Fossil Fuel Subsidy Reform Explained: 10 questions you’ve always wanted to ask

1. What are fossil fuel subsidies and why do they matter?

Fossil fuel subsidies can take many forms, including direct budget transfers, tax breaks, retail prices held artificially below cost, and preferential finance or regulated tariffs for enterprises that do not reflect full production costs.

While each measure differs in design, the effect is the same: fossil fuels are mostly priced below their real costs. According to the Fossil Fuel Subsidy Tracker, governments provided roughly USD 1.1 trillion in explicit subsidies in 2023. The International Monetary Fund, which also includes unpriced climate and health costs, estimates the total at over USD 7 trillion—around 7% of global GDP.

These subsidies can distort markets, encourage overconsumption, and lock countries into fossil fuel dependence. They divert public funds away from other areas, such as clean energy investment, and they expose economies to global fuel price volatility—undermining the energy security they are often meant to protect.

That’s why countries are joining forces through the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies (COFFIS), launched at COP 28, to share data, build transparency, and make subsidy reform politically and socially achievable.

2. What does “inefficient” fossil fuel subsidy mean—and who has committed to phasing them out?

The term "inefficient" fossil fuel subsidies first entered the global policy lexicon in 2009, when G20 leaders meeting in Pittsburgh pledged to “phase out over the medium-term inefficient fossil fuel subsidies that encourage wasteful consumption” while providing targeted support for the poor. Similar commitments appear in APEC declarations, Sustainable Development Goal 12.c, and the UNFCCC COP 28 UAE Consensus, which called for a global transition away from fossil fuels and the phase-out of inefficient subsidies.

Most fossil fuel subsidies are inefficient because they are broad, permanent, and opaque. As a result, they distort markets and lock in fossil fuels, delaying the energy transition. A fossil fuel subsidy may be justified if it addresses a clear social or market failure—such as improving energy access for low-income households or supporting remote regions—and there is no better non-fossil fuel alternative available to achieve this. This support should be targeted, temporary, transparent, and complemented with plans to replace fossil fuels. Anything else—especially if it delays the shift to clean energy—is inefficient by design.

3. How does fossil fuel subsidy reform contribute to climate action?

Fossil fuel subsidy reform is one of the fastest, most cost-effective tools to cut greenhouse gas (GHG) emissions. When fossil fuels are cheap, consumers use more; when prices reflect real costs, consumption falls and consumers tend to shift to cheaper clean alternatives, for example, to renewable energy that does not emit greenhouse gases. The IPCC (2022) for example suggests fossil fuel subsidy reform reduces CO2 emissions by a range of 1%–4% and GHGs by up to 10% by 2030, while the IMF (2023) found that the reform of explicit fossil fuel subsidies reduces CO2 emissions by 5% by 2030. Reducing CO2 emissions contributes to mitigating climate change.  

The benefits go beyond these direct impacts. Reforming fossil fuel subsidies can also generate significant fiscal savings, which can be reinvested into renewables, efficiency, and electrification. As such, it also aligns fiscal policy with the Paris Agreement, moving from a system that hinders the transition to one that supports it.

4. How can reforming fossil fuel subsidies strengthen energy security?

Many governments see fossil fuel subsidies as a tool to protect energy security. In practice, the opposite is true as fossil fuel subsidies make countries more vulnerable to global price shocks and fiscal crises in multiple ways.

When international prices rise, governments that fix domestic prices must cover the gap—either by increasing their own spending or forcing state-owned enterprises to absorb losses. In 2022, as oil and gas prices spiked, subsidy bills ballooned worldwide, draining resources from social and clean energy spending.

Phasing out fossil fuel subsidies reverses this vulnerability because consumers respond by using energy more wisely and move to renewables that are often cheaper in an equal market environment. This makes governments less vulnerable to global price swings. They can redirect spending to strengthen long-term security by diversifying energy sources, expanding renewables and storage, and investing in energy efficiency. Households and businesses respond by using energy more wisely, insulating themselves from future volatility. Fossil fuel subsidy reform transforms energy security from a defensive measure into a proactive strategy for resilience.

5. Why is reforming fossil fuel subsidies so challenging?

Fossil fuel subsidies are among the most politically persistent policies in the world. They shape consumer expectations, business interests, and political narratives. Besides that, countries fear losing business activity when prices of energy become higher in their country and not in neighbouring countries. Ending them is never a purely technical question—it’s political and financial.

Governments often fear that raising fuel prices will increase inflation, trigger protests, result in a loss of economic activity, and come with political costs. Powerful interest groups—fuel distributors, utilities, energy-intensive industries—lobby to maintain support. Inside government, various ministries—finance, energy, environment, and welfare—are often at odds: one may seek savings and revenues, another worries about affordability and secure supplies, yet another about protection for the poor. These tensions, along with leadership changes and technical difficulties for collecting data and assessing impacts, can stall reform for years.

Experience shows reform succeeds when it is gradual, transparent, and inclusive. Countries that consult broadly, communicate early, compensate vulnerable households and businesses, and phase in price changes over time sustain support. Moreover, cooperation among countries helps to maintain a level playing field, facilitating the gradual phase-out of subsidies. The politics are challenging, but the rewards—healthy finances, fairer societies, and cutting fossil fuel consumption—are worth the effort.

