Fossil fuel subsidies ballooned in 2022, reaching a record high of USD 1.3 trillion. These subsidies were mostly for consumption, which rose to USD 1.27 trillion, as governments scrambled to respond to the energy crisis. The largest subsidizing nations were China (USD 266 billion), Saudi Arabia (USD 129 billion), and Indonesia (USD 72 billion). 

However, these data do not tell the full story. Actual global consumption subsidies are likely to have been much larger in 2022 because the source of the data, the IMF, is based on a definition of “explicit subsidies” that does not capture all types of consumption subsidies. The IMF’s data largely consist of “consumer price support”: subsidies that occur when governments cap retail prices below international market prices (e.g., selling gasoline for USD 0.50 per litre when the international price is USD 1.00 per litre). Consumer subsidies can also be provided when fuels are sold above international market prices, but policy interventions have tried to make them affordable through measures such as tax cuts or direct grants to reduce heating or electricity bills. The IEA tracked more than USD 500 billion in extra spending to reduce energy bills in 2022, mostly in advanced economies (USD 350 billion in Europe alone). We did not include this figure in the subsidy estimates because it is not possible to combine data from the IMF and the IEA without the risk of introducing errors by double counting. 

Consumer price support is most common in developing and emerging economies. However, the IMF data reveal that several European countries resorted to supporting consumer prices for fossil fuels in 2022 for the first time in years due to soaring natural gas prices: Germany (USD 49 billion), France (USD 42 billion), and Italy (15 billion). This support is likely to overlap with the transfers tracked by the IEA. At the time of writing, there was no global source that merges data on consumer price support and affordability measures. 

Assisting households and businesses during a cost-of-living crisis is crucial. However, many governments already have more effective mechanisms to deliver support than subsidizing fossil fuels, such as welfare systems. Untargeted consumption subsidies tend to help the rich more than the poor because they use the most energy and, hence, harness the most subsidy benefits. Fossil fuel subsidies reinforce and extend fossil fuel dependencies, delaying transitions and potentially causing more stranded assets. They also have unintended negative impacts on climate change and air pollution, which tend to affect the poor the hardest.

Instead, governments should direct support toward other investments that improve the lives of the societies they represent, such as cash transfers or investments in social welfare systems; clean energy; and behavioural change in all areas, including transport. In cases where an immediate removal of fossil fuel subsidies is not feasible (for example, due to the absence of adequate welfare systems), governments should better target subsidies to those most in need and develop plans to quickly eliminate fossil fuel subsidies, including through the development of welfare systems funded by fossil fuel subsidy reform.

Subsidies for producers totalled around USD 51 billion in 2022, based on a projection from Organisation for Economic Co-operation and Development (OECD) data covering 51 countries. Production subsidies might constitute a relatively small share of total support, but their impact should not be downplayed. Governments typically structure these subsidies to crowd in substantial private funds for the exploration and development of fossil fuels, fostering more investment than would normally occur. These subsidies are problematic because they amplify private investments, locking in higher production and emissions and diverting critical public and private resources away from cleaner sources of energy. In addition, actual production subsidies are likely to be significantly higher than shown here. Poor transparency means that many subsidies are not documented or quantifiable. 

Governments continue to evade their commitment to reforming these subsidies. In part, this is because the only near-term timeline for reform is the G7’s target of 2025, while all other countries are bound to a more distant timeline of 2030, given the commitment to fossil subsidy reform within the SDGs. In part, it is because there is no universally endorsed definition of what makes a subsidy “inefficient.” Some countries have considered all fossil fuel subsidies to be inefficient, while others exclude some tax or industry support measures, claiming that they are essential features of their tax regime or necessary to maintain industry competitiveness and avoid carbon leakage to countries with less stringent regulations. The fact is that all fossil fuel subsidies perpetuate the production and consumption of fossil fuels during the climate crisis and therefore should be eliminated; or, where they are essential for energy access, better targeted, while incubating alternative technologies.

SOEs are major players in the fossil fuel industry, accounting for around 55% of oil and natural gas production, and 60% of coal production and coal power globally. SOEs are responsible for at least 7.5 gigatonnes of carbon dioxide equivalent (GtCO2e) annually in direct (Scope 1) emissions—larger than the total annual emissions of any country except China—mostly arising from the power sector (85% share) and oil and natural gas production and distribution (10%). 

Investment decisions by energy SOEs will therefore have a major impact on climate change. Data collected by IISD show that capital expenditure by fossil fuel SOEs and energy utilities in G20 countries reached USD 350 billion in 2022, an 8-year high. Global data—if available—would be even higher. This is a huge outlay on fossil fuel production and use, and it is set to increase in 2023 with higher planned capital investment by national oil companies. Such investments put public funds at risk, potentially requiring substantial bailouts in the future due to the risk of stranded assets. And they are totally at odds with climate science: the IEA already stressed in 2021 that there needs to be “from today, no investment in new fossil fuel supply projects” to keep average global temperature increases below 1.5°C. 

