Soaring fossil fuel subsidies are holding back clean energy

As the price of oil and gas rises, governments are spending more to blunt the impact on consumers.
Subsidies for oil and gas consumption undercut the competitive edge of renewables.
Subsidies for oil and gas consumption undercut the competitive edge of renewables.
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An energy crisis like the one Europe is currently experiencing—with prices for natural gas and electricity at record heights—should be a time for renewables to shine. The more households and companies are hammered by extreme volatility in fossil fuel markets, the better a deal wind and solar, which pump out electrons at a consistent, low price, should be.

But government subsidies for fossil fuels throw a wrench in that dynamic by shielding consumers from their real cost. And in 2021, global fossil fuel subsidies nearly doubled from the year before, according to an Aug. 29 analysis by the Organization for Economic Co-operation and Development (OECD) and International Energy Agency.

“The concern here is that as you modify fossil fuel prices through these support measures, you kill or at least mute the price incentives to switch to other fuels and undergo a low carbon transition,” said Greg Garsous, a trade policy analyst at the OECD.

Fossil fuel subsidies track prices

The reason for the jump is the price of oil and gas, which collapsed during the pandemic and gradually recovered in 2021. In many low-income countries and major oil and gas exporters like Saudi Arabia, the retail cost of electricity, natural gas for heating and factories, and gasoline for vehicles is heavily subsidized. As the global market price of those commodities rises, governments must spend more to offset it. Likewise, in countries that are richer or more import-reliant, including the US, major energy consumers can write off some of their energy expenditures on their taxes. So as the commodity price increases, governments are forgoing more revenue.

“Although fossil fuels are sometimes touted as a very stable source of energy, when governments need to intervene so much to protect households from price volatility maybe they’re not so stable after all,” said Garsous.

There’s no question, he said, that fossil fuels may need to be subsidized for some lower-income households. France, for example, gave out €580 million ($580.8 million) in 2021 to help low income households with energy bills. The trouble today is that most energy subsidies are universal—and that prices are continuing to soar.

“We are on track for 2022 to probably double the amount of government support we observed in 2021,” Garsous said.