Why Do Governments Tax or Subsidize Fossil Fuels?

Cesar B. Martinez-Alvarez
August 18, 2020


Governments have long faced pressure to address the climate crisis by increasing taxes on fossil fuels, which are the source of more than three-quarters of the world’s anthropogenic carbon pollution. Since fossil fuel taxes and subsidies are hard to measure, it is unclear how much government policies have changed. Using original high-frequency data on gasoline taxes and subsidies in 157 countries, we establish three findings: despite rising alarm about climate change, from 2003 to 2015 there was little net change in fuel taxes and subsidies at a global level; fuel taxes and subsidies appear to be driven by slow-moving economic factors, primarily income and fossil fuel wealth; and reforms, when they occur, are overwhelmingly associated with country-level political conditions that follow no readily-discernible patterns. These patterns are consistent with a model in which fossil fuel taxes are determined by a country’s income and revenue needs, not its environmental commitments.

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