Fossil fuel subsidies are government policies that lower the cost of producing or consuming coal, oil, and natural gas, either through direct financial support or by letting companies avoid paying for the environmental damage their products cause. The combined global value is staggering: according to the International Monetary Fund’s 2025 update, fossil fuel subsidies totaled $7.4 trillion in 2024, roughly 6.4 percent of global GDP. That figure includes both direct government spending and the much larger cost of unpriced pollution and climate damage.
Explicit vs. Implicit Subsidies
The distinction between these two categories is central to understanding why subsidy estimates vary so widely depending on who’s counting.
Explicit subsidies are the straightforward kind: direct government payments, tax breaks, or artificially low fuel prices that reduce what producers or consumers actually pay. Globally, these amounted to $725 billion in 2024, or about 0.6 percent of global GDP. Many oil-producing countries keep gasoline and electricity prices below market rates, effectively paying the difference out of public budgets. In wealthier nations like the United States, explicit subsidies more often take the form of tax incentives for producers rather than price caps for consumers.
Implicit subsidies are far larger, totaling $6.7 trillion in 2024 (5.8 percent of global GDP). These represent the real costs that fossil fuels impose on society but that nobody pays for at the pump or on a utility bill. When a coal plant emits pollution that causes asthma hospitalizations, or when carbon emissions drive climate damage, those costs fall on the public rather than on the company selling the fuel. Economists treat this gap as a subsidy because it gives fossil fuels an artificial price advantage. Local air pollution and climate change together account for about 60 percent of these unpriced costs, with undercharging for other damages and supply costs making up most of the rest.
How Production Subsidies Work
In the United States, oil and natural gas producers benefit from a set of preferential tax breaks worth more than $36 billion over a recent ten-year budget window. Three have historically been the most significant.
- Percentage depletion: When a company extracts a natural resource, normal tax rules let it deduct costs in proportion to how much it pulls out of the ground. Percentage depletion instead allows eligible companies to deduct 15 percent of revenue from each site, up to 1,000 barrels of oil or 6,000 million cubic feet of natural gas. This often results in deductions that exceed the company’s actual costs. It costs the federal government roughly $500 million to $1.2 billion per year in lost revenue.
- Expensing of intangible drilling costs: Companies can immediately write off expenses related to site preparation, construction, wages, fuel, and drilling materials, rather than spreading those deductions over the life of the well. Only costs for equipment that retains resale value are excluded.
- Domestic manufacturing deduction: Oil and gas producers have historically qualified for a deduction originally designed to support domestic manufacturers, further reducing their tax burden.
Beyond tax breaks, coal extracted on federal lands is subject to royalties of 12.5 percent for surface mining and 8 percent for subsurface mining. But the effective rate after various adjustments drops to roughly 4.9 percent of coal’s delivered cost, well below the headline figure. Most natural gas and oil comes from state lands, where severance taxes vary widely from state to state.
How Consumption Subsidies Work
Many countries, particularly oil-producing nations and developing economies, keep fuel prices artificially low for consumers. Governments do this through price caps, direct cash transfers, or by absorbing the difference between international market prices and what people pay at the station. When global oil prices spike, these programs become enormously expensive. After energy prices surged in 2021 and 2022, natural gas and electricity consumption subsidies more than doubled, and oil subsidies rose by about 85 percent as governments scrambled to shield households from price shocks.
In the U.S. and Europe, consumption-side support is less visible. Federal excise taxes on gasoline sit at 18.4 cents per gallon, and diesel at 24.4 cents, with state taxes on top. Coal carries a federal excise tax of $1.10 per ton from underground mines and $0.55 from surface mines. These taxes exist but fall well short of covering the environmental and health costs that burning these fuels generates, which is exactly the gap that constitutes an implicit subsidy.
What Counts as an Unpriced Cost
The bulk of the $6.7 trillion implicit subsidy figure comes from damages that fossil fuels cause but that their prices don’t reflect. For coal and natural gas, the two biggest components are climate damage (measured through the social cost of carbon) and health effects from local air pollution, particularly fine particulate matter that drives heart disease, lung cancer, and respiratory illness. Modeling suggests that fully reforming fuel prices to account for these costs would prevent about 1.6 million premature deaths per year from local air pollution alone.
For gasoline and diesel, the calculation extends beyond pollution. It also includes costs from traffic congestion, accident fatalities, and road wear caused by heavy-duty diesel vehicles. These aren’t environmental externalities in the traditional sense, but they represent real costs that society bears and that fuel prices don’t capture.
Who Subsidizes the Most
In absolute dollar terms, the largest subsidies concentrate in countries with the biggest economies and the highest fossil fuel consumption. But measuring subsidies as a share of GDP reveals a different picture. Among European countries in 2022, Luxembourg topped the list at 3.4 percent of GDP, followed by Slovenia at 2.1 percent and Czechia at 1.5 percent. Greece, Croatia, Germany, and Bulgaria all clustered around 1 percent. These figures reflect explicit fiscal support during the energy crisis, when European governments introduced emergency measures to cushion consumers from soaring energy costs.
Globally, the largest implicit subsidies tend to concentrate in countries with heavy coal use, high traffic volumes, and limited environmental pricing. Nations that neither tax carbon emissions meaningfully nor enforce strong air quality standards carry the largest gap between what fossil fuels cost and what they should cost if their full damages were priced in.
Why Reform Has Stalled
International commitments to phase out fossil fuel subsidies date back to 2009, when G20 economies pledged to “rationalize and phase-out over the medium-term inefficient fossil fuel subsidies that encourage wasteful consumption.” Similar language appeared in the 2015 UN Sustainable Development Goals. Most recently, the first global stocktake under the Paris Agreement in late 2023 called on countries to make progress on phasing out inefficient subsidies “as soon as possible.”
The problem is that every one of these commitments targets “inefficient” subsidies without defining what that means. This vagueness gives countries an easy exit. When Germany and Mexico underwent G20 peer reviews of their subsidy programs, both defended the status quo by simply arguing that their subsidies weren’t inefficient. Without clear definitions, timelines, or enforcement mechanisms, these pledges have functioned more as aspirations than binding policy.
What Removal Would Mean
Eliminating fossil fuel subsidies wouldn’t just reduce emissions. Full fuel price reform, meaning prices that reflect environmental and health costs, would generate an estimated $4.4 trillion in government revenue by 2030, equivalent to 3.6 percent of global GDP. That revenue could fund clean energy investment, reduce other taxes, or support the low-income households most affected by higher energy prices.
The market distortion matters because fossil fuels currently compete against renewables with a hidden advantage. When coal-fired electricity doesn’t include the cost of the health damage it causes, and gasoline doesn’t reflect climate damages, cleaner alternatives look artificially expensive by comparison. Removing that tilt wouldn’t eliminate fossil fuels overnight, but it would shift investment decisions and consumer choices in ways that pricing signals are designed to do.