The importance of fossil fuel subsidy reform is overstated. Burning fossils fuels causes climate change, which has costs estimated to be in the trillions.[133] Some people refer to these negative externalities are “subsidies for fossil fuel”[134]. Perhaps it’s fair to refer to the amount untaxed negative externalities as ‘subsidies’, but some people might think that these ‘trillions in subsidies’ refer to funds in government budgets to directly lower the price of fossil fuels that could simply be cut.[135] But direct government support and tax breaks for fossil fuels that could be cut amounts to ‘only’ about $330 billion per year globally, according to a new study in Nature.[136] This means that unfortunately, fossil fuel subsidy reform will not increase the price of fossil fuels by trillions, because negative externalities (e.g. climate change and disease) make up most of these trillion dollar figures.

Would cutting these—still considerable—subsidies reduce emissions substantially? The Nature study suggests that global subsidy removal would only lead to a small, 1%–5% decrease in global CO₂ emissions. Only a small share of this can be influenced by policy in advanced economies: There are $43 billion in subsidies, amounting to 13% of global subsidies, within Europe, North America, and the Pacific OECD, and this number is not projected to grow much in the future. In fact, EU member states and G7 nations have pledged to end fossil fuel subsidies by 2020 and 2025 respectively (although they are currently not on track to fulfill this pledge).[137] Advanced economies might be able to use their influence to push fossil fuel subsidy reform in emerging economies, but this would be hard because even though it would have many benefits,[138] they are nevertheless often seen as regressive[139].

The Nature study has been criticized[140] for leaving out some subsidies, such as capacity market payments to ensure the constant electricity supply, public finance, and investment by state-owned fossil fuel enterprises. Others estimate subsidies in European countries alone to be $138 billion a year.[141] But even if we were to use these higher estimates to naively extrapolate them to get a rough upper bound of the direct government support in all advanced economies, then this number would probably not be much higher than the $330 billion. Thus, advocacy for subsidy reform in advanced economies is unlikely to reduce emissions by much more than 5%. Because phasing out these minor subsidies is theoretically equivalent to a very small tax on carbon, it will not substantially stimulate the kind of energy innovation that could spill over to emerging economies. Thus, the net benefits of advocacy might be lower than other policy areas.

Reducing emissions by 5% is not insignificant and worth promoting, especially if broad support can be garnered from both environmentalist and libertarian camps to end support of fossil fuel subsidies. Also, any country can unilaterally cut their fossil fuel consumption without the need for international coordination. But because the world must lower emissions to zero or even negative emissions soon,[142] phasing out fossil fuel subsidies can only be a small part of the answer. It is not the silver bullet some advocates claim.

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