Fossil Fuel Subsidies Explained (1.5T vs 7T)

People throw around two big numbers for fossil fuel subsidies: about $1.5 trillion and about $7 trillion. Both can be “right” because they use different definitions. This guide shows what each number means, what counts, and how to cite the right figure without misleading your readers.

Short answer: what does 1.5T vs 7T mean?

• About $1.5T (2022) usually means explicit fossil fuel subsidies: government actions that directly lower what people pay for fossil fuels (often during an energy price spike). This is close to how groups like the IEA and OECD track subsidies.
• About $7T (2022 range; IMF-style) means a broader idea: explicit subsidies plus “implicit” subsidies, like health and climate harms that are not priced into coal, oil, and gas. The IMF calls these costs “underpricing” of fossil fuels.

If you are writing or reporting, state which definition you are using and what is included.

What is a fossil fuel subsidy? (Simple definition)

A fossil fuel subsidy is any government action that makes coal, oil, or gas cheaper to make or cheaper to buy, or that helps fossil fuel companies earn more money than they would in a neutral market. Disagreement often centers on whether unpaid harms (like health and climate damage) should count as a subsidy.

That can look like:

• Keeping gasoline prices low with a price cap
• Lower taxes on diesel or heating fuel
• Tax breaks for drilling and exploration
• Government support for coal power plants

What counts as explicit fossil fuel subsidies?

Explicit subsidies are the most “budget-like.” You can usually point to a law, a line in the budget, or a regulated price. In many global summaries, the $1.5T figure for 2022 is largely driven by consumer price support during the energy crisis.

Common types of explicit subsidies (with plain examples)

• Price controls (price caps): the government sets a pump price below the true cost, and someone pays the difference (often the state).
• Direct payments: cash paid to a company, utility, or fuel supplier.
• Discounted electricity or heat when it is generated with fossil fuels (for example, support for coal-fired power).
• Consumer fuel discounts: rebates or vouchers that lower the price of gasoline, diesel, kerosene, or cooking gas.

What counts as tax expenditures (tax breaks), and why are they debated?

Tax expenditures are special tax rules that reduce taxes for fossil fuels. They can apply to consumption (buyers) or production (companies). They are debated because some definitions reserve “subsidy” for direct payments, while others include foregone tax revenue as support.

Examples of tax expenditures

• Lower sales tax/VAT on natural gas for home heating
• Fuel tax exemptions for certain industries
• Deductions or credits for exploration, extraction, or development

What are implicit subsidies (externalities), and why does the IMF include them?

Implicit fossil fuel subsidies are not a check written by the government. They are costs pushed onto the public because fuel prices do not include the full damage they cause. Economists call these damages negative externalities.

Two big implicit costs

• Local air pollution health costs: more asthma, heart disease, hospital visits, and early deaths.
• Climate change costs: storms, heat waves, crop losses, sea level rise, and other damages from greenhouse gases.

In IMF-style estimates, underpricing for these harms is treated like a subsidy because it makes fossil fuels look cheaper than they really are. This underpricing can lead to overuse compared with full-cost pricing.

One key quantitative insight (and what it implies)

An IMF working-paper approach has estimated that the largest share of global fossil fuel “subsidies” comes from underpricing local air pollution costs (about 42%), followed by global warming costs (about 29%). Other local harms like congestion and road accidents (about 15%) also contribute, with explicit subsidies (about 8%) and foregone consumption tax revenue (about 6%) making up the rest.

Implication: If your story is about government spending, the $7T number can confuse people because most of it is not a budget transfer. If your story is about the “true cost” of fossil fuels, the $1.5T number can understate the problem because it excludes large harms.

What remains uncertain (and why numbers move)

Implicit subsidy estimates depend on choices that can change the total a lot. They also depend on data quality and modeling assumptions, so totals can shift across updates.

• How a study values a ton of CO2 (the social cost of carbon)
• How air pollution damages are measured (health data, exposure, and mortality risk)
• Which taxes are treated as the “normal” baseline (the “efficient price” idea)

For that reason, the IMF-style total is best treated as a model-based estimate, not a single audited bill.

Why are fossil fuel subsidy estimates so different?

