The Times Australia
The Times World News

.

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

  • Written by Bernard Njindan Iyke, Lecturer in Finance, La Trobe University
For decades, governments have subsidised fossil fuels. But why?

Even now, decades after we first began trying to avert the worst of global warming, more than 80%[1] 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[2] come in. Australia gave A$14.5 billion[3] 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.

LNG tanker
Australia’s surging liquefied natural gas industry has been boosted by government funding. KDS Photographics/Shutterstock[4]

Private companies, public money

Globally, private companies dominate fossil fuel production, though fossil fuel-rich nations often have state-owned companies[5], 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[6] 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[7] – turned the US from a major importer of oil and gas into a net exporter[8] 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[9] now account for 2% of the nation’s GDP. When the national government tried to walk these back, there were riots[10].

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[11] 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[12]. 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[13] to boost coal production and consumption. The national government also supports fossil fuel consumption through direct payments to consumers.

coal miners China China has used subsidies to encourage exploitation of its large coal resources. zhaoliang70/Shutterstock[14]

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[15] in Darwin, funded by[16] 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[17], including the enormous $500 billion Inflation Reduction Act in the US, the European Union’s Green Deal[18], and China’s massive subsidies[19] 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.

References

  1. ^ more than 80% (www.spglobal.com)
  2. ^ fossil fuel subsidies (www.imf.org)
  3. ^ gave A$14.5 billion (australiainstitute.org.au)
  4. ^ KDS Photographics/Shutterstock (www.shutterstock.com)
  5. ^ state-owned companies (theconversation.com)
  6. ^ spent billions (environmentaldefence.ca)
  7. ^ major tax incentives (www.sei.org)
  8. ^ net exporter (www.eia.gov)
  9. ^ lavish fuel subsidies (thediplomat.com)
  10. ^ were riots (www.nytimes.com)
  11. ^ $10.5 trillion (www.imf.org)
  12. ^ surged worldwide (www.weforum.org)
  13. ^ explicit subsidies (www.climatescorecard.org)
  14. ^ zhaoliang70/Shutterstock (www.shutterstock.com)
  15. ^ Middle Arm development (middlearmprecinct.nt.gov.au)
  16. ^ funded by (www.theguardian.com)
  17. ^ green energy developers (acee.princeton.edu)
  18. ^ Green Deal (www.consilium.europa.eu)
  19. ^ massive subsidies (www.ifw-kiel.de)

Read more https://theconversation.com/for-decades-governments-have-subsidised-fossil-fuels-but-why-213467

Times Magazine

Understanding ITIL 4 and PRINCE2 Project Management Synergy

Key Highlights ITIL 4 focuses on IT service management, emphasising continual improvement and value creation through modern digital transformation approaches. PRINCE2 project management supports systematic planning and execution of projects wit...

What AI Adoption Means for the Future of Workplace Risk Management

Image by freepik As industrial operations become more complex and fast-paced, the risks faced by workers and employers alike continue to grow. Traditional safety models—reliant on manual oversight, reactive investigations, and standardised checklist...

From Beach Bops to Alpine Anthems: Your Sonos Survival Guide for a Long Weekend Escape

Alright, fellow adventurers and relaxation enthusiasts! So, you've packed your bags, charged your devices, and mentally prepared for that glorious King's Birthday long weekend. But hold on, are you really ready? Because a true long weekend warrior kn...

Effective Commercial Pest Control Solutions for a Safer Workplace

Keeping a workplace clean, safe, and free from pests is essential for maintaining productivity, protecting employee health, and upholding a company's reputation. Pests pose health risks, can cause structural damage, and can lead to serious legal an...

The Science Behind Reverse Osmosis and Why It Matters

What is reverse osmosis? Reverse osmosis (RO) is a water purification process that removes contaminants by forcing water through a semi-permeable membrane. This membrane allows only water molecules to pass through while blocking impurities such as...

Foodbank Queensland celebrates local hero for National Volunteer Week

Stephen Carey is a bit bananas.   He splits his time between his insurance broker business, caring for his young family, and volunteering for Foodbank Queensland one day a week. He’s even run the Bridge to Brisbane in a banana suit to raise mon...

The Times Features

Metal Roof Replacement Cost Per Square Metre in 2025: A Comprehensive Guide for Australian Homeowners

In recent years, the trend of installing metal roofs has surged across Australia. With their reputation for being both robust and visually appealing, it's easy to understand thei...

Why You’re Always Adjusting Your Bra — and What to Do Instead

Image by freepik It starts with a gentle tug, then a subtle shift, and before you know it, you're adjusting your bra again — in the middle of work, at dinner, even on the couch. I...

How to Tell If Your Eyes Are Working Harder Than They Should Be

Image by freepik Most of us take our vision for granted—until it starts to let us down. Whether it's squinting at your phone, rubbing your eyes at the end of the day, or feeling ...

Ways to Attract Tenants in a Competitive Rental Market

In the kind of rental market we’ve got now, standing out is half the battle. The other half? Actually getting someone to sign that lease. With interest rates doing backflips and ...

Top Tips for Finding the Ideal Block to Build Your Home

There’s something deeply personal and exciting about building your own home. You’re not just choosing paint colours or furniture, you’re creating a space that reflects your lifes...

The Home Buying Process Explained Step by Step

Buying a home is a thrilling milestone, but it can also feel like navigating a maze without a map. With paperwork, finances, and decisions at every turn, understanding the home-b...