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What are fossil fuel subsidies?

A fossil-fuel subsidy is a financial benefit that a government provides to producers or consumers of fossil fuels. Among others, this can take the form of a direct cash handout, a preferential tax treatment or price support to lower fuel prices below market price.

For the purposes of the Fossil Fuel Subsidy Tracker and consistent with inclusion of OECD, IEA and IMF data, fossil-fuel subsidies and other support measures encompass direct budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, along with induced transfers (price support), adopting the OECD Inventory approach for direct budgetary transfers and tax expenditures, and the IEA and IMF approach for induced transfers (see Methodology section).

Why should fossil-fuel subsidies be reformed?

The combustion of fossil fuels in power plants, vehicles, machinery, and dwellings continues to be a leading contributor to global anthropogenic greenhouse-gas emissions. Although many governments have already taken steps to reduce the carbon intensity of their economies, some policies remain in place that encourage more production and use of fossil fuels than would otherwise be the case. Fossil-fuel subsidies are one such policy.

Not only do fossil-fuel subsidies undermine global efforts to mitigate climate change, but they also aggravate local pollution problems, causing further damage to human health and the environment. They represent a considerable strain on public budgets as well, draining scarce fiscal resources that could be put to better use, such as strategic investment in the education, skills, and physical infrastructure that people value most in the 21st century. Lastly, fossil-fuel subsidies distort the costs and prices that inform the decisions of many producers, investors, and consumers, thereby perpetuating older technologies and energy-intensive modes of production.

Governments have committed to phasing out inefficient fossil-fuel subsidies in the context of the G20, G7 and APEC forums, and SDG 12 “Ensure sustainable consumption and production patterns” incorporates the target to “rationalise inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions” (Target 12.c). 

Why is it important to track fossil-fuel subsidies transparently?

Without understanding the magnitude of fossil-fuel subsidies, it is hard to understand their full impact: the degree to which they strain government budgets, distort energy markets, and cause environmental harm, including by working against efforts to curb climate change. The importance of measuring fossil-fuel subsidies has been recognised in the SDG process with a dedicated indicator (12.c.1—“Amount of fossil-fuel subsidies per unit of GDP (production and consumption)”). Reporting against a global indicator of fossil-fuel subsidies will, for the first time, provide a more comprehensive, government-led global picture that encompasses both consumer and producer subsidies, to complement existing tracking efforts of international organisations. It will allow researchers and governments to track national and global progress and serve as an important tool for policy-making. However, country reporting is likely to take some time to get up and running and there will be an ongoing role for international data to enhance comparability of country-led reporting. The Fossil Fuel Subsidy Tracker brings together existing international estimates of support for fossil fuels, to help bridge the reporting gap. Comprehensive information on support for fossil-fuel production and consumption is also needed to track progress against government commitments to phase out “inefficient fossil-fuel subsidies” in the context of the G20, G7 and APEC forums.

About IISD

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The International Institute for Sustainable Development (IISD) is an award-winning independent think tank working to accelerate solutions for a stable climate, sustainable resource management, and fair economies. Our work inspires better decisions and sparks meaningful action to help people and the planet thrive. We shine a light on what can be achieved when governments, businesses, non-profits, and communities come together. IISD’s staff of more than 120 people, plus over 150 associates and consultants, come from across the globe and from many disciplines. Our work affects lives in nearly 100 countries.

IISD is a registered charitable organization in Canada and has 501(c)(3) status in the United States. IISD receives core operating support from the Province of Manitoba and project funding from governments inside and outside Canada, United Nations agencies, foundations, the private sector, and individuals.

About OECD

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The Organisation for Economic Co-operation and Development (OECD) is an international organisation that works to build better policies for better lives. The OECD’s goal is to shape policies that foster prosperity, equality, opportunity and well-being for all. The Organisation draws on almost 60 years of experience and insights to better prepare the world of tomorrow.

Together with governments, policy makers and citizens, the OECD works on establishing evidence-based international standards and finding solutions to a range of social, economic and environmental challenges. From improving economic performance and creating jobs to fostering strong education and fighting international tax evasion, it provides a unique forum and knowledge hub for data and analysis, exchange of experiences, best-practice sharing, and advice on public policies and international standard-setting.