Low-Energy Fridays: How Much Are We Really Subsidizing Fossil Fuels?

One surprisingly common notion is that fossil fuels are heavily subsidized in America and that renewable energy subsidies only put them on par with fossil fuels. This is a great example of how oft-repeated narratives can take on a life of their own, irrespective of reality. With the recent release of a U.S. Energy Information Administration (EIA) report on energy subsidies, now is a good time to set the record straight on this topic.

The United States spent $29.4 billion on energy subsidies in 2022. Of that, $8.7 billion were “end-use” subsidies, mainly financial assistance for energy in low-income households ($3.8 billion), home energy efficiency subsidies ($2.7 billion) and electric vehicle subsidies ($1.1 billion). Another $481 million went to environmental conservation. That leaves $20.2 billion, 89 percent of which is for tax breaks.

Of that $20.2 billion, $15.6 billion went to renewable energy and $3.2 billion to fossil fuels. This yields a split of 77 percent of energy subsidies going to renewables and 16 percent going to fossil fuels (the remainder go to nuclear and other energy types). Fossil fuels produced 80.8 quadrillion British thermal units of energy in 2022, while renewables produced 13.3 quadrillion—meaning that, on average, renewable energy is subsidized 29 times as much as fossil energy.

The plot thickens when we dive into what specific subsidies are in this stewpot. Ideally, subsidies should be as close to zero as possible. This is especially the case for well-developed industries like fossil fuel, where there is no economic justification for subsidies. But most fossil fuel subsidies are not for economic purposes; rather, they are for things like pollution control, tax breaks for domestic oil production for energy security reasons, or even expensing, which isn’t a subsidy at all.

So where does the idea that fossil fuels are heavily subsidized for economic reasons come from?

One potential source is the International Monetary Fund (IMF). According to the IMF, fossil fuel subsidies equal $662 billion annually rather than the EIA’s $3.2 billion. To put it in perspective, this is comparable to the defense budget—the largest spending item Congress votes on each year. One would think that if taxpayers were doling out such a large subsidy, then Congress would be voting on it. So how did the IMF come up with this figure?

The IMF believes that everyone should tax pollution, which makes sense because pollution taxes are far more efficient at reducing pollution than other policies. But where the IMF and pragmatic economists differ is that the IMF considers not taxing pollution the same as subsidizing pollution. This doesn’t pass the smell test because a subsidy is an out-of-market payment (or tax exemption) to a firm to induce investment in an activity. Under the IMF’s logic, I’m subsidizing my local bank simply by not robbing it. Not taxing pollution is bad policy, but it does not equate to investing in pollution.

This topic really shouldn’t be so controversial, but politicians have made it so by attempting to fuel a narrative that stands in contrast to the data. Fossil fuel subsidies are bad, and R Street opposes them, but we know that fossil fuel use is explained by many factors—of which subsidies are only one. Additionally, the reason fossil fuel subsidies have often been resilient to repeal is because they primarily address politicians’ other stated priorities, such as pollution or energy security.

Climate change is a huge problem, but addressing it requires focusing on true barriers to solutions. Clean energy sources are held back by the challenging economics they face as imperfect substitutes for fossil fuels, and while ending fossil fuel subsidies is good economic policy, it won’t make these challenges disappear.