Governments handed out a staggering $7 trillion (£5.4tn) in fossil fuel subsidies in 2022, equal to 7.1% of global GDP.
By removing these subsidies they could deliver huge economic and environmental benefits, according to research from the ZEW Leibniz Centre for European Economic Research.
The study finds that most fossil fuel subsidies are implicit, meaning governments fail to charge industries for the local damage caused by pollution, congestion and road wear.
These hidden costs make up 95% of total subsidies, while direct subsidies—where governments artificially lower energy prices—account for just 5%.
Eliminating direct subsidies alone would have minimal impact, increasing economic welfare by just 0.2% on average.
But tackling implicit subsidies through proper taxation of fossil fuels could boost economic welfare by an average of 3.9%, with some countries like China, India and Russia seeing gains of up to 23%.
Money and climate targets
Removing fossil fuel subsidies could generate an extra $2.5 trillion (£1.9tn) in government revenue annually—equivalent to 4.9% of global consumption.
Major European economies like Germany, France and Italy would collect billions in new tax revenues, which could be used to reduce labour taxes and drive economic growth.
The environmental impact would be just as significant.
Global CO₂ emissions would fall by 32%, with 40% of countries—including India, China and Russia—meeting their Paris Agreement targets simply by cutting fossil fuel subsidies.
However, the study warns that some nations reliant on fossil fuel exports, such as Canada, Saudi Arabia and Australia, could suffer economic losses from reduced global demand.
Despite this, the findings suggest that phasing out fossil fuel subsidies would be a game-changer for both economies and the climate, urging governments to speed up their transition away from fossil fuel support.
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