The energy sector, especially fossil fuels, has always been subsidized. This stimulus that has never failed to get the industry into overdrive and induce a consequent boost in production is now being questioned in the context of climate change and pollution reduction efforts. While fossil fuels remain the dominant driver in the world economy today, they are being challenged head-on by renewable resources. Some governments, including the US, are debating reversing the fossil fuel subsidies as a way of reducing emissions and footing the bill for cleaner energy. This raises an important question—are subsidies still necessary today?

Oil Subsidies

Subsidies are used to protect customers from high energy costs, but come with a price. They have fiscal implications such as higher taxes, debt issuance, or reduced government spending, and result in distorted resource distribution, holding back economic progress. Subsidies come in two forms: direct and indirect.
Direct subsidies entail several types of tax exemptions for the companies that engage in fossil fuels activities. For example, "Intangible Drilling Costs Deduction" allows companies to deduct most drilling expenses, while "Percentage Depletion" allows them to deduct a portion of tax base income, which often exceeds capital costs. Subsidies for clean coal, capping gasification and carbon sequestration investment and projects are offering tax credits of up to 30%. There were also unconventional fuel subsidies, which were abolished in 2014 but were of colossal assistance to the coal industry until then.
Indirect subsidies are of the type of tax relief that allows the fossil fuel industry to keep taxes low or earn high returns. For example, the "Last In, First Out" (LIFO) accounting method allows companies to sell newly added reserves, thereby keeping their tax base low. "Foreign Tax Credit" allows companies to credit foreign tax as income tax paid, while "Master Limited Partnerships" (MLPs) allow oil and gas companies to exempt corporation taxation. A "Domestic Manufacturing Deduction”, which provided tax relief for oil companies, was phased out in 2018.

Global Trends

World fossil fuel subsidies in 2023 declined to $620 billion from over $1 trillion in 2022 due to the Ukraine war. The largest subsidizers are Iran, Saudi Arabia, China, and Russia, whereas poor nations are experiencing growing energy inflation. The EU performed well on its Emissions Trading System but lags behind on the phasing-out of wasteful subsidies. India and Morocco have removed subsidies, and protests broke out over rising fuel prices in Nigeria and Angola.
The United States alone provide $20 billion in annual tax credits to fossil fuel giants, and the oil majors have earned $953 billion between 2017-2022. The removal of subsidies has been proposed, although the heavy lobbying by the oil industry means that any changes in the next few years are fraught. Saudi Arabia, whose GDP is dependent on hydrocarbon revenues, is to implement economic reform to diversify its energy production despite high subsidization.

What will Drive Fuel Subsidy Reform?

Fuel subsidy reform will be of numerous benefits, though it is difficult to choose. For one, it lowers the enormous economic burden on the budget such that the government will have a higher amount of money to spend in other important areas like healthcare and education. Other than this, the market is encouraged to invest in energy conservation without subsidies as businesses and consumers will ultimately save energy. Deregulation makes the resources more equitably distributed in that wealthier segments have greater chances of benefiting at a larger scale from subsidized fuel. Last but not least, reduced fuel consumption generates fewer harmful environmental impacts, such as pollution and accidents on the roads.

The Future is Challenging

Fossil fuels subsidies are still an economic and political issue, but some countries have started making changes. While continued subsidization of fossil fuels helps lower fuel prices for low-income households, it halso leads to increased public debt, economic disparity, and environmental issues. Most governments are starting to reduce subsidies as part of the journey towards the achievement of carbon emission goals and dissociation from fossil fuels. As renewable energy takes center stage, it is getting easier to channel these subsidies elsewhere. However, cutting subsidies, may also lead to higher fuel prices and reduced oil company profits, potentially affecting investments and economic stability.