The cost of government support measures for the production and consumption of fossil fuels decreased sharply in 2023, as energy prices softened from the record highs seen in 2022. However, many measures to support the production and consumption of fossil fuels remained in place and, in some cases, even increased. The fiscal cost of these measures, along with implicit support for fossil fuels, remains elevated compared to its historical average according to analysis released today by the OECD and the International Energy Agency (IEA). This is despite pledges to phase out inefficient fossil fuel subsidies and increase climate action.
New OECD and IEA data show that the fiscal cost and implicit support of government support for fossil fuels across 82 economies dropped by almost one third, from USD 1.6 trillion in 2022 to USD 1.1 trillion in 2023. Lower prices for fossil fuels, especially for natural gas, narrowed the gap between market-based and subsidised consumer prices in some economies. Nonetheless, many governments maintained substantial initiatives to alleviate the burden of high energy bills on households and firms, most of which translated into support for fossil fuel production and consumption. Policy responses to the 2022 energy crisis were largely intended as temporary measures, but many are still in place. In addition, most of this support was not systematically targeted to those most in need, raising both equity and efficiency concerns.
The OECD and IEA produce complementary databases that provide estimates of different forms of government support for fossil fuels. The current OECD-IEA combined estimates cover 82 major economies, spanning the OECD, G20 and 33 other major energy producing and consuming economies representing around 85% of the world’s total energy supply.
The OECD Inventory of Support Measures for Fossil Fuels 2024 indicates that direct budgetary transfers and tax breaks linked to the production and use of coal, oil, gas and other petroleum products in 48 OECD and partner economies rose to USD 514.1 billion in 2023, up from USD 503.7 billion in 2022.
Data from the OECD Inventory also show that support to consumers represented 90% of the total fiscal cost of support for fossil fuels. The fiscal cost of support for residential users increased by 29% to record highs, reaching USD 189.3 billion in 2023 (from USD 146.4 billion in 2022), while for manufacturing and other industries it increased by 14% to USD 103.8 billion in 2023 (from USD 90.9 billion in 2022). Support to fossil fuel producers represented 7% of the fiscal cost of support and general services (not specifically targeted at either producers or consumers) 3%.
The IEA tracks fossil fuels subsidies, including implicit support, by identifying instances where consumer prices are lower than the market value of the fuel. The IEA finds that subsidies to fossil fuel consumption were halved in 2023, totalling over USD 600 billion due to declines in international market prices. Of the support measures provided in 2023, over 85% were not well targeted to help the most vulnerable consumers.
The new analysis also shows that the increase in the fiscal cost of support for fossil fuels in recent years contributed to a decrease in economic incentives to decarbonise compared to 2021. While carbon taxes and Emissions Trading Schemes (ETSs) saw modest increases, high direct budgetary transfers (direct government subsidies) for fossil fuels and low fuel excise rates reduced the net effective carbon rates (Net ECR) to EUR 14.0 per tonne of CO2-equivalent in 2023 from EUR 17.9/tCO2e in 2021. The share of emissions covered by carbon pricing in 2023 has remained unchanged since 2021 with 42% of greenhouse gas emissions subject to a Net ECR, 27% of which being covered by explicit carbon prices (carbon taxes or ETSs).
The OECD and IEA continue to call for more ambitious action to phase out inefficient fossil fuel support and re-direct public funding toward the development of low-carbon alternatives, alongside improvements in energy security and energy efficiency. Governments should also reform existing support measures to better target those most in need. Given the high costs of inaction, governments should reaffirm and implement their commitments to the Sustainable Development Goals by phasing out and reforming inefficient fossil fuel support, thereby aligning fiscal policies with climate objectives.
