Government Regulations and Policies

Government policies help to shape the operating conditions for the fossil fuel industry and the market for fossil fuel products.

This chapter looks at how governments support fossil fuel interests, both directly through policies such as tax breaks and subsidies, and indirectly by paying for the negative impacts of fossil fuel extraction and use.

Explanation

Governments provide billions of dollars worth of direct and indirect support to coal, oil, and gas companies every year. Typically, such support is justified on the grounds of economic development, energy security, or energy access and affordability. But by perpetuating the use of polluting fuels, this support drives climate change, pollution, and health impacts. It also tends to be socially regressive, as the wealthy use more energy than the poor and thus benefit more from artificially low prices.

Under The Paris Agreement struck in 2015, 194 signatories agreed to “make finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.” Then at the 2021 UN climate conference in Glasgow, COP 26, they agreed to accelerate “efforts towards the… phase-out of inefficient fossil fuel subsidies.”

It hasn’t happened. On the contrary, global government support for fossil fuels hit a record high of $2 trillion in 2022, according to the International Institute for Sustainable Development, an independent think tank. According to the International Energy Agency, “In 2022, global subsidies for fossil fuel consumption exceeded $1 trillion for the first time, marking a significant increase.”

The International Monetary Fund said fossil-fuel subsidies surged to a record $7 trillion in 2022, an estimate higher than the others because it includes enormous environmental costs, mostly from local air pollution and damage from global warming, so-called “indirect” costs.

Investigative journalism has an important role to play in examining subsidies, which come in a variety of guises.

Governments directly support fossil fuels in four main ways:

• Subsidizing consumption;
• Subsidizing production;
• Making investments through state-owned enterprises;
• Lending via international and domestic public finance institutions.

Consumption Subsidies

Any policy that gives people access to fossil fuels at below-market rates is known as a consumption subsidy. Fixed motor fuel prices, household energy bill rebates, and free gas cylinders for cooking fall into this category. Such measures are often popular, particularly when high commodity prices drive up the cost of living. In some countries, they are the main form of social welfare.

“Subsidies, the petroleum subsidies, have been a big aspect of India’s politics, and elections have been won on oil prices,” Richa Mishra, senior associate editor at The Hindu BusinessLine and author of Unfilled Barrels, a book on India’s oil and gas development, told GIJN. “The office boy who gets me my cup of coffee asks me: ‘OK, elections are over. How many gas cylinders do I get?’” So she told him the good news about the handouts, while noting that nothing comes for free. “Somewhere or the other you are paying for the subsidy,” Mishra recounted.

Because here’s the rub: consumption subsidies are an inefficient way to help the poor, and they hold back the clean energy transition. See a summary of research on how such subsidies in developing countries disproportionately impact women, by the International Institute for Sustainable Development (IISD) Global Subsidies Initiative.

Countries that subsidize the fossil fuel industry and keep gasoline prices historically low drive greater greenhouse gas emissions and stall the transition to renewable energy. Image: Shutterstock

Cheap motor fuel delivers the biggest benefits to those who can afford to drive a large vehicle over long distances. It reduces the incentive for motorists to switch to electric vehicles. Free or cheap gas cylinders for cooking play an important role in energy access, but are a costly and inflexible way of reaching households in need. Reforming consumer subsidies can free up public budgets for spending on health care, education, welfare, clean energy, and other social goods.

For Christopher Beaton, director of the energy program working on public financial flows at the IISD, the social justice dimension goes unreported. “Large shares of fossil fuel subsidies benefit wealthier individuals,” he said. “And even when there are policies that are intended to help poorer households, often they perform really, really badly.” Beaton stressed that reforms must be undertaken with care to protect the vulnerable and replace inefficient subsidies with better forms of welfare support.

Example stories:

• Climate Home News explored the impact of fossil fuel subsidy reform in Zambia, undertaken on the advice of the International Monetary Fund as a condition for credit (April 2024). Removing subsidies and increasing fuel taxes almost doubled the cost of filling up a car but paid for free public education.
• The Nigerian publication THISDAY reported in September 2023 that the richest 20% of Nigerians used 75% of the petrol, which received federal subsidies of approximately $10 billion between 2005 and the first half of 2023.

