While the reduction and phasing out of emergency support measures introduced in response to exceptionally high energy prices, along with the decrease in energy supply costs, drove down the fiscal cost of support for fossil fuel in 2024, the OECD Inventory shows that governments continued many measures supporting the consumption and, to a lesser extent the production, of fossil fuels. Consequently, the fiscal cost of support measures for fossil fuels remains elevated relative to historical averages. Furthermore, direct budgetary transfers for fossil fuels and low fossil fuel excise rates weakened the economic incentives to decarbonise, as measured by Net ECR in 2023 compared with 2021 levels.1
The high fiscal cost of support and low Net ECR highlight the challenges of ensuring the effective and efficient use of public resources to support well-functioning energy markets and meet public policy goals, including net-zero commitments, in the face of economic and geopolitical pressures. The recent peak in energy prices has raised concerns about energy security, as fossil fuels have become a less reliable source of energy (OECD, 2022[17]). Reforming support for fossil fuels and phasing out inefficient measures could release valuable fiscal resources, which could be redirected towards other government priorities. Such reforms would also accelerate innovation to enhance energy efficiency and reduce dependence on fossil fuels, thereby decreasing households’ exposure to energy price shocks, while also better aligning fiscal policy with public policy and climate goals.
While support to fossil fuels can reduce the burden of high energy bills on households and firms, it can have a sizeable fiscal cost, increase emissions, and undermine incentives for the energy transition and thus longer-term growth. Moreover, as currently designed, it tends to disproportionately benefit higher income households.
In undertaking reforms, governments can move away from broad-based support for households and businesses and redesign policies to ensure better targeting. Fossil fuel support measures are often highly inefficient as only a small proportion of the benefits reach the intended consumers or sectors. Reforming and redesigning these measures would limit fiscal costs while restoring fossil fuel price signals for a larger share of final consumers, thereby encouraging energy efficiency and conservation, as well as innovation and the shift towards non-fossil fuel sources (OECD, 2022[17]). Alternative approaches, such as direct income support for households, may offer more cost-effective options for governments with fewer adverse side effects (Wooders, 2024[15]; OECD, 2022[17]). Reforms should focus on better targeting those most in need and phasing out inefficient support for fossil fuels as soon as possible, to free-up much-needed public resources, make progress towards better functioning energy markets and the clean energy transition, help accelerate innovation in energy efficiency and better align fiscal policy with public policy and climate goals.