Fossil fuel subsidies

The sustained interest in energy subsidy reform reflects the increasingly recognized negative environmental, fiscal, macroeconomic, and social consequences of energy subsidies.

The Addis Ababa Action Agenda specifically:

  • Reaffirms the commitment to rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities

Update from the 2019 Financing for Sustainable Development Report

Environmental taxes applied to consumption goods, such as heating and cooking fuels, could represent a higher proportion of a poor household’s income than a rich household’s income, depending on the design and national circumstances. There is popular perception that the regressive effects make environmental taxes undesirable despite their environmental benefits. This concern is most prominent in relation to energy and fossil fuel pricing, as many countries use fossil fuel subsidies to try to reduce the price of necessities. In the last few years many national efforts at fossil fuel subsidy reform and environmental taxation have been derailed by popular protest against the perceived inequities of the policies, while other countries have successfully implemented reforms.

Despite the perception of regressivity, if properly structured, the effect of reforms on the poor can be off- set by using the revenue for redistributive expenditure, similar to other taxes. A large portion of the value of some subsidies may be captured by the rich. For example they may have greater access to vehicles, often with low fuel efficiency. Country experiences show that the likelihood of success in subsidy reform almost triples with strong political support and proactive public communications. Clear communication about beneficiaries is important because political acceptability may be tied to the use of the revenue.

Read more on inequality, energy pricing and environmental taxation here.

Relevant SDG indicator