The Shadow Subsidy: How Hidden Fossil-Fuel Support Undermines the Energy Transition

By Kento Sato May 22, 2025

Every year, governments around the world publicly pledge to phase out fossil fuels. Yet behind these promises lies a quiet contradiction: they continue to fund them. According to the International Monetary Fund (IMF 2024), global fossil-fuel subsidies—both direct and indirect—totaled US$7.1 trillion in 2023, equivalent to 7.1 percent of global GDP. This staggering figure is nearly double the world’s annual spending on education. The “shadow subsidy” sustains the very system that climate policy claims to dismantle.

The Hidden Architecture of Subsidy

When most people think of subsidies, they imagine explicit budgetary transfers—governments writing checks to oil and gas firms. But the majority are implicit: unpriced pollution, under-taxed externalities, and artificially low consumer prices.

The IMF’s Energy Subsidy Tracker (2024) shows that only 18 percent of fossil-fuel subsidies are direct payments. The remaining 82 percent come from not charging for environmental damages or from under-taxation of carbon. This means that every ton of CO₂ emitted receives an effective public subsidy of about US$80, distorting markets in favor of the old economy.

The Political Logic of Contradiction

Why do governments sustain what they claim to oppose? Because subsidies are politically invisible and economically addictive. Removing them risks social unrest.

In 2019, Ecuador’s attempt to eliminate fuel subsidies triggered mass protests that paralyzed the country. Indonesia faced similar upheavals when cutting diesel support in 2020. These episodes underscore the paradox: fossil subsidies often protect the poor in the short term while perpetuating poverty in the long run by crowding out spending on health, housing, and clean energy.

The World Bank (2024) estimates that phasing out fossil subsidies in developing economies could free US$500 billion annually—enough to provide universal access to electricity and clean cooking fuels. Yet few governments act. The fiscal cost of reform is immediate; the environmental benefit is deferred.

The Developed World’s Double Standard

Subsidy narratives often focus on developing nations, but rich economies are the biggest offenders. The OECD (2024) reports that G7 countries collectively spent US$600 billion in fossil support in 2023, primarily through tax breaks, price caps, and strategic petroleum reserves.

The United States alone provides US$20 billion per year in direct subsidies to oil and gas, while granting US$200 billion in annual implicit support through non-pricing of externalities. In contrast, federal clean-energy spending in 2023 amounted to US$37 billion. For every dollar invested in renewable transition, roughly five dollars sustained fossil incumbents.

The Financialization of Carbon

Subsidies are not merely fiscal—they are structural. Low fossil-fuel prices reduce perceived investment risk, lowering the cost of capital for polluting industries. A BloombergNEF (2024) study found that subsidized energy prices reduce fossil-fuel companies’ average debt costs by 2.3 percentage points, translating into US$200 billion in annual financial advantage.

This creates a vicious cycle: cheap energy inflates demand, which justifies further subsidies. Meanwhile, renewables face higher financing costs because their returns depend on policy consistency—something subsidies erode.

The Climate Cost of Cheap Energy

Economically, subsidies function as negative carbon pricing. The International Energy Agency (IEA 2024) calculates that removing all fossil subsidies could reduce global emissions by 2.8 gigatons per year—equivalent to eliminating the entire European Union’s carbon footprint.

Yet even after the 2021 Glasgow Pact, which committed nations to “phase down inefficient fossil-fuel subsidies,” progress remains negligible. Political incentives favor visible generosity (cheap fuel) over invisible responsibility (climate mitigation).

Pathways to Reform

A credible subsidy reform must be gradual, transparent, and compensatory. The OECD Green Budgeting Framework (2025) proposes three key principles:

1. Targeted compensation – Use part of saved subsidies to fund direct cash transfers for low-income households.

2. Transparent accounting – Publish annual subsidy inventories, including implicit fiscal losses from tax breaks and externalities.

3. Redirected investment – Channel savings into clean infrastructure, retraining programs, and public transport.

When Egypt implemented phased fuel reforms between 2014–2019 while expanding social assistance, it reduced subsidy expenditure from 8 percent of GDP to 2 percent without major unrest. The policy lesson is not austerity—it is alignment.

The Global Energy Contradiction

The energy transition will fail not because renewables are too expensive, but because fossil fuels remain too cheap. As long as governments subsidize pollution, carbon markets and green investments will fight gravity with paper wings.

Ending the shadow subsidy is the single most effective climate policy available—cheaper than carbon taxes, faster than technology breakthroughs, and fairer than moral appeals. The only obstacle is political courage.

The world cannot afford to pay for its own destruction twice: once through taxes, and again through temperature.

Works Cited

“Energy Subsidy Tracker 2024.” International Monetary Fund (IMF), 2024.

 “Global Subsidy and Fiscal Report.” Organisation for Economic Co-operation and Development (OECD), 2024.

 “World Development Indicators: Energy Reform.” World Bank Group, 2024.

 “Global Fossil Fuel Subsidy Database.” International Energy Agency (IEA), 2024.

 “Fossil-Fuel Financialization Study.” Bloomberg New Energy Finance (BNEF), 2024.

 “Green Budgeting Framework 2025.” Organisation for Economic Co-operation and Development (OECD), 2025.

 “G7 Energy Support Review.” OECD Energy Policy Division, 2024.

 “Subsidy Reform in Emerging Economies.” United Nations Environment Programme (UNEP), 2024.

 “Macroeconomic Implications of Fossil Support.” Bank for International Settlements (BIS), 2024.

 “Climate Pact Progress Assessment.” United Nations Framework Convention on Climate Change (UNFCCC), 2024.