Different groups answer different questions, so they count different things. The same policy can look large or small depending on the framework. When quoting a number, match it to the question being asked.

• IEA/OECD-style: “How much did governments do to lower fossil fuel prices or support fossil fuel supply?”
• IMF-style: “What is the gap between what people pay and what they would pay if prices included supply costs, normal taxes, and health/climate damages?”
• UNEP SDG 12.c.1: “How can countries report subsidies consistently for the Sustainable Development Goals?”

Methodology comparison matrix (use this to pick the right number)

Framework	Best for	Usually includes	Usually excludes
IEA	Tracking consumer price support over time	Price-gap consumer subsidies; often energy crisis supports	Most externality costs (health/climate)
OECD	Policy inventory and tax break tracking	Budget transfers; tax expenditures; producer support measures	Most externality costs (health/climate)
IMF	Full-cost pricing and economic efficiency	Explicit + implicit (externalities) + foregone taxes	Less detail on specific tax provisions (focus is total gap)
UNEP SDG 12.c.1	Country reporting and transparency	Defined subsidy categories aligned with global reporting	May not capture full externality pricing gap

Decision tree: does a policy count as a subsidy?

Use this quick check when someone asks, “Does this count as a fossil fuel subsidy?” It separates explicit support, tax expenditures, and IMF-style externality underpricing.

Question	If yes	Counted as
Does the government set a retail fuel price below supply cost?	Yes	Explicit subsidy (price-gap)
Is there a cash payment, grant, or support to a fossil fuel firm or fossil-based power?	Yes	Explicit subsidy (budget transfer)
Is there a special tax rule that lowers taxes for fossil fuel production or consumption?	Yes	Subsidy via tax expenditures (often in OECD inventories)
Are pollution and climate harms not priced into the fuel (no fee/tax for damage)?	Yes	Implicit subsidy (IMF-style externality underpricing)

How to measure fossil fuel subsidies for a country (step-by-step)

If you need a country estimate, do not start with a headline number. Start with your purpose and define what you will count. Then pick sources that match that definition.

Step 1: Pick the question you are answering

• Budget question: “How much public money is used to lower fossil fuel costs?” Use an explicit or inventory approach.
• True-cost question: “What costs are we not paying at the pump or on the power bill?” Use an IMF-style efficient pricing approach.

Step 2: Choose a definition and stick to it

Write your definition in one sentence at the top of your memo or article. This prevents readers from mixing incompatible numbers.

In this piece, “fossil fuel subsidies” means explicit consumer and producer support (price caps, budget transfers, and tax expenditures), and does not include health and climate externalities.

Step 3: Build a simple subsidy inventory (what to list)

• Consumer supports (gasoline, diesel, electricity, cooking gas)
• Producer supports (exploration, extraction, favorable leases, coal power support)
• Tax expenditures (VAT exemptions, credits, deductions)
• State-owned enterprise losses (if fuel is sold below cost)

Step 4: Use the right data source for your definition

• IEA: strong for tracking consumption subsidies over time.
• OECD: strong for tax expenditure and policy inventory detail.
• IMF: strong for implicit subsidy estimates tied to externalities.
• UNEP SDG 12.c.1: useful for consistent reporting language.

Step 5: Show your totals by type (so people can see what is driving the number)

Avoid reporting one blended number if your audience needs clarity. Break it down by type so the main driver is visible.

Example reporting table (fill in your country numbers)
- Consumer price support (explicit): $___
- Producer support (explicit): $___
- Tax expenditures: $___
Subtotal (explicit + tax): $___
- Implicit externality underpricing (IMF-style): $___
Total (IMF-style broad estimate): $___

Are unpriced externalities really “subsidies”? A fair way to say it

This is a real argument, not just a talking point. Your wording should make the definitional choice explicit and avoid implying everyone uses the same framework.

• Why some say “no”: A subsidy is direct government support. Not taxing a harm is not the same as paying a company.
• Why the IMF says “yes”: When prices do not include harms, fossil fuels are effectively underpriced. That underpricing acts like a subsidy because it encourages higher use than under full-cost pricing.