Production Subsidies

Coal, oil, and gas companies also benefit from tax breaks, guarantees, and other supportive government policies. While the sums involved are smaller than for consumption subsidies, they can have a big impact. Public support encourages private investment into the sector, locking in higher production of fossil fuels and associated emissions.

Fossil fuel exploration and development is a risky business. Companies can spend millions of dollars finding and developing a resource, with no guarantee of reward. Even if they strike oil, it takes time for a field to produce enough to repay the investment. Until the investment pays off, the asset is not considered profitable and therefore taxable. By permitting development with deferred and uncertain tax revenues, governments effectively share in the risk. Sometimes they create such generous arrangements that they end up with little benefit from the exploitation of resources.

Support measures include tax-rate reductions, allowances, credits, and deferrals. The Government Tax Expenditures Database is a good source of data for these (look at the methodology section). Governments also forgo revenue by underpricing public goods and services through royalty subsidies, cheap land and water, and low-interest loans.

The Organization for Economic Cooperation and Development inventory of government support for fossil fuels captures most production subsidies across 51 countries. It is based on a conservative definition of “subsidy” that does not include all forms of support to the industry.

For example, it does not count the billions of dollars governments are sinking into carbon capture and storage (CCS) and blue hydrogen (generated from fossil gas with CCS) projects, according to a 2024 Oil Change International report. As is covered in more detail in this guide’s chapter on the future of the fossil fuels industry, CCS is pitched as a climate solution but has consistently underdelivered in decades of development. Fossil fuel companies use the promise of CCS to justify continued production and directly benefit from these subsidies in many cases, according to a 2020 analysis in the Journal of Cleaner Production.

“Trusting the industry that drives climate change to fix it doesn’t make sense,” said Lorne Stockman, research co-director at Oil Change International. “This is money that could be invested into proven solutions like renewables. And instead that money — taxpayer money — is propping up fossil fuel profits, while capturing less than 0.1% of global emissions.”

Example stories:

• The New York Times profiled the Zombies of the US Tax Code (March 2024) — tax breaks for oil and gas producers the Biden Administration tried and failed to scrap. Oil executives rejected the term “subsidy” to describe these tax policies and accused Biden of attacking the industry.
• The Guardian reported on how ExxonMobil Corporation was set to be one of the biggest beneficiaries of the US Inflation Reduction Act (August 2024). It qualified for billions of dollars in subsidies for carbon capture and storage while investing heavily in oil and gas exploration. ExxonMobil declined to comment for the article.

Investment in State-Owned Enterprises

As covered in the first chapter of this guide, state-owned enterprises (SOEs) are responsible for more than half of fossil fuel production, according to the Natural Resources Governance Institute (NRGI). They invest billions of dollars into fossil fuel production and infrastructure, according to a 2023 report by Energy PolicyTracker. In some cases, SOEs generate significant export earnings and government revenues, which can support social welfare and sovereign wealth funds. In others, they become debt-laden drains on the public purse, too big to fail. Even a high-performing national oil company can become a liability if global prices fall below the cost of production. Though many SOEs have incentives to invest in developing fossil fuel projects, it’s an increasingly risky bet, according to a 2021 NRGI report.

State-owned oil and gas enterprises, like Saudi Arabia’s Aramco, are responsible for more than half of global fossil fuel production. Image: Shutterstock

State-owned oil companies and coal mines often have a close and opaque relationship with their governments. They are not guided purely by profit but may be used for political and policy purposes. In theory, this means they could take a lead in phasing out production in line with international climate goals, but in practice, very few are diversifying into clean energy, according to a 2022 Energy Policy Tracker report. On the contrary, governments with major fossil fuel interests are notorious for undermining climate ambition in international negotiations. Domestic pressures to sustain export revenue or reduce reliance on fuel imports can take priority over climate objectives.

Investigative reporters have done significant work to expose corruption at SOEs. Brazil’s Operation Car Wash scandal is an iconic example.

There are also stories to be told about the fundamental incompatibility of national investment in fossil fuels with slowing climate change. Many oil and gas producers claim they are simply meeting demand. As and when clean technology destroys demand, they will outcompete others to sell the last barrels of oil. It is a competition they cannot all win. Those with high production costs face the highest transition risks.