Given that SOEs are owned and controlled by the governments that signed the Paris Agreement, they should be at the forefront of efforts to reduce emissions. However, they continue to invest in fossil fuels, not clean energy. In the G20, only 13% (7 out of 56) of the fossil fuel SOEs surveyed indicated in their annual reports that they had invested in renewable energy. Less than 2% of upstream capital expenditure by oil and natural gas companies (public and private) in 2022 was channelled into renewable power. 

Governments can influence their SOEs to make more sustainable investment decisions. The National Resource Governance Institute suggests several pathways: better understand the extent of SOE exposure to changes in fossil fuel demand and pricing, revise rules related to cash flows in and out of SOEs, mandate or incentivize lower risk and lower emission investment decisions, benchmark and measure performance, and improve corporate governance and reporting (including capital expenditure by energy type).

Governments support the global fossil fuel industry through international public finance in the form of international aid, export credit support, and concessional financing, such as equity, grants, loans, and loan guarantees. This support, together with the absence of sufficient clean energy financing, locks countries into a reliance on fossil fuels and obstructs their ability to achieve their nationally determined contributions and long-term climate and clean energy targets. 

Global data on international financing for fossil fuels was not available for 2022 at the time of writing. However, preliminary 2022 data were available for the G7 and MDBs, which represented 62% of all fossil fuel finance and 67% of all international public finance for energy between 2019 and 2021. The data reveals that G7 governments and MDBs provided an average of USD 30 billion a year to fossil fuels from 2020 to 2022. Although this figure may seem small in relation to the over USD 1 trillion in fossil fuel subsidies during the same period, international public finance has an outsized impact on energy projects due to its ability to catalyze and crowd in private financing. 

Overall trends show that G7 and MDB international public financing for fossil fuels has fluctuated but shows an overall declining trend over the past decade, while investments in clean energy have increased (see Figure 4). This is predominantly due to the leadership of several MDBs, notably the European Investment Bank, which is the leading investor in clean energy. 

On average, MDB support for clean energy was USD 21 billion per year from 2020 to 2022, 6.5 times their support for fossil fuels (USD 3.5 billion). In 2022 alone, MDBs provided USD 26 billion for clean energy, the largest amount since Oil Change International began tracking them in 2012. While MDBs have made several commitments since 2016 to align their finance with the Paris Agreement, they still provided an annual average of USD 3.2 billion in direct fossil fuel finance from 2020 to 2022. The World Bank Group (WBG) provided the most finance for fossil fuels at USD 1.2 billion a year on average, with at least 68% of this for natural gas, which some donors categorize as a transition fuel despite major economic and environmental risks. In addition, a large portion of MDBs’ indirect energy support is not captured here, and indications suggest this support is weighted toward fossil fuels. This includes finance provided through financial intermediaries (like other banks) and most policy-based lending (budget support for the reform of broad programs or entire sectors). Finally, most MDBs, including major fossil fuel financiers like the WBG, remain uncommitted to fossil fuel phase-out agreements, such as the Clean Energy Transition Partnership (CETP) on phasing out fossil fuel finance (e.g., the WBG; see policy insight below).

International public financing for fossil fuels grew from 2021 to 2022, predominantly due to financing from the G7. Despite the groundbreaking commitments to end “new direct public support for the international unabated fossil fuel energy sector by the end of 2022” (also see policy insight below on the CETP), G7 countries continued to finance fossil fuel projects. They spent USD 20 billion on fossil fuels in 2022, or two times more than on clean energy (USD 10 billion). Natural gas received the highest share of G7 fossil finance in 2022, at 39%. Canada and Japan were the largest providers of fossil fuel finance between 2020 and 2022, and some countries, particularly Italy, Japan, Germany, and the United States have not delivered on the implementation of their commitments and have provided at least USD 5.2 billion in public finance for international fossil fuel projects in 2023. G7 finance flows remain largely misaligned with climate goals.

Wealthier countries are the main recipients of MDB international public financing—whether for fossil or clean energy. Central and Western Europe received the largest share of all international energy finance between 2020 and 2022, including 58% of all clean energy finance. This is primarily because the largest supporter of clean energy, the European Investment Bank, directs most of its finance within the European Union. In contrast, low- and low-middle-income countries were more likely to be recipients of financing for fossil fuels than clean energy. This trend risks locking countries into high-emissions pathways and dependence on economically unstable fossil fuels, particularly natural gas. 

