Fossil fuel consumption subsidies worldwide soared in 2022, rising above $1 trillion for the first time, as turmoil in energy markets sent fuel prices in international markets well above what was paid by many consumers, says a report by the International Energy Agency (IEA).
According to the energy agency, 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 Glasgow Climate Pact, which in November 2021 called on countries to “phase-out inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable,” IEA said.
“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.”
According to IEA’s preliminary estimates for 2022, oil subsidies increased by around 85 percent while natural gas and electricity consumption subsidies more than doubled.
The energy agency also said that high fossil fuel prices were the main reason for upward pressure on global electricity prices, accounting for 90 percent of the average electricity generation costs worldwide (natural gas alone for more than 50 percent).
IEA added that governments took various 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,” it said.
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“Almost all of the consumption subsidies we found with our price-gap methodology were in emerging and developing economies. More than half were in fossil-fuel exporting countries.”
According to the IEA, more than $500 billion in extra spending was committed to reducing energy bills in 2022, mainly in advanced economies.
“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,” IEA said.
“Phasing out fossil fuel subsidies is a fundamental ingredient of successful clean energy transitions, as the Glasgow Climate Pact underscored. However, today’s global energy crisis has also highlighted the political challenges of doing so.”
According to IEA, 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 a significant economic and social costs. High fossil fuel prices are no substitute for consistent climate policies,” the energy agency said.
“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 weaken incentives for consumers to save or switch to alternative energy sources and use public funds that could be spent in other areas, including on clean energy transitions.”
IEA also said that 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 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,” according to IEA.
“This means anchoring market-based prices in a broader suite of policies and measures that enable households and industries to make cleaner energy choices.”
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