How to write it cleanly: “The IMF uses a broader definition that treats unpriced health and climate damages as an implicit subsidy. Other trackers focus on explicit subsidies like price caps and tax breaks.”

What happens when fossil fuel subsidies are removed?

Subsidy reform can create real benefits, but also real risks. The distributional impact matters as much as the fiscal total.

Likely benefits

• Less waste and pollution because prices better reflect true costs
• More fiscal space: governments can fund health, education, or clean energy
• Clearer market signals for energy efficiency and renewables

Likely risks (especially if reform is fast and unfair)

• Higher prices for transport, cooking, and electricity
• Hard hits on low-income households if there is no protection
• Political backlash and unrest if people think reform is a cash grab or corruption cover

How to phase out fossil fuel subsidies without hurting the poor (practical playbook)

The job is not just “remove the subsidy.” The job is “remove it and keep families safe.” Design the reform around protection, timing, and credibility.

Reform scorecard (quick checklist)

1. Name the subsidy: Is it a gasoline price cap, a VAT exemption, or a producer tax credit?
2. Show who benefits now: In many cases, richer households use more fuel and get more of the subsidy.
3. Protect the bottom: Use targeted cash transfers, lifeline electricity rates, or focused transport support.
4. Phase in changes: Small, scheduled steps beat surprise jumps.
5. Communicate early: Explain the timeline, the help, and where savings go.
6. Track and publish results: A public dashboard builds trust.

One political tension to expect (and plan for)

Subsidy reform often becomes a fight between short-term cost-of-living relief and long-term climate and budget goals. Energy price spikes can push governments to bring subsidies back, even after phase-out pledges.

Durable reform plans often include automatic protection for households (like cash support tied to income) instead of broad fuel discounts that mainly reward higher fuel use.

Worked examples: how the same policy can be counted differently

Example 1: A gasoline price cap

• IEA/OECD view: Yes, this is an explicit consumer subsidy if the price is kept below cost.
• IMF view: Yes, and the “efficient price” would also add taxes for pollution and climate harms.

Example 2: Lower VAT on home heating gas

• Inventory view: Often counted as a subsidy via tax expenditures.
• Price-gap view: Might not show up if retail prices still cover supply costs.

Example 3: Unpriced air pollution from coal power

• Explicit subsidy view: Not necessarily a subsidy unless there is direct support.
• IMF view: Counted as an implicit subsidy if pollution costs are not paid by the polluter.

Tools and sources (so you can cite responsibly)

• IEA (tracking fossil fuel consumption subsidies over time)
• OECD (policy inventories, tax expenditures)
• IMF (efficient pricing and implicit subsidy estimates)
• UNEP SDG 12.c.1 guidance (reporting method for subsidies)
• WTO Fossil Fuel Subsidy Reform initiative (policy discussion and transparency)
• Subsidy trackers that combine OECD/IEA/IMF sources for country browsing

FAQ (quick answers)

What are explicit fossil fuel subsidies?

Explicit subsidies are direct supports like price caps, budget transfers, and some tax breaks that lower fossil fuel costs or raise producer returns.

What are implicit fossil fuel subsidies?

Implicit subsidies are unpriced harms (negative externalities) like air pollution health costs and climate damage that are not included in the price of fossil fuels.

Why does the IMF say $7 trillion in fossil fuel subsidies?

The IMF-style approach adds implicit costs (health, climate, other harms) to explicit subsidies and compares current prices to an “efficient price.”

Which number should I use: $1.5T or $7T?

Use $1.5T when your focus is explicit government support (especially during energy crises). Use $7T when your focus is full-cost pricing (including health and climate harms). Always state the definition.

What you can do next (realistic civic action)

Pick one action that matches your role. Keep it specific enough that someone can do it this month.

• If you are a voter: Ask your elected official to publish a simple annual subsidy report (explicit subsidies, tax expenditures, and who benefits) and to pair any subsidy reform with targeted cash support.
• If you work in policy or finance: Start SDG 12.c.1-aligned reporting, and publish a one-page table separating explicit subsidies from IMF-style implicit estimates.
• If you are a journalist or educator: Add one line in every story that says which definition you are using and what is included.

This one step reduces confusion and makes reform easier to evaluate.