Fossil Fuels Consumption Subsidies 2022

Aerial view of coal power plant high pipes with black smoke moving up polluting atmosphere at sunset.

The IEA has been tracking fossil fuel subsidies for many years, examining instances where consumer prices are lower than the market value of the fuel itself. Our systematic analysis highlights the magnitude of these subsidies, and the potential benefits of their removal for energy markets, climate goals and government budgets. This report provides our first estimates for 2022, which show that global fossil fuel consumption subsidies doubled from the previous year to an all-time high of USD 1 trillion.

The Glasgow Climate Pact emphasized that phasing out fossil fuel subsidies is a fundamental step towards a successful clean energy transition. However, today’s global energy crisis has also underscored some of the political challenges of doing so. This report suggests lessons for energy subsidy reform from today’s energy crisis.

Prices for fossil fuels were extraordinarily high and volatile in 2022 as energy markets grappled with the strains caused by Russia’s invasion of Ukraine – in particular the sharp cuts in Russian natural gas deliveries to Europe. In many countries, though, the prices actually paid by consumers for these fuels remained at a much lower level. A range of policy interventions insulated consumers from ballooning prices, but with the adverse effect of keeping fossil fuels artificially competitive with low-emissions alternatives. In 2022, subsidies worldwide for fossil fuel consumption skyrocketed to more than USD 1 trillion, according to the IEA’s latest estimate, by far the largest annual value ever seen.

The IEA has been tracking fossil fuel subsidies for many years, examining instances where consumer prices are less than the market value of the fuel itself (adjusted for transport costs and VAT, as applicable). Our first estimates for 2022 show that subsidies for natural gas and electricity consumption more than doubled compared with 2021, while oil subsidies rose by around 85%. The subsidies are mainly concentrated in emerging market and developing economies, and more than half were in fossil-fuel exporting countries.

Fossil fuel consumption subsidies by fuel, 2010-2022


In addition to these consumption subsidies, the IEA has tracked more than USD 500 billion in extra spending to reduce energy bills in 2022, mainly in advanced economies, with around USD 350 billion of this in Europe. This spending is not necessarily captured in our methodology as a fossil fuel consumption subsidy because average end-user prices are still sufficiently high to cover the value of the market fuel in question1. In Europe, preliminary analysis shows that average end-user prices were close, in some cases, to the market reference values2. Nonetheless, spending to bring down energy bills represents a significant fiscal burden for governments and, as is often the case with such measures, these interventions have not always been well targeted. Furthermore, it risks diminishing the incentive to use energy efficiently or to switch to cleaner fuels.

Government consumer measures to reduce energy bills during the energy crisis


In November 2021, the Glasgow Climate Pact called on countries to “phase-out … inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable”. Our analysis shows that, over the last year, many new government measures were implemented that limited the passing on of high international fossil fuel prices to consumers.

Some of these measures can be defended as social or political necessities, given the hardship that full exposure to market-driven prices could have caused. But the scale of these interventions is still a worrying sign for energy transitions. While many other measures taken by governments are serving to accelerate transitions, these price interventions worked in the opposite direction by favouring the incumbent fuels.

In this report, we explain how we approached the subsidy calculations in the exceptional circumstances seen in 2022, consider the various responses by governments, and assess the broader implications for energy transitions. 

Establishing the international market value of oil and coal is typically quite simple, as there are well-recognised international price markets for different fuel types and qualities that are closely correlated. However, a lot of the usual relationships between price markers broke down in 2022. Following Russia’s invasion of Ukraine, Russian crude oil was trading at a significant discount to other crude types, as some buyers opted not to purchase it, either voluntarily or because of sanctions. This segmentation of the crude market was accompanied by a dramatic increase in the price differentials between crude oil and oil products, as product markets continued to run up against a shortage of global refining capacity. For the purposes of this estimate, we used regionally distinct prices for the final oil products and coal qualities.

