Climate policy has traditionally focused on taxes and permits to reduce emissions, but fossil fuel subsidies present a significant challenge to these efforts. These subsidies, which involve government contributions that distort market prices, act as a negative carbon tax, encouraging fuel consumption. In 2022, fossil fuel subsidies made up 7.1% of the global GDP, highlighting the gap between efficient pricing and actual retail prices. For instance, in January 2024, gasoline cost just $0.029 per litre in Iran, compared to $3.091 in Hong Kong.

The implications of such subsidies are far-reaching, impacting investment in renewables, emissions, health outcomes, poverty, inequality, and fiscal stability. The benefits of fossil fuel subsidies disproportionately favour wealthier households, particularly in developing nations, where the top 20% consume six times more subsidized fuel than the bottom 20%, despite the poor spending a larger share of their income on energy.

Attempts to reduce or eliminate subsidies often lead to political unrest, as evidenced by protests in 24 countries between 2006 and 2019 following fuel price hikes. This reflects the complex balance between political, economic, and environmental objectives in subsidy reform.

Addressing these challenges requires understanding the political economy of subsidies, including the factors that shape policymaking. This involves analysing how subsidy reforms have been successfully implemented in some cases and the conditions that facilitated these changes. It also means exploring the dynamics of renewable energy subsidies and how they can be strategically leveraged to support a transition away from fossil fuels.