6. Don’t fossil fuel subsidies help the poor?

Not all fossil fuel subsidies are used to help the poor; some are intended to support competitiveness and therefore boost business activity. However, where fossil fuel subsidies do in practice help the poor—at least in the cases when they can access them—it is an expensive way to do so. In reality, broad fuel subsidies overwhelmingly benefit the rich. High-income households consume more energy—driving cars, using air conditioning, living in larger homes—and thus capture the largest share of benefits. Comparative evidence shows the top 20% of households can receive up to six times more in fossil fuel subsidy benefits than the poorest 20%.

A more cost-effective way that bypasses the fuel is targeted social protection. Cash transfers, lifeline electricity tariffs, and clean cooking initiatives such as India’s Ujjwala scheme directly support low-income households without distorting markets. When governments replace universal fuel subsidies with targeted programs, they still protect the poor while freeing funds that can be invested in areas that benefit everyone, achieving even more equitable outcomes.

7. What happens when fossil fuel subsidies are reformed?

When countries undertake reform, the results can be transformative. In Indonesia, the government removed most gasoline and diesel subsidies in 2014–2015, saving roughly IDR 211 trillion (≈ USD 15 billion)—nearly 10% of national expenditure—which was moved to fund rural development, infrastructure, and social programs.

India’s experience is equally telling. Through its PAHAL/DBTL system and Ujjwala initiative, the government replaced broad liquefied petroleum gas (LPG) subsidies with direct transfers to low-income women, reducing fraud and improving access to clean cooking fuels.

Italy provides a recent example from a high-income economy. In 2024, the government began gradually aligning excise duties on diesel and petrol, ending the long-standing preferential rate for diesel (EUR 0.6174/L vs. EUR 0.7284/L for petrol). The reform is expected to generate EUR 1.1 billion in additional revenue over 5years, all earmarked for the National Fund for local public transport. The proceeds are financing renewed transport contracts, improving service quality, and advancing sustainable mobility.

Not every reform creates immediate fiscal windfalls—some can correct hidden losses at state-owned utilities while others may effectively reduce tax revenues due to changes in consumer behaviour and businesses relocating abroad. But all well-planned and implemented reforms strengthen fiscal stability, market efficiency, and public trust, and lay the groundwork for cleaner and fairer energy systems.

8. What are COFFIS member countries doing to advance reform?

At COP 28 in Dubai, a group of governments launched COFFIS to accelerate reform by improving transparency, establishing domestic reform processes, and strengthening cooperation. Chaired by the Government of the Netherlands and supported by IISD, COFFIS unites countries committed to fair and practical reform.

Members are publishing fossil fuel subsidy inventories to map what measures exist and how much support flows to fossil fuels. Many have already submitted their inventories or indicated a date when they would be published. To strengthen alignment, members committed to also work on a comprehensive framework for such inventories. As a first step, members agreed on Minimum Standards for the National Inventories of Fossil Fuel Subsidies.

They are further developing time-bound national phase-out plans that identify which subsidies need to be phased out when, how to mitigate short-term social impacts, and how to redirect savings toward clean energy and public welfare. To support exchanges and peer learning about reforming fossil fuel subsidies across members but also to strengthen whole-of-government support from different ministries within governments, COFFIS has been hosting regular gatherings on the sidelines of important events, such as meetings organized by the UNFCCC, World Bank, or the IEA.

In addition, COFFIS members are jointly examining international barriers that currently hinder domestic reform efforts—such as tax exemptions and long-standing bilateral or multilateral agreements in international aviation and maritime transport—to explore opportunities to address them. IISD, in its function as COFFIS secretariat, is supporting these efforts through research and expert advice (i.e. on fuel taxation in aviation).

Perhaps most importantly, COFFIS fosters communication, trust, and confidence beyond its members who share the commitment to be proactive, transparent, and engage with civil society and other relevant groups. Through these efforts, COFFIS is turning what once seemed a politically very difficult reform into a practical approach to responsible climate and fiscal policy. 

9. How can governments communicate fossil fuel subsidy reform effectively?

Fossil fuel subsidy reform succeeds when people understand it. Governments that communicate clearly—before, during, and after the reform—build the trust needed to sustain change. The most effective strategies focus on why a reform is necessary and what benefits reinvesting the savings can bring.

Transparency is key. Publishing subsidy data, consulting stakeholders, and showing trade-offs—what is gained versus what is lost—helps counter misinformation. When people see reforms fund health care, education, or cleaner transport, they are more likely to support them. Communication that combines consistency, honesty, and fairness can turn a technical policy into a shared national project.

10. How can citizens and civil society support fossil fuel subsidy reform?

Ultimately, subsidy reform succeeds when it becomes a public demand rather than a technocratic initiative. Citizens, journalists, and civil society organizations can drive progress by demanding transparency, fact-checking claims, and tracking whether processes and alternatives are inclusive and whether savings are spent productively.

Journalists can expose the scale of subsidies and the inequity of their distribution. Researchers can analyze impacts and propose better alternative policies. Non-governmental organizations can amplify stories of success and fairness, showing that reform is not about taking away—it’s about using public money for better purposes.

When people understand that fossil fuel subsidies hold back their country’s development, reforming fossil fuel subsidies becomes not only possible but popular. It begins as an economic correction but ends as a collective step toward justice, resilience, and a cleaner future. Through COFFIS, those national efforts are building a larger movement to ensure fair, transparent, and lasting reforms.