Global fossil fuel subsidy levels peaked at an all-time high of $1.5 trillion in 2022, after having oscillated between $400 and 800 billion annually in the preceding 10 years. Although the trillion-dollar mark was breached in large part due to the post-Covid-19 economic rebound and the Russian invasion of Ukraine, the magnitude of subsidies is a testament to the scale of the structural challenges ahead. Yet the imperative of phasing out fossil fuel subsidies—the adverse environmental and socioeconomic effects of which are well-documented—is clear (see here, here, and here). For instance, the Intergovernmental Panel on Climate Change finds that “fossil fuel subsidy removal is projected [ … ] to reduce global CO₂ emissions by 1–4%, and [greenhouse gas] emissions by up to 10% by 2030, varying across regions.” In terms of its socioeconomic impacts, less than 3% of subsidies for fossil fuel consumption in developing countries are captured by the poorest 20%.

Accordingly, governments have repeatedly acknowledged the need to reform fossil fuel subsidies, formalized through numerous international commitments. G20 economies first committed to “rationalize and phase-out over the medium-term inefficient fossil fuel subsidies that encourage wasteful consumption” in 2009. Similar commitments were made by all UN members under the 2015 Sustainable Development Goals (SDG Target 12.c). Moreover, in the context of the international climate change regime, the outcome of the first global stocktake under the Paris Agreement, adopted in late 2023, called on parties to make progress on phasing out inefficient fossil fuel subsidies “as soon as possible.” While some parties have also included references to fossil fuel subsidies in their nationally determined contributions submitted under the agreement, very few of those references clearly commit those parties to eliminating subsidies by a given date. The G7 is the only intergovernmental forum that has set an explicit deadline for eliminating inefficient fossil fuel subsidies—i.e. 2025—but its members are highly unlikely to meet this target (see Figure).

Responding to the weaknesses of the current set of international commitments to phase out fossil fuel subsidies, here we suggest how to make them work better. Our focus is on strengthening existing voluntary, non-binding commitments, noting that there are parallel, ongoing efforts at the World Trade Organization that could eventually result in legally binding disciplines on fossil fuel subsidies.

Source: Data taken from Fossil Fuel Subsidy Tracker (2024). Increases in 2022 were driven by increases in petroleum, fossil gas, and end-use electricity subsidies, especially in Italy, Japan, and the United Kingdom, underscoring the importance of the national context for these subsidies.

Fossil fuel subsidies support the consumption and production of coal, fossil gas, oil, and fossil-fuel-generated electricity. Consumption subsidies target energy users mainly through pricing fuels below market rates or reducing excise taxes. Production subsidies take the form of tax breaks, grants, and favorable loans to boost fossil fuel supply.

Phasing out these subsidies faces obstacles that are deeply rooted in countries’ domestic political and economic structures. Beyond actors benefitting from fossil fuel subsidies generally being better organized than those opposed to them, in countries with large fossil fuel resources, subsidies are used as a tangible way of distributing resource rents to the public, which in turn increases support for the government. Furthermore, in countries with limited information on the income of individual households, it is difficult to compensate those adversely affected by fossil fuel subsidy reform. Under these conditions, fossil fuel subsidy reforms have faced protests in countries from Ecuador to Nigeria and have, in many cases, been rolled back.

Fossil fuel subsidy reforms work best if they are tailored to countries’ political and economic circumstances. Hence international commitments should ensure that international pressure and incentives are congruent with the domestic factors that determine what is feasible. Existing commitments are all rather imprecise (e.g., they target “inefficient” subsidies without defining the term) and ignore domestic contexts. The commitments should be more specific than existing ones by establishing basic principles that countries should adhere to. But, at the same time, they should offer countries some flexibility in implementing the commitments within the constraints of these principles.

International commitments should require countries to submit their own time-bound roadmaps indicating how they will phase-out their fossil fuel subsidies. The roadmaps should set out a national framework that applies to all fossil fuel subsidies across the economy, and define terms such as “subsidies” and “(in)efficient.”