Prices for Brent, Urals crude and diesel in Northwest Europe, 2021-2022


Establishing a reference market price for natural gas is always more complicated than for oil or coal because there are large regional differences between different gas markets and transportation costs are significant. But as trade in liquified natural gas (LNG) has grown and as more prices are set by gas-to-gas competition, a typical year would see the differentials in traded prices in North America, Europe and Asia reflect the costs of moving gas between these markets, with North American prices being the lowest. However, 2022 was far from a typical year, with markets coming under incredible pressure because of the cuts in Russian deliveries to Europe. Long-term contract prices linked to oil remained relatively low and this enabled some importing countries – especially in Asia – to sidestep some of the market turbulence. But anyone buying gas on international markets that reflected the actual scarcity of gas faced a major escalation in price levels.

Infrastructure constraints played a part in the wide range of prices seen worldwide, as supply could not be reallocated in sufficient volumes to close price gaps despite the attractive opportunities for price arbitrage. These factors complicate the task of establishing indicative prices for key markets; our estimates aim to reflect a balance of different sources of gas. The figure below highlights how much gas prices changed year-on-year, with knock-on effects also on electricity prices.

Average benchmark prices of natural gas for selected region and countries, 2020-2022


Our assessment for fossil fuels does not take into account environmental externalities such as carbon prices. As we have shown in another analysis, incorporating a carbon price in the assessment of the ‘true value’ of these fuels would increase the reference values and, all else being equal, push up the estimate of fossil fuel subsidies.

Prices for end-consumers rarely move in lockstep with international prices because of various buffers, contractual provisions or other mechanisms to smooth volatility. In many cases, estimated subsidy levels increased in 2022 simply because of the gap between fixed end-user prices and the international reference levels. This was the case in many countries in the Middle East. But in the exceptional circumstances of 2022, governments found multiple ways to avoid passing on high and volatile prices to consumers. In some instances, these measures involved direct allocations from national budgets; in other cases (notably among the fossil fuel exporters), our subsidy estimates reflect income that is foregone by keeping domestic prices much lower than international benchmarks. Tax exemptions and reductions have a similar effect. 

These interventions (not all of which would be picked up as fossil fuel consumption subsidies by our methodology) can be categorised as follows:

Fixing prices or capping price increases, e.g.:

  • The Peruvian government decided in April 2022 to temporarily include a number of transport fuels in the State Fuel Price Stabilization Fund to reduce the rise in prices.  
  • Thailand introduced a diesel price cap of THB 30 (USD 0.85) per litre.
  • El Salvador introduced price caps for gasoline and diesel products.
  • Egypt extended the period for subsidising electricity, while it had previously been planning to stop doing so by the end of the fiscal year 2021-2022.
  • France enacted a "tariff shield" that initially froze electricity and gas retail tariffs for households and then limited the possibility for increases in price.

Exemptions from various taxes and levies, e.g.:

  • The South African government froze the general fuel levy on petrol and diesel from February 2022, and reduced it by of ZAR 1.50 (USD 0.9) per litre from April to June 2022.
  • Guyana removed the excise tax on gasoline and diesel in March.
  • The United Kingdom cut fuel duty, and Belgium reduced the VAT on electricity bills from 21% to 6%.

Easing payment terms or banning disconnections for non-payment:

  • Japan has eased gas and electricity payment terms for those struggling to pay.
  • In Spain, a “vital minimum supply” obligation for utilities was enacted from September 2021, ensuring vulnerable households unable to pay their electricity bills would still get supplied for a period of 10 months.

Compensation mechanisms for different affected groups of consumers, including households, businesses and industrial consumers:

  • In India, the Pradhan Mantri Ujjwala Yojana-subsidy scheme, which supports access to LPG for the poorest segments of the population, saw its cost reach USD 820 million. 
  • In Germany, the government implemented several additional payments to help vulnerable communities pay their heating bills (households on housing benefits, apprentices and students with student loans).
  • In Korea, vouchers for energy expenses – including electricity, gas, LPG and heating – were provided to around 1.2 million vulnerable households in 2022, and the voucher amounts were increased twice during the year.

