London February 19 2023: Prices for fossil fuels were extraordinarily high and volatile in 2022 as energy markets grappled with the strains caused by Russia’s invasion of Ukraine – in particular the sharp cuts in Russian natural gas deliveries to Europe.
In many countries, though, the prices actually paid by consumers for these fuels remained at a much lower level. A range of policy interventions insulated consumers from ballooning prices, but with the adverse effect of keeping fossil fuels artificially competitive with low-emissions alternatives. In 2022, subsidies worldwide for fossil fuel consumption skyrocketed to more than USD 1 trillion, according to the IEA’s latest estimate, by far the largest annual value ever seen.
The IEA has been tracking fossil fuel subsidies for many years, examining instances where consumer prices are less than the market value of the fuel itself (adjusted for transport costs and VAT, as applicable). Our first estimates for 2022 show that subsidies for natural gas and electricity consumption more than doubled compared with 2021, while oil subsidies rose by around 85%. The subsidies are mainly concentrated in emerging market and developing economies, and more than half were in fossil-fuel exporting countries.
In addition to these consumption subsidies, the IEA has tracked more than USD 500 billion in extra spending to reduce energy bills in 2022, mainly in advanced economies, with around USD 350 billion of this in Europe. This spending is not necessarily captured in our methodology as a fossil fuel consumption subsidy because average end-user prices are still sufficiently high to cover the value of the market fuel in question. In Europe, preliminary analysis shows that average end-user prices were close, in some cases, to the market reference values. Nonetheless, spending to bring down energy bills represents a significant fiscal burden for governments and, as is often the case with such measures, these interventions have not always been well targeted. Furthermore, it risks diminishing the incentive to use energy efficiently or to switch to cleaner fuels.