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Fossil fuels are the main contributors to climate change, yet they continue to receive significant government subsidies.

What are fossil fuel subsidies?

Subsidies are direct or indirect payments made by the government to individuals or businesses, normally in the form of cash or a targeted tax cut.

Governments provide fossil fuel subsidies to make fossil fuels such as oil, coal, and gas more affordable for consumers. 

These subsidies can take many different forms, such as direct price controls, tax breaks for oil companies, or failure to account for the environmental damage caused by fossil fuel extraction and use.

Case Study In Saudi Arabia, fuel prices are set by the government rather than the market, and price ceilings help to subsidize the price of gasoline. Oil exports surpass domestic consumption, compensating for the cost to state-owned oil producers. Indonesia limits energy prices and compensates state-owned energy companies for the losses they make. Oil companies in the United States may claim a significant portion of their drilling costs as a tax deduction.

Why are fossil fuel subsidies common worldwide?

Governments provide subsidies for fossil fuels for both practical and political reasons. 

Politically, subsidies help to maintain support from large businesses and citizens who depend on low-cost energy. 

Practically, they can protect industries, stimulate economic growth, or keep energy prices stable during economic downturns.

How do fossil fuel subsidies impact the environment?

Fossil fuel subsidies cause environmental damage because they make fossil fuels more affordable, encouraging their continued use. This leads to increased carbon emissions, air pollution, and climate change. 

The failure to consider the environmental costs of fossil fuels, such as local pollution and global warming, effectively encourages their use.

According to the Organization for Economic Cooperation and Development (OECD), global fossil fuel subsidies are estimated to be almost $1.5 trillion by 2022. The IMF's more comprehensive calculation, which includes the environmental costs of fossil fuel use, raises the total to nearly $7 trillion.

Global efforts to reduce fossil fuel subsidies

To combat climate change, the G20 agreed in 2009 to phase out inefficient fossil fuel subsidies. Other international groups, such as the Asia-Pacific Economic Cooperation (APEC) and Friends of Fossil Fuel Subsidy Reform, were formed to advocate for subsidy reductions. However, progress has been slow, with subsidies increasing in recent years.

Why is it difficult to end fossil fuel subsidies?

Reducing subsidies may result in higher energy prices, affecting the cost of many goods and services. This causes inflation and raises energy costs for consumers, particularly low-income households. 

Subsidy cuts may result in public unrest. Reducing subsidies can be politically unpopular, even in nations that support climate action.

Case Study Energy prices increased worldwide as a result of the Russian invasion of Ukraine. As a result, many European governments increased fossil fuel subsidies to help citizens deal with rising costs. This highlights the challenging conflict between the need for affordable power during emergencies and climate goals.

Way Forward

Raising fossil fuel prices can reduce demand, which will decrease greenhouse gas emissions. However, governments must carefully plan policies to avoid harming low-income groups. 

The IMF suggests that after a price increase, governments should restrict higher carbon prices to continue reducing emissions without raising consumer energy costs.

Price increases, such as the one caused by the Russia-Ukraine war, present an opportunity for reform, as prices decline, governments can impose higher carbon taxes without significantly increasing consumer energy costs. This can help the transition to more sustainable energy practices.

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Source: 

The Hindu

PRACTICE QUESTION Q.How do fossil fuel subsidies impact low-income households and the overall economy? Provide examples from different countries to support your explanation. (150 words)