By Allianz Research
Fossil fuel subsidies account for 0.5% of global GDP, almost exactly the size of the funding gap needed to comply with the Paris Accord. Abolishing fossil fuel subsidies and directing the funds to renewable energy seems like an easy win for the climate: After all, estimates from the OECD and IEA put the total value of fossil fuel subsidies at USD468bn as of 2019 (for 81 countries). Fossil fuel subsidies outpace those for renewable energy in most countries, with the EU-28 and the US being notable exceptions. On the other hand, exceptionally high subsidies are paid in the MENA region (Middle East & North Africa) or in Venezuela, i.e. in countries with a large domestic fossil fuel industry, which tends to have strong political and lobbying power.
Getting rid of them comes with steep costs for consumers, particularly the poorest households. The richest 20% of households receive six times the subsidies of the 20% poorest households, but the poorest households still get hit harder as they spend around 7% of their income on energy related expenditures compared to about 3% that the rich households spend. Nevertheless, abolishing fossil fuel subsidies should free enough fiscal room for redistribution.
In this context, abolishing fossil fuel subsidies requires a holistic approach to secure a just transition. Abrupt measures will not work. What is required are comprehensive plans for phasing-in and sequencing price increases to enable the whole population to smoothly adjust. This has to be accompanied by targeted cash transfers to poor households, e.g. expanded safety net programs or increased spending on programs benefiting primarily the poor (targeted health, education or infrastructure expenditures).