The MDBs and G7 are well placed to catalyze the just, clean energy transition thanks to their ability to crowd in finance for large, capital-intensive infrastructure projects and more innovative projects. In order to do this, they must show leadership on both fossil fuel finance phase-out and clean energy financing. COP 28 can push the level of ambition by recommending deadlines to phase out all fossil fuel financing, led by developed nations, and adopting mechanisms that close loopholes in the implementation of existing commitments.

Recent years have seen some substantial government funding announcements to support renewable energy. According to the IEA’s Government Energy Spending Tracker, commitments to support low-carbon electricity (excluding nuclear) and grid investments for integration of renewable energy totalled USD 320 billion over 41 countries between Q2 2020 and Q3 2023. This includes allocations for a wide range of measures, including grants, tax deductions, and funding for concessional loans. While impressive, the amount is dwarfed by global subsidies for fossil fuels, which exceeded USD 2 trillion over the same period. In addition, the data on renewables includes total funding allocations, which might be spent over future years, while the value for fossil fuels includes actual budget impact in the given years. 

Renewable energy support was primarily provided in a small group of economies, namely China, the European Union, and the United States. These economies make up around 50% of global GDP and 28% of the global population but are expected to account for 80% of clean energy investments in 2023. Ensuring that the benefits of the clean energy transition are equitably distributed requires support policies and investments to be fostered in all developing and emerging economies, supported by financing and technology transfer from developed countries. This is particularly important in the context of calls for governments to commit to a tripling of global renewable energy capacity by 2030, which in practice may create the biggest implementation challenges for countries with the least access to finance and other resources for appropriate support policies.

Some renewable energy technologies are already fully competitive with many fossil technologies, but support may still be required because of the heavy upfront capital investment needs, the scale of capacity needed to respond to the climate crisis, and the costs of integration (e.g., grid upgrades, storage, dispatchable power, and balancing). In addition, support may also be required for research and development, as well as for technologies that are not fully mature yet, such as green hydrogen, off-shore wind, and new types of battery storage. In the absence of a global carbon pricing scheme, governments must turn to second-best tools to crowd in large volumes of private investment and deploy historically unseen year-on-year clean energy capacity additions between now and 2030. This will require establishing stable enabling policies and regulations to encourage private investment in renewable energy, as well as strategic support policies, including subsidies, SOE investments, and lending from public financial institutions.

Investment in clean energy is rising steadily, with almost every sector setting a new record in 2022. However, total investment in fossil fuels still exceeded investment in renewables. The public sector accounted for around one third (31%) of total investment in renewables in 2020 (latest available data), with state-owned financial institutions, national development financial institutions, and SOEs providing more than 80% of public investment.  

Tripling global renewable energy capacity by 2030 is imperative to limit the global average temperature rise to below 1.5°C above pre-industrial levels according to most energy and climate scenarios, including the IEA’s Net Zero Roadmap (2023f) and IRENA’s World Energy Transitions Outlook 2023 1.5°C pathways. However, the scale of investments in renewables remains highly insufficient. Annual average investment in renewable power generation was USD 486 billion in 2022 and must reach USD 1,300 billion by 2030, leaving an investment gap of USD 814 billion. The gap suggests that governments need to do more to support clean energy, as discussed in the previous section. 

Support for clean financing must occur within an overall context of developed countries providing climate financing to developing countries according to their fair share. At COP 15 in 2009, developed countries committed to collectively mobilize USD 100 billion a year by 2020 for climate action in developing countries. This goal has not yet been achieved  but negotiations are underway for a “new collective quantified goal (NCQG) on climate finance.” The required amount is still being discussed, as is whether the NCQG will address all or just part of the climate finance needs of developing countries. The latest Technical Expert Dialogue (TED 7) on NCQG included a demand for setting the required amount at USD 1.1 trillion per year, excluding the outstanding USD 100 billion per year already promised. However, emerging and developing economies alone will need USD 2.2 trillion–2.8 trillion a year invested in clean energy from the early 2030s until 2050 in order to meet their energy needs in line with the Paris Agreement. And we know that achieving the SDGs will cost between USD 3.9 trillion and USD 7 trillion a year in financing.

Tripling renewable energy capacity will also require a substantial expansion in the mining and refining operations for critical raw materials (CRMs). CRM are important for the renewable energy transition because they are inputs for the various green technologies that can lead to net-zero emissions. The IEA forecasts that there is a 55% gap in the required investment for four key minerals (copper, lithium, nickel, and cobalt) to achieve net-zero by 2050, highlighting the need for new sources of capital to meet CRM demand. 

Governments can play an active role by investing directly, such as through SOEs, public finance, and crowding in private investment. Producing countries can participate directly in the extraction of CRM as a means of harnessing more financial benefits while potentially creating a more stable supply. Public funds will also be key to unlocking the necessary geological data to increase supply. One way to do this is by shifting part of the public financial support currently allocated to fossil fuels toward clean energy technologies and investments, including CRM supply chains.