Abolishing fuel subsidies in a green and just transition

Abolishing fossil fuel subsidies and directing the funds to renewable energy seems like an easy win for the climate: After all, fossil fuel subsidies account for 0.5% of global GDP, almost exactly the size of the funding gap needed to comply with the Paris Accord . But getting rid of them comes with steep costs for consumers, particularly the poorest households. Estimates from the OECD and IEA put the total value of fossil fuel subsidies at USD468bn as of 2019 (for 81 countries). These subsidies outpace those for renewable energy in most countries, with the EU-28 and the US being notable exceptions. The most likely determinant is the presence of a large domestic fossil fuel industry, which tends to have strong political and lobbying power in many countries. Exceptionally high subsidies are thus paid in the MENA region (Middle East & North Africa) as well as in Australia and Venezuela. 

While fossil fuel subsidies have been declining at the global level, the trend is not nearly sufficient to reach climate ambitions. IRENA’s estimates suggest that fossil fuel subsidies will have to fall below USD139bn by 2050 for a 1.5°C compatible energy transition pathway. More than half of current fossil subsidies benefit petroleum products . IRENA projects total energy subsidies (renewable and fossil) to decline by 26% until 2030 and stabilize from 2030 onward, since the 69% drop in fossil fuel subsidies will not be fully compensated by the increase in renewable subsidies. The main reason is that renewable energy will become cheaper and thus require relatively less state support. As this cost deflation is largely driven by economies of scale, a larger share of the cost burden will fall on the first movers. A broad and coordinated effort with the developed economies as well as China and India in the lead, would allow for a fair distribution of the initial burden.

The persistence of subsidies towards fossil fuels stems from the political and lobbying power of the sector in many economies along with the lower pace of energy transition that we expect in emerging economies. Subsidies persist for several reasons: lack of disclosed information regarding the amount, distribution, and effects of subsidies; weak institutions unable to better target subsidies; lack of confidence in the government’s use fiscal revenues from abolishing subsidies (especially in countries prone to corruption); concerns over harmful impact on the poor and over general economic impact (inflation, competitiveness); or weak macroeconomic conditions.


Ano Kuhanathan
Allianz Trade
Markus Zimmer
Allianz SE