Fossil Fuel Subsidy Reform Policy

Abstract

At present, the scale of global subsidies for fossil fuels is still huge, and their energy, economic, environmental, and technological impacts cannot be ignored. This chapter reviews the previous literature to answer three questions: What are the impacts of fossil fuel subsidies? What are the benefits of reforms in fossil fuel subsidies? How can fossil fuel subsidy reforms be successfully implemented? Specifically, subsidies lead to excessive use of fossil fuels, resulting in wasted resources, increase the fiscal burden on governments and lead to smuggling of fossil fuels among some countries, are distributed unequally between rich and poor residents, increase emissions of carbon dioxide, and discourage the use and development of clean energy. Reforming fossil fuel subsidies might gradually mitigate the problems caused by subsidies. The increase in fuel prices after the removal of subsidies might enable more efficient use of fuels and affect a country’s gross domestic product, reducing the welfare of residents overall, but with a smaller effect on the interests of the poor than the rich, and affecting carbon emissions and promoting the development of clean energy. In the process of implementing subsidy reform, policymakers should pay attention to the method of reform. It is important to adjust subsidies based on local conditions, using cash transfer and other forms of compensation for residents, shifting to subsidies for clean energy, and gradually reducing subsidies of all types.