SOEs are public assets and can be vehicles for clean energy transition. The most striking example of this is Ørsted, formerly known as DONG Energy. The Danish SOE, which also has private sector shareholders, started diversifying away from oil and gas production into electricity generation and distribution in the 2000s. It became a world leader in offshore wind power, harnessing some of the same engineering skills used on North Sea oil rigs. Today its portfolio is almost completely free of fossil fuels.

Journalists can explore the opportunities for SOEs to diversify into clean energy and mitigate the risks associated with reliance on fossil fuel revenues. Annual reports are a good place to look for data on investments in fossil fuel and clean energy projects.

Example stories:

• Global Witness comprehensively investigated UAE’s national oil company (ADNOC) and its expansion plans and deal-making carried out the same year its CEO presided over COP28 climate talks (June 2024). ADNOC denied reports it had used the COP28 presidency to make oil and gas deals.
• OCCRP exposed corruption at two companies owned by Azerbaijan’s state oil company (SOCAR), with respect to a major gas pipeline project (January 2022). SOCAR denied the allegations.

International Public Finance

Many governments use public money to help developing countries and boost trade. Historically, this has included billions of dollars in fossil fuel projects. This is starting to change. Countries, including Canada, France, and the UK, are meeting COP26 commitments to end funding to fossil fuels, according to a 2024 report by the International Institute for Sustainable Development. However, others, mainly in East Asia, continue to support the sector, according to the Public Finance for Energy Database, a project of Oil Change International. As with production subsidies, this public financing mobilizes private investment and has an impact beyond its face value.

Multilateral and bilateral development banks exist to alleviate poverty and support sustainable growth in developing countries. They are increasingly adopting policies to stop financing fossil fuel projects, but this is far from universal. Some exclude coal finance but support oil and gas, or finance fossil fuels through intermediaries. Regardless of policy, they tend to be more transparent and sensitive to public opinion than private companies, which makes them a target for campaigners — and a useful source for journalists. They publish searchable project databases with loan amounts and impact assessments, research and performance reports. Export credit agencies provide guarantees and loans to businesses to mitigate the risks of trading with other countries. The bulk of this is trade between high- or upper-middle income countries. Some have committed to exclude fossil fuel projects and prioritize clean energy investment.

Journalists can report on trends like the share of a development bank’s portfolio dedicated to coal, bring an international angle to a controversial project, or highlight double standards between the energy projects a government permits at home and abroad.

Example stories:

• Climate Home News reported on the role of export credit agencies, the World Bank, and the IMF in supporting a major gas project in Mozambique, despite security, climate, and human rights concerns (July 2020). Backers claimed the project could cut net global emissions by displacing coal. UK Export Finance, for one, defended its decision to approve funds through the courts, but changed its policy in 2021 to stop financing fossil fuels.
• Eco-Business scrutinized Malaysia’s export credit agency (Exim Bank) over its role in financing arrangements for a controversial coal plant in Vietnam (June 2024). Exim Bank said its support for the project was aligned with Vietnam’s energy transition plan as it used emissions-reducing technology.

Indirect Support

Governments indirectly support the fossil fuel sector by paying for the damage it causes. If the industry bore the full cost of its impacts on people and the planet it would be much less competitive.

The IMF takes a broader view of fossil fuel subsidies than the OECD or the International Energy Agency, with the IMF counting the underpricing of external costs. It covers 192 countries and factors in air pollution, road traffic accidents, congestion, and global warming, among other things. Even this expansive definition may not capture corporate benefits that are harder to quantify, such as weak enforcement of license conditions.

What follows is a non-exhaustive list of angles that may be worth investigating.

Hidden Costs of Fossil Fuels

Fossil fuel companies get their social license to operate by providing jobs, public revenue, and an energy product that is still in demand. However, this comes at a cost. Extraction, transport, and use of fossil fuels is linked to environmental damage, human rights violations, health problems, and safety hazards. A 2022 study in the academic journal Nature estimates the “social cost of carbon” at $185 per ton of CO₂.

The IMF, among others, argues polluters should pay for these costs. Governments could impose an economy-wide carbon tax, say, or a windfall tax on producers. Introducing such taxes is politically challenging, as they increase energy costs in the short term. But evidence in an academic study shows carbon pricing measures are effective at reducing emissions. In the longer term, an energy system based on renewables is safer, cleaner, and cheaper. The IEA calculates that, for advanced economies, pursuing a path to net zero emissions by 2050 delivers immediate cuts to household energy bills. In those countries, the lower running costs of technologies like solar panels, electric vehicles, and heat pumps compared to fossil-fueled alternatives quickly repay the upfront investment. Emerging markets and developing countries typically face higher financing costs and may need targeted support to extend these benefits to all.

Building out renewable energy infrastructure, like public electric vehicle charging stations, can reduce long-term energy costs while encouraging trends that lower carbon dioxide emissions. Image: Ivan Radic, Creative Commons via Climate Visuals

In places with weak governance, carbon taxes are a distant prospect. But simply shining a light on the human cost of fossil fuel development makes a difference. Fossil fuel infrastructure is disproportionately sited near marginalized communities, whose concerns are ignored or overruled. Journalism can expose these inequities and amplify marginalized voices.

Stella Martany is a journalist and fixer in Iraq. She has faced death threats and a culture of fear to expose the heavy toll that gas flaring (burning fossil gas as a waste product at oil fields or refineries) takes on ordinary people. For the award-winning investigation Choking Kurdistan, she worked with three other journalists and a data scientist. Together they combined satellite images, air pollution data, health studies, and interviews with residents and doctors to tell a compelling story. “If you ask the Iraqi people in general and specifically in the northern Kurdish region, they are not positive about the oil industry at all,” she told GIJN. “They just live with the smoke and illness. They don’t get paid.” An official said the regional government was committed to ending flaring by 2023. The investigation led to more local media coverage and awareness of the problem, said Martany, although the situation had yet to materially improve a year after the deadline.

• Politico US profiled a community movement in Richmond, California that threatened Chevron with a refinery tax and won a $550 million settlement (March 2024). Chevron officials said the deal was just a “historical wrinkle” in a series of tax agreements with the city and set no precedent.
• Mongabay reported on an investigation (in Spanish) on corruption and impunity into Pemex, the Mexican state oil company, allegedly dumping toxic waste on communities (May 2024). In March 2024, Pemex approved an environmental, social, and governance plan for the first time.
• Politico EU uncovered torture and killings at TotalEnergies’s gas stronghold in Mozambique that had been kept quiet for three years (September 2024). TotalEnergies denied all knowledge of the alleged human rights violations.

Failure to Enforce Clean-Up Obligations

In most jurisdictions, fossil fuel producers have an obligation to clean up extraction sites at the end of their economic life. Abandoned oil and gas wells and coal mines release methane and other pollutants, harming the climate, the local environment, and health. All too often, operators walk away from their mess, leaving the public to bear the costs of pollution or rehabilitation — a deferred subsidy.

While output and profits are high, the authorities can wrongly assume that fossil fuel companies have enough money to cover cleanup costs. Production — and therefore cash flow — from an oil well declines as it ages. Since governments have agreed to transition away from fossil fuels, future demand is increasingly uncertain. By the time regulators realize the remaining projected cash flow will not cover asset retirement liabilities, it may be too late, as described by Carbon Tracker.

One warning sign is large, publicly listed companies selling their aging assets to smaller, private companies. The former have environmental policies and are obliged to disclose information to shareholders. The latter can be opaque and harder to hold to account.

Mark Olalde, a reporter, has investigated this issue in South Africa (for Climate Home News) and the US (for ProPublica). In the process, he has become an expert in asset retirement obligations and using record requests to compile data from multiple sources.

Abandoned mine site still plagued by water and soil pollution in western Serbia. Image: Shutterstock

His interest was sparked by gang wars over abandoned gold mines in South Africa. “South African journalists were doing amazing breaking news on this at the daily newspapers,” Olalde said, “But no one was stepping back. What were the policy failures that led to these being abandoned in the first place?”

The best way to prevent taxpayers getting stuck with the bill is to require companies to set aside sufficient money for site restoration upfront. Other measures that can help include reforming bankruptcy laws, enshrining joint and several liability agreements so governments can recover clean-up costs from previous operators, and strengthening regulators’ mandates to protect the environment.

Example stories:

• Climate Home News reported on the toxic legacy of abandoned coal mines in South Africa (March 2017). The Department of Mineral Resources said its role was to ensure the state was not exposed to the risk of inheriting environmental liability.
• ProPublica and Capital & Main found that the money set aside by fossil fuel companies to clean up abandoned oil and gas wells in the 15 states that account for nearly all US production covered barely 2% of the costs (February 2024). Regulators in some states said they were reforming their bonding systems while others maintained they had adequate protections in place for taxpayers. Industry representatives said they were doing their bit in line with federal and state laws.
• Drilled showed how the oil and gas industry in Australia is turning depleted wells into carbon sequestration projects to defer or avoid clean-up liabilities (October 2024). A government spokesperson said taxpayers would not be left to pick up the costs.

Planning Assumptions

Without spending a cent, governments can encourage or deter private investment in fossil fuel infrastructure. Central planning assumptions have a strong influence over investors.

At an international level, this can be seen in the battle of the demand forecasts. The International Energy Agency centers climate action in its future scenarios, predicting in its 2024 Energy Outlook that demand for all fossil fuels will peak by 2030. OPEC (the Organization of Petroleum Exporting Companies) sees oil demand growing to 2035 and accuses the IEA of discouraging necessary investment in the sector. Several oil companies also publish world energy outlooks.

Governments may pick one of these scenarios as the basis for their energy planning or carry out their own analysis. Assumptions made about economic growth, consumer behavior and implementation of climate policies all affect demand predictions — and which projects go ahead. Sometimes plans are more overtly geared to boost a specific industry or political pet project.

Journalists can interrogate these assumptions: Are the economic forecasts credible? Do rooftop solar panel sales weaken the investment case for new coal or gas-fired power stations? Is future demand for LNG robust enough to justify new export terminals?

Example stories:

• Project Multatuli documented how under then-President Joko Widodo, Indonesia lurched from one target to another, based on overly optimistic economic growth forecasts and shifting climate commitments.
• The Financial Times reported on how Pakistan overbuilt coal plants and its power sector is now saddled with debt as businesses and wealthier households turn to cheap rooftop solar. The energy minister said the government was trying to renegotiate power sector debts to make grid electricity more affordable.

Resources

The OECD keeps an inventory of government support for fossil fuels that covers 51 advanced and major emerging economies. This is the most comprehensive bottom-up assessment of policy measures that directly favor fossil fuels.

The International Energy Agency (IEA), a leading source of research and policy advice, takes a different approach, using a price-gap methodology to assess the scale of fossil fuel subsidies in 42 countries. Analysts calculate the difference between the retail price and a reference price, then multiply it by the volume of energy consumed. The IEA produces a comprehensive annual World Energy Outlook, which includes many projections. (See the 2024 version.)

The International Monetary Fund (IMF) takes a broader view of subsidies and covers a wider range of countries, resulting in the biggest estimates. It extends the price-gap analysis by asking: What if fossil fuels were priced to account for the social and environmental damage they cause? The costs of road accidents and congestion, air pollution, and climate impacts are all factored in.

The Fossil Fuel Subsidy Tracker, a joint initiative by OECD and the International Institute for Sustainable Development, integrates the OECD, IEA, and IMF data in an interactive data dashboard.

The Public Finance for Energy Database tracks flows of public finance from G20 countries and multilateral development banks to energy projects internationally. It also tracks their policies on excluding finance to coal, oil, and gas.

If you know what you are looking for, you can put in records requests to national or sub-national authorities under freedom of information laws in more than 135 countries. Annual reports and sustainability reports for state-owned enterprises contain useful information.

Think-tanks and NGOs that work on related issues include Publish What You Pay, IEEFA, Oil Change International, Carbon Tracker, National Resource Governance Institute, IISD, Global Witness, Reclaim Finance, and ClientEarth.

Megan Darby is a writer and strategist on the IISD Energy program. Before joining the organization, she was the editor of Climate Home News, an award-winning independent media outlet specializing in the international politics and diplomacy of the climate crisis.