PARIS - Government support measures for the production and consumption of fossil fuels decreased sharply in 2023, as energy prices softened from record highs seen in 2022. However, many measures remained in place and, in some cases, even increased.
This is despite pledges to phase out inefficient fossil fuel subsidies and increase climate action.
New OECD and IEA data show that the fiscal cost and implicit support of government support for fossil fuels across 82 economies dropped by almost one third, from USD 1.6 trillion in 2022 to USD 1.1 trillion in 2023.
Many governments maintained substantial initiatives to alleviate the burden of high energy bills on households and firms, most of which translated into support for fossil fuel production and consumption. Policy responses to the 2022 energy crisis were largely intended as temporary measures, but many are still in place. In addition, most of this support was not systematically targeted to those most in need, raising both equity and efficiency concerns.
The OECD and IEA continue to call for more ambitious action to phase out inefficient fossil fuel support and re-direct public funding toward the development of low-carbon alternatives, alongside improvements in energy security and energy efficiency. Governments should also reform existing support measures to better target those most in need. Given the high costs of inaction, governments should reaffirm and implement their commitments to the Sustainable Development Goals by phasing out and reforming inefficient fossil fuel support, thereby aligning fiscal policies with climate objectives.
Key messages
- The fiscal cost of government support for fossil fuels fell by around one thirdin 2023 toUSD1.1 trillion, down from USD 1.6trillion in 2022, reflecting in large part a decline in energysupply costs from record highs in 2022. This decline lowered the reference price, and thusthe estimated value of fossil fuels sold below this reference price. Yet, with many measuresto support production and consumption of fossil fuels still in placeor increasing, thefiscal costof support to fossil fuels remains elevated relative toits historical average.
- Most (90%) of the fiscal cost of support related tothe consumption of fossil fuels. The fiscalcost ofsupport for residential users increased by 29%to record highs, reaching USD 189.3billion in 2023 (from USD 146.4billion in 2022), while formanufacturing and other industriesitincreasedby14% to USD 103.8 billion in 2023(from USD 90.9 billion in 2022). Most of thissupport lacked systematic targeting towards those in greatest need, raising both equity andefficiency concerns.
- Economic incentives to decarbonisefrom fuel taxes, carbon taxes, emissions trading systems(ETSs) and price-reducing support mechanisms –summarised in the net Effective CarbonRate (Net ECR) declined compared to 2021. While carbon taxes and ETSpricessaw modestincreases, the increase in support measures throughdirect budgetary transfersfor fossil fuelsand low fuel excise rates led to a decrease in the average NetECR to EUR 14.0/tCO2e in2023 from EUR 17.9/tCO2e in 2021.
— In 2023, as in2021, the share of GHG emissions covered by a positive Net ECRremainedunchanged was42%;27% of GHG emissions are covered by explicit carbon prices (carbontaxes or ETSs).
- The high fiscal costof government support for fossil fuelsand low Net ECRhighlight thechallenges of staying on track with net zero commitments in the face of economic andgeopolitical pressures.
- Reforms should focus on better targetingthose most in need andphasingoutinefficientsupport for fossil fuels as soon as possible to enable the release of much-needed resourcesfor the net zero transitionand help accelerate innovationforenergy efficiency.
- Given the high costs of inaction, governments shouldreaffirm and implement their SDGcommitment to phase out and reform inefficient support to fossil fuels to align fiscal policywith climate goals.
For the full report, visit: https://www.oecd.org/content/dam/oecd/en/publications/reports/2024/11/oecd-inventory-of-support-measures-for-fossil-fuels-2024_bd47de52/a2f063fe-en.pdf
