While the decrease in energy supply costs drove down the fiscal cost of support for fossil fuel in 2023, the OECD Inventory shows that governments continued many measures supporting the consumption and production of fossil fuels. As a result, the fiscal cost of support measures for fossil fuels remains elevated relative to its historical average. Moreover, direct budgetary transfers for fossil fuels and low fossil fuel excise rates weakened the economic incentives to decarbonise measured by Net ECR compared with 2021 levels.
The high fiscal cost of support and low Net ECR highlight the challenges of meeting net zero commitments amid economic and geopolitical pressures. Reaching net zero emissions requires a much faster deployment of non-fossil technologies (IEA, 2023[20]), and the recent energy crisis has raised concerns about energy security, as fossil fuels have become a less reliable source of energy (OECD, 2022[12]). Reforming support for fossil fuels and phasing out inefficient measures has the potential to free up much-needed resources which could be used for the transition to net-zero emissions, accelerate innovation to improve energy efficiency, and help reduce dependence on fossil fuels thereby reducing households’ vulnerabilities to price shocks.
In undertaking reforms, governments can shift away from broad-based household and business support, which tend to benefit users which are not necessarily in greatest need, and redesign policies to be better targeted. Indeed, fossil fuel support measures are often highly inefficient as only a small share of the benefit they bring goes to those consumers or parts of the economy which they are ostensibly designed to help. Reforming and redesigning these measures would limit fiscal costs and re-establish the price signal in relation to fossil fuels for more final consumers, thus providing incentives for energy saving and switching to non-fossil fuels sources (OECD, 2022[12]). Some alternatives to fossil fuel support measures, such as direct payments to households to support their incomes, could be less costly for governments and have fewer associated negative impacts (Wooders, 2024[10]; OECD, 2022[12]).
Developing capabilities to enable energy users to make the transition to clean energy sources would contribute to achieving climate, energy, and social policy goals (OECD, 2022[12]). Achieving this triple policy objective is currently hindered by policies that encourage the continued consumption and production of fossil fuels. Countries should therefore reaffirm and implement commitments made in the SDGs for phasing out and reforming inefficient fossil fuel support, with a view to ensuring that fiscal policy is better aligned with climate objectives.