The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation

The report argues that fossil-fuel subsidies disadvantage renewable energy by impairing its cost competitiveness, reinforcing incumbent fossil-fuel-based infrastructure, and distorting investment decisions. It details various subsidy mechanisms—including fuel input subsidies, funding of utility losses, and tax breaks—and highlights how these create an artificial advantage for thermal generation. The document also examines the role of underpriced externalities and the political economy of the energy sector in resisting reform. It concludes that reforming these subsidies is a priority for transitioning to a sustainable energy system, though it notes that governments often opt for 'second-best' renewable energy incentives instead of removing fossil-fuel supports.

• Fossil-fuel subsidies impair the cost competitiveness of renewable energy by artificially lowering the wholesale price of electricity, which can prevent renewable generators from covering their capital costs.
• Subsidies reinforce the dominance of fossil fuels by creating an incumbent advantage, as existing electricity systems are designed around large thermal facilities and centralized infrastructure that are ill-suited for distributed renewable energy.
• Investment decisions are distorted because fossil-fuel projects often have lower upfront capital costs and higher operational costs compared to renewables; subsidies further improve the project economics for thermal generation, locking in fossil-fuel paths for the long term.
• The failure to price environmental and social externalities, such as greenhouse gas emissions and local air pollution, provides a financial benefit to fossil-fuel generators and disadvantages renewable energy.
• Fossil-fuel subsidies reduce the fiscal space available for governments to invest in renewable energy infrastructure, such as flexible generating facilities and grid balancing networks.
• The political economy of the electricity sector creates significant barriers to reform, as wealthy and influential interest groups—including fossil-fuel producers and grid operators—exert pressure to maintain subsidies.

APA

Bridle, R., & Kitson, L. (2014). The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf

Chicago

Bridle, Richard, and Lucy Kitson. The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation. International Institute for Sustainable Development, 2014. https://www.iisd.org/system/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf.

Wikipedia

{{cite report |last1=Bridle |first1=Richard |last2=Kitson |first2=Lucy |title=The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation |publisher=International Institute for Sustainable Development |date=December 2014 |url=https://www.iisd.org/system/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{bridle2014impact, author = {Bridle, Richard and Kitson, Lucy}, title = {{The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation}}, institution = {International Institute for Sustainable Development}, year = {2014}, month = dec, url = {https://www.iisd.org/system/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }