For decades, governments have subsidised fossil fuels. But why?

Written by Bernard Njindan Iyke, Lecturer in Finance, La Trobe University

Even now, decades after we first began trying to avert the worst of global warming, more than 80% of the world’s total energy comes from fossil fuels.

You might think this would make fossil fuel production extremely profitable. But it’s not always the case. Much of the most accessible oil has already been extracted and burned. Many countries want to shore up domestic sources of fossil fuels to boost energy security. Energy price fluctuations and competition from new energy sources such as solar, wind and fossil gas have made it harder for some fossil fuel companies to make money, especially in coal.

This is where fossil fuel subsidies come in. Australia gave A$14.5 billion in subsidies to major fossil fuel producers and consumers in 2023–24 alone.

You might have wondered – why would some of the largest companies on Earth need subsidies? Here’s why.

Australia’s surging liquefied natural gas industry has been boosted by government funding. KDS Photographics/Shutterstock

Private companies, public money

Globally, private companies dominate fossil fuel production, though fossil fuel-rich nations often have state-owned companies, such as Saudi Arabia’s Aramco and Russia’s Rosneft.

Why would governments give fossil fuel companies money? Many reasons. But the most important is that wealthy countries have historically needed huge volumes of fossil fuels for manufacturing, transport and power. Many countries have some sources of fossil fuels inside their borders, but only a few are self-sufficient. This has enabled fossil fuel giants such as Saudi Arabia to become wealthy beyond belief.

Many governments have used subsidies to boost their energy security and encourage local producers to seek out new sources of coal, gas and oil. These subsidies can make all the difference in making fossil fuel companies competitive internationally. For instance, Canada spent billions on subsidies to boost its oil sands and fracking projects.

Subsidies were essential in the United States’ fracking revolution. Novel approaches to extracting fossil gas and oil – boosted by major tax incentives – turned the US from a major importer of oil and gas into a net exporter by 2019.

You can see why the US did this. At a stroke, it went from being dependent on energy provided by foreign nations to being independent.

Once subsidies are in place, they become very hard to remove. Indonesia’s lavish fuel subsidies now account for 2% of the nation’s GDP. When the national government tried to walk these back, there were riots.

And there’s another reason, too. Fossil fuels are still playing an important role in boosting the economy in most nations. Subsidising them has long been seen as a way to maintain economic growth and stability.

Globally, these subsidies are estimated at a staggering $10.5 trillion each year.

This figure has grown sharply in recent years, after Russia’s invasion of Ukraine. As European nations tried to wean themselves off Russia’s gas, energy prices surged worldwide. In response, some countries introduced new subsidies to support businesses and consumers.

The top-line figure of $10.5 trillion includes two types of subsidy – explicit (meaning real dollars change hands) and implicit (for example, governments building roads and railways to encourage crude oil transport).

Explicit subsidies

Explicit fossil fuel subsidies are direct financial incentives from governments to fossil fuel producers and consumers. These incentives come in different forms, such as tax breaks, direct payments, grants and price controls. All of them aim to reduce the financial burden associated with fossil fuel production and use.

In Australia, explicit subsidies include fuel tax credits and exploration tax reductions. Fossil fuel companies can get subsidies to offset the losses they make during the years it takes to find and begin extracting new fossil fuels.

In the US, oil and gas companies benefit from the oil depletion allowance, which permits them to deduct a percentage of their gross income from oil and gas sales as an expense. They can also claim tax deductions for intangible drilling costs, such as the wages of workers and material needed to find new sources of oil and gas.

China, too, uses direct subsidies, discounted land-use fees, and preferential loans as explicit subsidies to boost coal production and consumption. The national government also supports fossil fuel consumption through direct payments to consumers.

China has used subsidies to encourage exploitation of its large coal resources. zhaoliang70/Shutterstock

Implicit subsidies

Implicit subsidies are often described as “imaginary”. That doesn’t mean they don’t exist, just that they’re not a direct transfer to directly paid to fossil fuel producers.

For instance, the cost of burning fossil fuels is borne by the global community and the natural world, in the form of climate change, damage to human health and other harms. Most fossil fuel companies don’t have to pay a cent for the pollution their products cause – so in effect, they are being granted an indirect subsidy.

Implicit incentives also include government investment in facilities such as transport networks, pipelines, oil refineries and port infrastructure, which will accelerate fossil fuel production and delivery. Think of the Middle Arm development in Darwin, funded by both the federal and territory government.

Why are these subsidies still being paid?

As the world grapples with a worsening climate crisis, fossil fuel subsidies are under great scrutiny.

It’s politically difficult to withdraw subsidies once given. This is why governments around the world have instead begun to give subsidies and tax incentives to green energy developers, including the enormous $500 billion Inflation Reduction Act in the US, the European Union’s Green Deal, and China’s massive subsidies of green technologies such as electric vehicles and solar panels.

The goal here is to make renewable energy and electrified transport steadily more affordable and competitive – just as fossil fuel subsidies did for oil, gas and coal.

Authors: Bernard Njindan Iyke, Lecturer in Finance, La Trobe University