Expert Speak Terra Nova
Published on Jul 27, 2023
The primary reason behind the difficulty in phasing out subsidies arises from the fact that energy subsidies are deeply rooted in the political economy of the countries
The war against fossil fuel subsidies: Is victory in sight? In September 2009, leaders of the G20 countries committed to a war on fossil fuel subsidies to achieve the goals of energy security and climate protection. Research and advocacy activities to understand and combat fossil fuel subsidies were accelerated in OECD (organisation of economic cooperation & development) countries. The International Institute for Sustainable Development (IISD), the World Bank (WB), International Monetory Fund (IMF) and the International Energy Agency (IEA) were among the front-line forces in the war against fossil fuel subsidies.  The World Energy Outlook 2010, an annual publication of the IEA carried a special section on fossil fuel subsidies that observed that the subsidy-phase out between 2011 and 2020 would reduce primary energy demand by 5.8 percent (equivalent to the then energy consumption of Japan, Korea, Australia and New Zealand combined), reduce oil demand by 6.5 mb/d (million barrels per day) equal to a third of US oil demand by 2020 predominantly in the transportation sector and reduce CO2 (carbon dioxide) emissions by 6.9 percent by 2020 or 2.4 GT equivalent (giga tonnes equivalent) equal to the emissions of France, Germany, Italy, Spain and UK combined. The report pointed out that ‘notable reforms’ in countries including India, China, Russia and Indonesia to bring domestic energy prices in line with world prices would contribute to a reduction in the cost of energy subsidies.  In 2008, oil product subsidies estimated at US$ 312 billion dominated total subsidies followed by natural gas at US$ 204 billion and coal at US$ 40 billion.  Referring back to the ‘450 scenario’ which is one of the scenarios projected by the IEA in its 2009 World Energy Outlook reports, the IEA subsidy study concluded that implementing the Copenhagen accord and the G20 subsidy commitment would reduce emissions by 70 percent and 30 percent respectively by 2020 and put the world on track to meet the 2°C target by 2020. The core argument was that subsidies were offered to keep the price of fossil fuels below the level in an undistorted market, leading to higher levels of consumption than would occur in their absence. IEA’s subsequent publications continued to discuss fossil fuel subsidies as a key barrier to adoption of climate friendly policies in developing countries. The IISD introduced a dedicated programme on energy subsidies called ‘Global Subsidies Initiative’ under which many research programmes were carried out.

Current Status

The global subsidies tracker that includes data for 192 countries for 2020 and partial data for 82 major economies for 2021 shows that fossil fuel subsidies have not reduced as expected.  Subsidies were driven by energy prices, geopolitical events such as the conflict in Ukraine and global challenges such as COVID 19 rather than by climate change concerns.  In 2010, fossil fuel subsidies were estimated at US$621.25 billion (nominal US$). In 2013 fossil fuel subsidies touched a peak of US$844.81 billion on account of crude oil prices that remained above US$100/barrel (b) from 2010-2014. In 2016, fossil fuel subsidies fell to US$ 465.16 billion reflecting the fall in oil prices to about US$ 50/b that year. In 2021, fossil fuel subsidies increased to US$731.65 billion because of the dramatic increase in the price of globally traded natural gas as well as the increase in the price of crude oil and coal. In 2010-22, global energy consumption has increased by over 18 percent and CO2 emissions have increased by over 10 percent. Reports from IISD, WB, IMF and the IEA have assigned blame on the unwillingness of governments to reduce fossil fuel subsidies. A survey-based study by these agencies conducted in developing countries including India shows that most people agreed that fossil fuel subsidies must be phased out to address climate change. This added credibility to the claim that people are willing but governments are weak.


For India which is listed among key subsidy offenders, none of the information generated by the WB, IMF, IEA and IISD programmes is new. Indian policy makers know that the subsidy schemes are well intended but leakages in the system, both financial and social, are counterproductive in that they serve interests of unintended constituencies.  They also know that energy subsidies impose extreme stress on public finances and that the schemes only partially meet the goals of the subsidy policy which is to improve energy access to the poor. In India, petroleum subsidies (for Kerosene and LPG) have been phased out. Even when subsidies for LPG and Kerosene were in place, the tax take on petroleum products such as diesel and petrol was more than three times the subsidy outgo. Today taxes on petroleum products account for a major share of federal and regional revenue. However, “subsidies” persist on electricity. The ‘time inconsistency’ of electricity subsidies whereby the near-term benefits of subsidies (such as electoral victories) are bestowed on the current regime while costs are passed on to future regimes does not offer any incentive for changing the system. Well-organised minorities, the articulate and politically active Indian middle class (also the biggest electricity consuming group that appropriates most of the subsidies on electricity intended for the energy poor in India) prevents reform and re-targeting of electricity subsidies to the poor who are the intended beneficiaries. In India, electricity “subsidies” are price distortions and cross-subsidies rather than under-pricing of electricity. The price distortions are a part of India’s well intended energy redistribution schemes to compensate for economic and social inequalities. However, electricity price interventions and cross subsidisation misallocates resources - both energy and investment - in addition to facilitating widespread leakage and abuse in the sector.  In order to compensate for this gross inefficiency, electricity prices are maintained at the highest possible level in India. This inefficiency penalty imposed on the average Indian energy consumer is so high that when compared to energy prices in other countries in purchasing power parity terms energy prices in India are often among the highest in the world. If the administrative and economic inefficiencies in energy pricing in India are corrected, the price of energy is likely to decrease rather than increase. This may lead toan  increase in energy consumption and a consequent increase in CO2 emissions. In the case of petroleum, the build-up in prices is largely a result of federal and regional taxes which reflects the inefficiency in distributive policies, social and economic sector reforms and governance of the economy in general. Indirect taxes on petroleum are easy to collect and even easier to appropriate.  In the case of electricity, the build-up in prices is largely a result of political inefficiency, theft and technical losses along the way.  Electricity available at a price of about INR 1/kWh (kilowatt hour) at the bus bar transforms into INR 6-7/kWh when it is delivered to the consumer. The huge penalty for inefficiency that is built into the price of energy is conveniently hidden by the subsidy narrative. The Indian energy consumer is not subsidised; he is subsidising the inefficiency in the sector.  For sustainable reform of the energy sector, the subsidy narrative needs to be reframed as one of inefficiency and poor governance rather than a simplistic issue of under-pricing energy. The primary reason behind difficulty in phasing out subsidies arises from the fact that energy subsidies (both for non-fossil fuels and for fossil fuels) are deeply rooted in the political economy of countries. The failure to reform subsidies, not just in India but in many other countries including rich countries such as the United States which offers substantial overt subsidies to fossil fuel producers, lies in the political economy of subsidies making victory in the war against fossil fuel subsidies elusive.  Source: Fossil Fuel Subsidy Tracker
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