Clean air, land, and oceans are critical for human health and nutrition and underpin much of the world’s economy. Yet they suffer from degradation, poor management, and overuse due to government subsidies. The new report “Detox Development: Repurposing Environmentally Harmful Subsidies” examines the impact of subsidies on these foundational natural assets. Explicit and implicit subsidies—estimated to exceed US$7 trillion per year—not only promote inefficiencies but also cause much environmental harm. Poor air quality is responsible for approximately 1 in 5 deaths globally. And as the new analyses in this report show, a significant number of these deaths can be attributed to fossil fuel subsidies.
Key findings about fossil fuel subsidies
- Fossil fuel usage—incentivized by vast subsidies—is a key driver of the 7 million premature deaths each year due to air pollution. About 94 percent of the world’s population is exposed to unsafe particulate matter (PM2.5) concentrations. The health burden of air pollution is particularly high in industrializing middle-income countries. Poor and marginalized groups are often exposed to higher levels of pollution and are less able to afford adequate health care.
- Countries around the world actively paid about US$577 billion in 2021 to artificially lower the price of polluting fuels such as oil, gas, and coal. By underpricing fossil fuels, governments not only incentivize overuse, but also perpetuate inefficient polluting technologies and entrench inequality. Of all subsidies to the energy sector, about three-quarters go to fossil fuels.
- By increasing fossil fuel prices, subsidy reform can reduce the incentives to use polluting fuels—but the effectiveness of this instrument can be limited. When polluting fuels are expensive, people reduce their consumption. On average, a 10 percent increase in the unit price of energy results in a short-run reduction of consumption of about 2 percent. This means the demand for energy is only sluggishly responsive to prices, especially when cleaner alternatives are unavailable or unaffordable.
- Fossil fuel subsidy reforms are pro-poor. In nearly all countries, richer households consume significantly more energy than poorer ones, and thus lose more when subsidies are removed. Even when looked at as a share of income, poor people are not necessarily hit harder by subsidy reform; it depends on the country context.
- Subsidy reform could reduce air pollution and save up to 360,000 lives by 2035 in 25 high-pollution, high-subsidy countries. But it is more effective when accompanied by complementary policies. For instance, ensuring the availability and affordability of clean technologies, addressing information and capacity constraints, and addressing behavioral biases are ways to increase the effectiveness of subsidy reform.
The world’s sustainable development goals are directly undermined by the roughly US$1.25 trillion in explicit subsidies paid every year to fossil fuel, agriculture, and fishery sectors. This report documents the hidden consequences of subsidies. It shows that subsidy reform can remove distorted incentives that obstruct sustainability goals, but it also can unlock significant domestic financing to facilitate and accelerate sustainable development efforts that would have greater, wider, and more equitable benefits.
Excerpt of: Detox Development: Repurposing Environmentally Harmful Subsidies. World Bank, 2023