Such roadmaps should, first of all, include clear deadlines. For G7 countries, the roadmaps should target the existing 2025 deadline. The remaining G20 and OECD countries should adopt deadlines that immediately follow the G7 one, such as 2027 for OECD countries and 2030 for non-OECD G20 countries; all other countries should be strongly encouraged to adopt similar deadlines. Second, the roadmaps should include milestones towards the full phase-out of subsidies, for instance initially focusing on less politically contested reforms or the most environmentally damaging subsidies (e.g. to coal), or reducing the scope of subsidies from universal to targeted at low-income households. It is quite possible that several countries will not meet their deadlines. Therefore, provisions should be made for updating roadmaps so as to meet the deadlines as soon as possible. Third, countries should agree to a ‘standstill’ policy on subsidies—i.e. commit not to introduce new subsidies. Governments often resort to fossil fuel subsidies in the case of price shocks. Standstill policies can anticipate this situation by creating alternative administrative capacity for assisting households and businesses during energy price shocks and establishing expectations to ensure that, if new subsidies are introduced after a drastic price shock, they will be truly temporary. Fourth, the roadmaps should include commitments to report (bi)annually on progress against milestones, and to update reform targets and strategies as needed.

Roadmaps can help to change state behaviour in several ways. First, by articulating nationally understood definitions of subsidies and efficiency, roadmaps can reduce the ambiguity present in global agreements on subsidy reform. Some countries may adopt definitions that are insufficiently ambitious, but articulating a definition establishes a foundation for a discussion to help ratchet up that ambition. There can also be positive feedback loops if global agreements close loopholes (see below). Second, roadmaps—even if they are non-binding policy documents—could strengthen the hand of domestic accountability mechanisms such as national audits and parliamentary inquiries. Third, roadmaps allow for civil society organizations (CSOs) and other countries to hold governments accountable in case they fail to meet the deadlines and milestones set out in the roadmaps, as well as praise those countries that do follow their roadmaps, similar to how they have held governments accountable to non-binding commitments on transboundary pollution and human rights. Fourth, roadmaps can reduce the risk of fossil fuel investors successfully challenging governments’ fossil fuel subsidy phase-outs in investment dispute mechanisms, as clear expectations will have been established that the policy environment will change over time. Conversely, if a country is not living up to its own commitments in a roadmap, it may be challenged by CSOs through domestic court cases. Lastly, the mere process of drafting roadmaps and progress updates would make phasing out fossil fuel subsidies a regular feature on the day-to-day agenda of policymakers, which could lead to the creation of working groups and other structures spanning several government departments.

The default for international commitments should be that all fossil fuel subsidies should be phased out within a reasonable timescale (building on the immediate deadlines for the G20 and OECD countries mentioned in the previous section). This also means that loopholes that allow countries to claim that their subsidies are not covered by the commitment should be closed. Examples include the notion that exemptions to or reductions in taxes do not constitute subsidies, or that the commitments apply only to “inefficient” subsidies that encourage “wasteful consumption”. Experience from the G20 commitment shows that even countries that were subject to peer review, such as Germany and Mexico, could defend the status quo by claiming that their subsidies were not inefficient. A better approach would be to instead assume that all fossil energy subsidies are “inefficient” unless proven otherwise, with governments setting out clear criteria that justify an “efficient” subsidy that should be exempt from reforms, for instance, because it supports a just transition. These criteria should consider subsidies’ full economic, social, and environmental impacts and whether alternative non-fossil-subsidy policy tools could achieve the same outcomes. For example, subsidies for liquefied petroleum gas can in some circumstances be important for clean cooking, and may only be fully removed once alternative non-fossil cooking technologies are deployed. In such cases, a reform plan can still be articulated—restricting the scope of subsidies in the short-term to improve efficiency, while supporting non-fossil alternatives over the medium-term.

