts to address climate change because they make fossil fuels cheaper than they would be otherwise.

In 2009, the heads of the G20, which includes many of the world's largest economies, resolving to "rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption." Later that same year, the governments of the Asia-Pacific Economic Cooperation forum, or .

In 2010, 10 other countries, including the Netherlands and New Zealand, formed the group to "build political consensus on the importance of fossil fuel subsidy reform."

Yet these commitments have scarcely moved the needle. A major between 2003 and 2015 found that governments "collectively made little or no progress" toward reducing subsidies. In fact, the OECD found that total global subsidies nearly doubled in both 2021 and 2022.

So why are fossil fuel subsidies hard to eliminate?

There are various reasons fossil fuel subsidies are hard to eliminate. Many subsidies directly affect the costs that fossil fuel producers face, so reducing subsidies tends to increase prices for consumers. Because fossil fuels touch nearly every economic sector, rising fuel costs elevate prices for countless goods and services.

Subsidy reform tends to be broadly felt and pervasively inflationary. And unless carefully designed, subsidy reductions can be regressive, forcing low-income residents to spend a larger percentage of their income on energy.

So, even in countries where there is widespread support for robust climate policies, reducing subsidies and may even .

The 2021-22 spike in fossil fuel subsidies is illustrative. After Russia's invasion of Ukraine, . Governments were quick to provide aid for their citizens, resulting in ever. Forced to choose between climate goals and affordable energy, Europe overwhelmingly chose the latter.

Of course, economists note that increasing the price of fossil fuels can lower demand, reducing emissions that are driving climate change and harming the environment and human health. Seen in that light, price spikes present an opportunity for reform. , when prices recede after a surge, it "provide[s] an opportune time to lock in pricing of carbon and local air pollution emissions without necessarily raising energy prices above recently experienced levels."

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