Fossil Fuels Consumption Subsidies 2022

Prices for fossil fuels were extraordinarily high and volatile in 2022 as energy markets grappled with the strains caused by Russia’s invasion of Ukraine – in particular the sharp cuts in Russian natural gas deliveries to Europe. In many countries, though, the prices actually paid by consumers for these fuels remained at a much lower level. A range of policy interventions insulated consumers from ballooning prices, but with the adverse effect of keeping fossil fuels artificially competitive with low-emissions alternatives. In 2022, subsidies worldwide for fossil fuel consumption skyrocketed to more than USD 1 trillion, according to the IEA’s latest estimate, by far the largest annual value ever seen.

The IEA has been tracking fossil fuel subsidies for many years, examining instances where consumer prices are less than the market value of the fuel itself (adjusted for transport costs and VAT, as applicable). Our first estimates for 2022 show that subsidies for natural gas and electricity consumption more than doubled compared with 2021, while oil subsidies rose by around 85%. The subsidies are mainly concentrated in emerging market and developing economies, and more than half were in fossil-fuel exporting countries.

In addition to these consumption subsidies, the IEA has tracked more than USD 500 billion in extra spending to reduce energy bills in 2022, mainly in advanced economies, with around USD 350 billion of this in Europe. This spending is not necessarily captured in our methodology as a fossil fuel consumption subsidy because average end-user prices are still sufficiently high to cover the value of the market fuel in question1. In Europe, preliminary analysis shows that average end-user prices were close, in some cases, to the market reference values2. Nonetheless, spending to bring down energy bills represents a significant fiscal burden for governments and, as is often the case with such measures, these interventions have not always been well targeted. Furthermore, it risks diminishing the incentive to use energy efficiently or to switch to cleaner fuels.

In November 2021, the Glasgow Climate Pact called on countries to “phase-out … inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable”. Our analysis shows that, over the last year, many new government measures were implemented that limited the passing on of high international fossil fuel prices to consumers.

Some of these measures can be defended as social or political necessities, given the hardship that full exposure to market-driven prices could have caused. But the scale of these interventions is still a worrying sign for energy transitions. While many other measures taken by governments are serving to accelerate transitions, these price interventions worked in the opposite direction by favouring the incumbent fuels.

In this report, we explain how we approached the subsidy calculations in the exceptional circumstances seen in 2022, consider the various responses by governments, and assess the broader implications for energy transitions. 

Prices for end-consumers rarely move in lockstep with international prices because of various buffers, contractual provisions or other mechanisms to smooth volatility. In many cases, estimated subsidy levels increased in 2022 simply because of the gap between fixed end-user prices and the international reference levels. This was the case in many countries in the Middle East. But in the exceptional circumstances of 2022, governments found multiple ways to avoid passing on high and volatile prices to consumers. In some instances, these measures involved direct allocations from national budgets; in other cases (notably among the fossil fuel exporters), our subsidy estimates reflect income that is foregone by keeping domestic prices much lower than international benchmarks. Tax exemptions and reductions have a similar effect. 

These interventions (not all of which would be picked up as fossil fuel consumption subsidies by our methodology) can be categorised as follows:

Fixing prices or capping price increases, e.g.:

• The Peruvian government decided in April 2022 to temporarily include a number of transport fuels in the State Fuel Price Stabilization Fund to reduce the rise in prices.  
• Thailand introduced a diesel price cap of THB 30 (USD 0.85) per litre.
• El Salvador introduced price caps for gasoline and diesel products.
• Egypt extended the period for subsidising electricity, while it had previously been planning to stop doing so by the end of the fiscal year 2021-2022.
• France enacted a "tariff shield" that initially froze electricity and gas retail tariffs for households and then limited the possibility for increases in price.

Exemptions from various taxes and levies, e.g.:

• The South African government froze the general fuel levy on petrol and diesel from February 2022, and reduced it by of ZAR 1.50 (USD 0.9) per litre from April to June 2022.
• Guyana removed the excise tax on gasoline and diesel in March.
• The United Kingdom cut fuel duty, and Belgium reduced the VAT on electricity bills from 21% to 6%.

Easing payment terms or banning disconnections for non-payment:

• Japan has eased gas and electricity payment terms for those struggling to pay.
• In Spain, a “vital minimum supply” obligation for utilities was enacted from September 2021, ensuring vulnerable households unable to pay their electricity bills would still get supplied for a period of 10 months.

Compensation mechanisms for different affected groups of consumers, including households, businesses and industrial consumers:

• In India, the Pradhan Mantri Ujjwala Yojana-subsidy scheme, which supports access to LPG for the poorest segments of the population, saw its cost reach USD 820 million. 
• In Germany, the government implemented several additional payments to help vulnerable communities pay their heating bills (households on housing benefits, apprentices and students with student loans).
• In Korea, vouchers for energy expenses – including electricity, gas, LPG and heating – were provided to around 1.2 million vulnerable households in 2022, and the voucher amounts were increased twice during the year.

Some of the actual budgetary expenditures were very large. For example, in Malaysia, MYR 5 billion (about USD 1 billion and equivalent to 2% of national fiscal revenue) was spent in June 2022 alone, and the government is planning to reform its gasoline subsidy to be more targeted in 2023. In Thailand, the elimination of excise tax on diesel and bunker oil for electricity generation has been extended and will continue to March 2023. In Europe, Germany has decided to spend nearly EUR 100 billion to reduce energy bills for the first four months of 2023 with EUR 56 billion for gas and district heating as well as EUR 43 billion for electricity.

Governments also spent considerable sums on recapitalisation, debt suspension and support for energy companies or key energy-intensive industries. For example, the Peruvian government authorised an exceptional injection of capital, as well as a loan guarantee, to state-owned Petroperú. France fully renationalised EDF to reinforce its financial position during the crisis and to ensure its ability to complete planned and unplanned maintenance work on its nuclear fleet. And Germany provided a EUR 13 billion credit line to Uniper, which operates thermal power generation assets, to secure the company's short-term liquidity.