Countries should also be encouraged to replace general price subsidies with more targeted policies, such as cash payments to those most adversely affected by the reforms. Progress updates should also help ensure that countries revisit the assumptions behind these subsidies, for example, if they were needed at some point to address energy poverty, but that need has disappeared. Requiring countries to justify why certain subsidies are omitted from their roadmaps enables CSOs and other actors to challenge the rationale of an exemption similarly to how they can hold it accountable for not following the roadmap.

One major stumbling block for reform in lower-income countries is inadequate resources, which, for example, could result in insufficient compensation for the poor. Roadmaps can address this obstacle if lower-income countries use them to identify their needs for financial and technical assistance and call for such assistance. A realistic prospect of financial and technical support may reduce the reluctance of governments to reform fossil fuel subsidies.

Innovative mechanisms for such support will likely be needed. One option is to provide funding for the roll-out of low-carbon alternatives ahead of, or in parallel with, the reform, tied to the milestones in the roadmap. As an example, Egypt gradually increased fuel prices, including for transport fuels, against an announced schedule between 2016 and 2018, with one mitigation measure being “the opening of a third metro line that significantly improved public transit connectivity across Cairo.” Beyond public transport, such an approach could involve, say, improving energy access (using cleaner energy), energy efficiency, electric vehicles (including bicycles), and renewable energy.

Access to capital for up-front investments at affordable interest rates can be challenging in developing countries, and international support could be provided using a combination of grants and subsidized capital such as bonds. Industrialized countries or multilateral development banks would continue to make tranches of investment available as steps are taken along the roadmap, for example, as scheduled price rises on gasoline are made. If the reform were not delivered, further investment would not be made.

Another mechanism could consist of industrialized countries providing funding that locks in reform. For example, a country could sign up for a reform-bonus mechanism related to the resources it saves. If reform then leads to savings of, say, US$1 billion, the country would receive a 10% premium of US$100 million into an independently managed escrow account. However, this bonus would automatically be reduced or eliminated entirely if the reform is reversed.

Successful phase-outs in lower-income countries could also increase pressure on industrialized and emerging economies to adhere to their roadmaps since actors opposing subsidies could point out that if poorer countries can phase out their subsidies, so should richer ones.

So far, international commitments have had, at best, modest impacts on fossil fuel subsidy levels. Committing states to roadmaps, closing loopholes, and providing support are pivotal ways in which international commitments can help to advance the phase-out of fossil fuel subsidies. Our proposal for more effective international commitments addresses the domestic political obstacles that have hindered previous commitments. The proposal does so by granting governments the necessary flexibility while channelling and strengthening domestic and international forces working to realize a subsidy phase-out. Countries that want to champion fossil fuel subsidy reform will have increased opportunities to take these ideas forward in the G7, G20, and the UNFCCC, especially within the next couple of years. Coalitions of countries that span industrialized and developing countries will have the greatest legitimacy and chance of success in doing so.

* This article was first published in npj climate action.

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Jakob Skovgaard is Associate Professor and Senior Lecturer, Department of Political Science, Lund University.

Harro van Asselt is Hatton Professor of Climate Law, University of Cambridge.

Christopher Beaton is Director, Energy Program, Public Financial Flows, International Institute for Sustainable Development (IISD).

Evan Drake is Doctoral Student, Department of Political Science, Lund University.

Natalie Jones is Policy Advisor, Energy Program, International Institute for Sustainable Development (IISD).

Neil McCulloch is Director, The Policy Practice.

Ronald Steenblik is Senior Technical Advisor, Quaker United Nations Office, Geneva.

Peter Wooders is an independent energy specialist.

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Synergies by TESS is a blog dedicated to promoting inclusive policy dialogue at the intersection of trade, environment, and sustainable development, drawing on perspectives from a range of experts from around the globe. The editor is Fabrice Lehmann.

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