The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation

This report by the International Institute for Sustainable Development (IISD) examines how fossil-fuel subsidies act as a barrier to the deployment of renewable electricity. It argues that these subsidies impair the cost competitiveness of renewables, reinforce the dominance of incumbent fossil-fuel systems, and distort investment decisions. The document advocates for fossil-fuel subsidy reform and the pricing of environmental externalities to create a more sustainable energy system.

• Fossil-fuel subsidies create a significant financial disadvantage for renewable energy. In 2013, the International Energy Agency (IEA) estimated consumer subsidies to fossil fuels at US$548 billion, while subsidies to renewable energy were estimated at US$121 billion.
• Subsidies impair the cost competitiveness of renewable energy by artificially lowering the cost of fossil-fuel-based alternatives. This occurs through several mechanisms: subsidizing fuel inputs (as seen in Tunisia), funding the losses of electricity companies (as seen with NEPCo in Jordan), providing tax breaks to generators, and granting producer subsidies to upstream activities.
• Fossil-fuel subsidies reinforce incumbent systems by reducing the fiscal space available for renewable energy investment. The IMF estimates pre-tax fossil-fuel subsidies account for 0.7% of global GDP or 2% of total government revenues. In the Middle East and North Africa (MENA) region, 12 out of 20 countries have energy subsidies exceeding 5% of GDP.
• The report identifies a 'lock-in' effect where investments in long-lived fossil-fuel generation technologies are favored over renewables due to distorted project economics. Thermal generation often has lower upfront capital costs but higher operational costs compared to renewables, and subsidies further improve the discounted cash flow and rate of return for fossil-fuel projects.
• The underpricing of environmental and social externalities—such as air pollution and greenhouse gas emissions—acts as a financial benefit to fossil-fuel generators. One study cited estimated the cost of air pollution from coal-fired electricity at approximately US$40/MWh, which exceeds the price difference between coal and cleaner alternatives.
• Political economy barriers hinder subsidy reform because the established fossil-fuel industry creates wealthy and influential interest groups. These include domestic producers, transport operators, and grid operators who may exert significant pressure on policy-makers to avoid reform.
• In Indonesia, high electricity subsidies have severely limited the sector's ability to adapt to growing demand. In fiscal year 2013, the government allocated 100 trillion rupiah (US$9.0 billion) to electricity subsidies, representing 8% of all government expenditure.

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} }