Fossil Fuel Subsidies: The $760 Billion Lie About ‘Free Market’ Energy

Energy Freedom? Not Without Billions in Subsidies

Let’s talk about energy freedom and the free market. If you listen to many conservative policymakers and think tanks, you’ll hear these terms thrown around a lot. The idea is that by removing government intervention, we can unleash innovation, lower costs, and secure energy independence. But what if I told you that the fossil fuel industry—the sector that these same voices champion—is anything but a free market?

On an episode of The Daily Show, host Jon Stewart pointed out a contradiction in U.S. energy policy: “How about we just take $3 billion in subsidies we give to oil and gas companies that already turn billions in profits?” The response from some industry sympathizers was swift, who argued that these aren’t really subsidies, just standard tax deductions available to all businesses. But this argument misses the point.

What are Fossil Fuel Subsidies?

Fossil fuel subsidies are direct financial incentives and tax breaks provided by governments to oil, gas, and coal industries. These subsidies lower production costs and distort energy markets, costing taxpayers billions annually while delaying the transition to cleaner energy alternatives.

The fossil fuel industry benefits from several provisions in the U.S. tax code that directly reduce its tax burden. While it’s difficult to pinpoint the single largest contributor without detailed government budget data and economic modeling, the Expensing of Intangible Drilling Costs (IDCs) and Percentage Depletion Allowance are generally considered to be the major direct subsidies that benefit the U.S. fossil fuel industry. As shown in Table 1, these are just two of many tax breaks available to the fossil fuel industry, though other subsidies likely contribute to a lesser extent.

Beyond broad-based provisions in the U.S. tax code, subsidies also manifest in state-level exemptions. For example, it is common for liquefied natural gas (LNG) plants in Texas and Louisiana to obtain exemptions on property taxes. Louisiana’s Industrial Tax Exemption Program (ITEP) exempts industrial facilities from property taxes for ten years, and Texas offers a similar program. While such property tax exemptions may seem minor, they add up to enormous sums. According to a recent analysis from the Sierra Club, nine proposed and existing LNG facilities in Texas and Louisiana are set to receive a combined $21.6 billion in property tax exemptions over ten years.

Fossil Fuel Subsidies in the U.S.

Table 1. A breakdown of direct and indirect fossil fuel subsidies in the U.S., including the various tax breaks, financial incentives, and government support mechanisms that lower production costs and shield the oil and gas industry from market risks. These subsidies range from tax deductions and favorable financing to military protection and environmental cost externalization, illustrating the extent to which public funds sustain the fossil fuel sector.

Who Really Pays for Oil and Gas Subsidies? You do.

In a truly free market, the fossil fuel industry would compete without government help. Instead, a complex web of subsidies props up fossil fuel ventures, sheltering them from the true forces of supply and demand. For example, a 2017 study in Nature Energy found that nearly half of new U.S. oil fields wouldn’t be viable without this support. This dependence on subsidies is particularly concerning, as a recent analysis by FracTracker reveals that even in states like California with purported regulatory oversight, the financial health of some oil and gas operators is marginal. These tax advantages shield oil and gas companies from real market risks, which means that unprofitable fossil fuel ventures—businesses that would otherwise fail in a competitive market—are kept afloat at the expense of the public. 

But the story doesn’t end with preventing failure. These same subsidies also amplify success. While many fossil fuel projects teeter on the brink of profitability and require constant government assistance, others are wildly profitable, generating billions of dollars in revenue each year. These profits flow to shareholders, inflate executive compensation packages, and further entrench the industry’s political power. In effect, taxpayer dollars not only prevent the collapse of unviable projects but also contribute to the extraordinary wealth accumulated by the most successful fossil fuel companies. Both extreme failure and extreme fortune within the fossil fuel industry are, ironically, bankrolled by the public.

This dynamic exemplifies a regressive economic policy. While funded by general tax revenue collected from all citizens, the primary beneficiaries of these subsidies are disproportionately wealthier corporations and investors. This effectively transfers wealth upward and creates unequal footing for those who cannot afford such energy investments. Meanwhile, the broader public bears the burden of environmental degradation and associated health costs, often disproportionately impacting lower-income communities and marginalized populations who lack the resources to mitigate these negative consequences.

The Illusion of Savings

Fossil fuels often appear deceptively affordable for consumers, but low retail prices are an illusion created by underpricing that does not account for the full scope of their impact. And while we might not see the true cost reflected at the pump or on our energy bill, we pay the price in countless other ways. The International Monetary Fund (IMF) estimates that global fossil fuel subsidies—which include direct subsidies as well as the unaccounted costs of climate change, pollution-related health issues, and environmental damage—reached a staggering $7 trillion in 2022, with the U.S. accounting for nearly 35% of the global total.

These subsidies incentivize the reckless extraction and burning of fossil fuels, fueling climate change, polluting our air and water, and destroying precious habitats. Air pollution alone triggers a cascade of health problems–respiratory illnesses, heart disease, and more–which drives up healthcare costs for everyone. Furthermore, every dollar funneled into propping up fossil fuels is a dollar not invested in cleaner, sustainable energy sources, stifling innovation and job creation in those sectors. The IMF research shows how the apparent savings are dwarfed by the long-term burden we all shoulder, a hidden cost of “cheap” energy paid through environmental disasters, public health emergencies, military expenditures, and a stifled economy. And let’s be clear: it’s the taxpayer who ultimately foots the bill, not only through direct subsidies but also through the costs that oil and gas companies pass off to the public.

U.S. Fossil Fuel Subsidies Breakdown (2022)

Table 2. The $760 billion in U.S. fossil fuel subsidies reported by the International Monetary Fund (IMF) for 2022 represents an annual estimate for that year. The IMF’s analysis indicates that these subsidy levels can fluctuate annually due to factors like energy price changes, policy adjustments, and shifts in consumption patterns.

The Truth About the Free Market

The narrative of a free market in energy is a convenient fiction, particularly when it comes to fossil fuels. The truth is that the idea that fossil fuels thrive in a free market is a myth. The industry has been shielded by decades of favorable policies, tax breaks, and government handouts that keep prices artificially low and bog down the transition to cleaner energy. While policymakers who decry government intervention in markets continue to guarantee billions in subsidies for oil and gas companies, taxpayers ultimately foot the bill—funding these subsidies and paying for the long-term consequences of a system rigged in favor of polluting industries.

If policymakers genuinely believed in free-market principles, they would eliminate fossil fuel subsidies and allow energy sources to compete equitably, including the costs of pollution and climate impacts. This means ensuring that renewables have equal access to infrastructure investment and fair regulations. If we’re serious about energy freedom, it’s time to yank the lifeline of subsidies propping up fossil fuels and force them to compete in a truly open market.

References

• Liquefied Natural Gas | FracTracker Alliance
• Effect of subsidies to fossil fuel companies on United States crude oil production | Nature Energy 
• Fossil Fuel Subsidies Surged to Record $7 Trillion
• Fact Sheet | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs (2019) | White Papers
• How much in subsidies do fossil fuels receive? – Our World in Data