Some of the actual budgetary expenditures were very large. For example, in Malaysia, MYR 5 billion (about USD 1 billion and equivalent to 2% of national fiscal revenue) was spent in June 2022 alone, and the government is planning to reform its gasoline subsidy to be more targeted in 2023. In Thailand, the elimination of excise tax on diesel and bunker oil for electricity generation has been extended and will continue to March 2023. In Europe, Germany has decided to spend nearly EUR 100 billion to reduce energy bills for the first four months of 2023 with EUR 56 billion for gas and district heating as well as EUR 43 billion for electricity.

Governments also spent considerable sums on recapitalisation, debt suspension and support for energy companies or key energy-intensive industries. For example, the Peruvian government authorised an exceptional injection of capital, as well as a loan guarantee, to state-owned Petroperú. France fully renationalised EDF to reinforce its financial position during the crisis and to ensure its ability to complete planned and unplanned maintenance work on its nuclear fleet. And Germany provided a EUR 13 billion credit line to Uniper, which operates thermal power generation assets, to secure the company's short-term liquidity.

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 some of the political challenges of doing so.

In an energy crisis, governments prioritise shielding consumers from damaging price impacts over commitments to phasing out subsidies. This was very visible in 2022 and resulted in a sharp rise in fossil fuel consumption subsidies and other measures to limit the impacts on energy bills. This reduced hardship but diminished the incentive for consumers to save or to switch to alternative – and cleaner – sources of energy, thereby delaying a lasting resolution of the crisis. It also drained public funds that could have been spent in other areas, including on clean energy transitions.

The jump in fossil fuel consumption subsidies in 2022 brings some important lessons on the prospects for orderly and people-centred transitions.

  1. Fossil fuel prices are not the best way to drive clean energy transitions. Imbalanced or poorly sequenced approaches to transitions, in which fuel supply is cut ahead of demand, create clear risks of further price spikes, and there is no guarantee that such episodes are unambiguously good for transitions. As noted in the World Energy Outlook 2022, “high fossil fuel prices are no substitute for climate policies”. In practice, concerns about affordability can reduce the attention and money that policymakers devote to clean energy. They can also in some cases (as seen in 2022) prompt higher use of more polluting fuels, i.e. a switch from gas to coal. And the inflationary pressures push up borrowing costs to the detriment of capital-intensive clean energy investments.
  2. High fossil fuel prices hit the poor hardest, but subsidies are rarely well-targeted to protect vulnerable groups and tend to benefit better-off segments of the population. This was demonstrated again in 2022, as the political priority to respond quickly often overrode the more painstaking task of directing support where it was needed most. Effective targeting requires prior investment in better data collection and in setting up effective cash transfer mechanisms.
  3. Better to spend on structural changes than on emergency relief. Resources are best deployed in promoting changes that provide lasting protection against volatile fuel prices. This means anchoring market-based prices in a broader suite of policies and measures that enable cleaner choices by households and industries. This should make high-efficiency and low-emissions equipment and services readily available, and help poorer consumers to manage the upfront costs of these investments.

  1. In order to calculate subsidy levels, there are three typical methods (Sovacool, 2017; Koplow, 2018), including:

    - Program-specific estimation is an inventory approach used to identify and quantify the sources of energy subsidies

    - A price-gap analysis – an approach that tries to identify the gap by comparing reference prices with end user prices for consumers; this is the approach used in this commentary:

    By combining the aforementioned two methods, total support estimates aim to determine the total consumer and producer support levels. This is the approach used in the joint OECD/IEA work.

  2. This analysis will be refined as more data on end-user prices becomes available. In other advanced economies, the situation is more clear-cut. In Japan, for example, the average end-user price for natural gas in 2022 was around USD 35/Mbtu; whereas market reference prices including distribution costs and VAT were about USD 25/Mbtu.

  3. Reference: Sovacool, B. (2017), “Reviewing, reforming, and rethinking global energy subsidies: Towards a political economy research agenda”, Ecological Economics, Vol. 135, pp 150–163.

  4. Reference: Kolpow, D. (2018), “Defining and measuring fossil fuel subsidies”, in The Politics of Fossil Fuel Subsidies and Their Reform, Cambridge University Press, Cambridge.

  5. Reference: Taylor, Michael (2020), Energy subsidies: Evolution in the global energy transformation to 2050, International Renewable Energy Agency, Abu Dhabi.