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Collectively, governments around the world provided more than $1 trillion in fossil fuel subsidies in 2023. While there is international consensus that fossil fuel use must be phased out in the coming decades to combat climate change, eliminating subsidies abruptly without a plan would likely produce a cost shock disproportionately impacting lower- and middle-income households.

A new report by Robert Pollin, Shouvik Chakraborty and Gregor Semieniuk of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst lays out a comprehensive and socially equitable blueprint to end these subsidies while simultaneously boosting support for the most vulnerable populations and accelerating the transition to clean energy to achieve net-zero emissions by 2050.

Fossil fuel subsidies “create perverse incentives, encouraging both consumers to continue purchasing fossil fuel energy and producers to continue producing it. They also represent a huge financial resource that could be mobilized to help finance the transition to a clean energy-dominant energy infrastructure,” the report notes.

It envisions a gradual and carefully managed elimination of fossil fuel subsidies, accompanied by:

• Targeted Cash or In-Kind Transfers: Programs to protect low- and middle-income households from energy price spikes, modeled after existing reforms in India and Indonesia.
• Revenue Reallocation: Redirecting savings from eliminated subsidies to finance clean energy infrastructure — particularly in renewable energy and energy efficiency.
• Public Communication and Gradual Reform: To build political support, the report stresses the importance of transparency and phased implementation, including price smoothing to prevent economic shocks.
• Addressing Political Resistance: Through building broad-based public support, the authors highlight the necessity of countering opposition from high-income households and fossil fuel companies, which are the largest beneficiaries of fossil fuel subsidies.   

“This report presents a path to expand opportunities and defend people’s living standards while phasing out subsidies for oil, coal and natural gas,” says Pollin, distinguished professor of economics at UMass Amherst, PERI co-director and lead author on the report. He recently told the Institute for New Economic Thinking that a just transition must be at the heart of a global Green New Deal.

Fossil fuel subsidies reached $1.7 trillion in 2022 and remained at $1.1 trillion in 2023 —approximately 1% of global economic output. The report asserts these subsidies undermine climate goals and entrench reliance on polluting energy sources.

While subsidies reduce energy costs for the poor, the study highlights that the wealthiest households and the fossil fuel industry capture the lion’s share of the benefits. In developing countries, the top income quintile receives over six times more in subsidy benefits than the bottom quintile.

The authors also document a strong correlation between global oil prices and the scale of subsidies, indicating that government policies alone have not curbed fossil fuel support effectively.

Some of the report’s recommendations are based on the experiences of India and Indonesia. Both countries have made efforts to reduce subsidies and implement compensation programs for low-income households. However, the study notes that these reforms have been only partially successful and remain heavily influenced by fluctuations in global oil prices.

The complete report, “Phasing Out Fossil Fuel Subsidies for the Green Transition: Financing and Distributional Prospects,” is available on PERI’s website.