The fiscal cost of government support for fossil fuels fell by around one third in 2023 to USD 1.1 trillion, down from USD 1.6 trillion in 2022, reflecting in large part a decline in energy supply costs from record highs in 2022. This decline lowered the reference price, and thus the estimated value of fossil fuels sold below this reference price. Yet, with many measures to support production and consumption of fossil fuels still in place or increasing, the fiscal cost of support to fossil fuels remains elevated relative to its historical average.
Most (90%) of the fiscal cost of support related to the consumption of fossil fuels. The fiscal cost of support for residential users increased by 29% to record highs, reaching USD 189.3 billion in 2023 (from USD 125.7 billion in 2022), while for manufacturing and other industries it increased by 14% to USD 103.8 billion in 2023 (from USD 90.9 billion in 2022). Most of this support lacked systematic targeting towards those in greatest need, raising both equity and efficiency concerns.
Economic incentives to decarbonise from fuel taxes, carbon taxes, emissions trading systems (ETSs) and price-reducing support mechanisms – summarised in the net Effective Carbon Rate (Net ECR) declined compared to 2021. While carbon taxes and ETS prices saw modest increases, the increase in support measures through direct budgetary transfers for fossil fuels and low fuel excise rates led to a decrease in the average Net ECR to EUR 14.0/tCO2e in 2023 from EUR 17.9/tCO2e in 2021.
In 2023, as in 2021, the share of GHG emissions covered by a positive Net ECR remained unchanged was 42%; 27% of GHG emissions are covered by explicit carbon prices (carbon taxes or ETSs).
The high fiscal cost of government support for fossil fuels and low Net ECR highlight the challenges of staying on track with net zero commitments in the face of economic and geopolitical pressures.
Reforms should focus on better targeting those most in need and phasing out inefficient support for fossil fuels as soon as possible to enable the release of much-needed resources for the net zero transition and help accelerate innovation for energy efficiency.
Given the high costs of inaction, governments should reaffirm and implement their SDG commitment to phase out and reform inefficient support to fossil fuels to align fiscal policy with climate goals.
OECD Inventory of Support Measures for Fossil Fuels 2024
Policy Trends up to 2023
