Scientists, environmental experts, and global bodies have called on nations to reduce their consumption and production of fossil fuels. But the countries have been doling out subsidies worth $5.9 trillion for the production of coal, oil and gas in 2020, said the International Monetary Fund (IMF).

"Subsidies encourage excessive energy consumption, which accelerates the depletion of natural resources. They also reduce the incentive for investment in energy efficiency and other forms of cleaner energy. By encouraging wasteful use of energy, energy subsidies can also exacerbate the external vulnerability of countries to volatile international energy prices," the IMF stated in its report.

What are fossil fuel subsidies?

Energy subsidies are governmental measures that keep costs for end-users below market levels, or for producers above market levels, or reduce costs for both groups. The analysts from the international body found that direct subsidies for the fossil fuel industry account for 8 percent of the total cost while tax breaks cost 6 percent of the total.

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The biggest cost factor was the choice to not factor in, through taxes or base rates, deaths and poor health caused by air pollution when determining power costs, at 42 percent. Similarly, the cost of heatwaves and other impacts of global warming were not factored in and cost 29 percent of the whole figure.

Who benefits the most from these subsidies?

The biggest benefactor of subsidies to the sector is the power generation industry. Coal-based power producers receive 61 percent of the total subsidies and natural-gas based power producers received 33 percent of the subsidies.

There was no apparent difference between industrial and residential consumers, and both rich and poor citizens received the benefits of the subsidies equally.

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Why are subsidies bad?

Subsidies, by shoring up the cost for the producers and consumers, incentivises the continued production of energy from fossil fuel sources. Since this energy is cheaper to produce and consumer due to government intervention, it also makes it harder for alternative sources and producers of energy to compete against them.

"Subsidies encourage excessive energy consumption, which accelerates the depletion of natural resources. They also reduce the incentive for investment in energy efficiency and other forms of cleaner energy. By encouraging wasteful use of energy, energy subsidies can also exacerbate the external vulnerability of countries to volatile international energy prices," read IMF's report.

In a time where the world is racing against the clock to contain the excessive spread of carbon emission and increase in global temperatures, continuing to subsidise the fossil-fuel industry means actively going against the goals set in the Paris Climate Accords to restrict temperature increase to 1.5° C of pre-industrial levels.

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The report found that efficient pricing could reduce global carbon emissions by 36 percent below baseline levels, an important step in reaching net-zero carbon emissions as early as possible. The stoppage of subsidies would also increase revenues by 3.8 percent of the global GDP, and prevent the death of 900,000 individuals due to air pollution every year.

Future reforms

While subsidies benefit both the rich and the poor, their sudden disappearance may cause a financial burden for the poor and middle class. Since subsidies are essentially paid off through the money that the taxpayers pay to the government, it is more efficient for governments to directly target the less affluent through schemes and policies to offset their new financial burdens.

An increase in fuel prices often mean a backlash against the ruling government, and even though the Group of 20 (G20) had advocated and affirmed for the phasing out of fossil fuel subsidies nearly a decade ago, very little progress has been made on the front.

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Comprehensive planning, gradual phasing out of subsidies, improving the efficiency of producers, and targeted programs to protect the poor are some of the ways that governments can take the important step of finally pulling the plug on fossil fuels.

(Edited by : Jomy Jos Pullokaran)