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(Gradual) Removal of Fossil Fuel Subsidies

Challenges to investment 

As a G20 member, India committed in 2009 to “phase out inefficient fossil fuel subsidies that encourage wasteful consumption”. For example, price discounts were offered to kerosene and liquid petroleum gas that were eventually sold at a loss. These subsidies, originally intending to protect consumers by keeping prices low, resulted in substantial fiscal costs, promoted inefficient resource allocation, and encouraged pollution without effectively targeting low-income individuals. Furthermore, a lower dependency on fossil fuels reduces energy security concerns as prices for imported fossil fuels were highly volatile. India faced significant challenges in reforming or phasing out these subsidies, including political challenges and the need for sustained commitment and communication (e.g., India reintroduced diesel subsidies in the build-up to the 2004 national elections). Additionally, many of the subsidies were untargeted, with about 87% of electricity subsidy payments going to households above the poverty line and over half benefiting the richest 40%. 

 

Approach 

One particular method India used to phase out inefficient fossil fuels was a subsidy swap, or shifting subsidies from one area of focus to another. The subsidy swap was designed to redirect fiscal support from fossil fuel to renewable energy consumption, redirecting part of the demand towards renewable energy and disincentivizing investment in new fossil fuel-based systems. Thereby, the subsidy swap consisted of two key elements: (i) reducing subsidies for fossil fuels and (ii) increasing subsidies for renewable energy deployment. 


Key Enabling Conditions 

India pursued self-reports and peer reviews of fossil fuel subsidies as initial steps toward fulfilling the commitment it made in 2009, reflecting its dedication to following international best practices and addressing domestic policy-making needs. Alongside the subsidy efforts, India also implemented additional policy measures to meet the needs of poor, rural households who lacked grid access. For example, India’s 2010 National Solar Mission promoted the installation of solar off-grid and decentralized PV systems for rural populations, targeting 2000MW equivalent of solar off-grid and decentralized PV systems by 2022. In June 2024, off-grid solar reached a capacity 3440MW.

 

Impact / Outcomes

Between fiscal year (FY) 2014 and FY 2017, India shifted public financial flows from petroleum products to electricity transmission, distribution, and renewable energy. Support for petroleum products fell by almost three quarters due to policy reforms and lower world oil prices, while support for renewable energy increased nearly six times. From 2014 to 2021, fossil fuel subsidies, including coal, oil, and gas, dropped by 72% to USD 8.5 billion. Specifically, coal subsidies decreased from USD 2.8 billion in FY 2014 to USD 1.6 billion in FY 2021, and oil and gas subsidies fell from USD 28 billion to USD 6.9 billion over the same period. RE subsidies increased from USD 0.6 billion in 2014 to USD 2 billion in 2017. In part due to increased subsidies, the share of renewables in total power generation increased from around 17% 2014 to 21% in 2021.


Additional Sources

Locations
India & South Asia, India
Year published
01 January 2009
Policy type
Energy policy
Policy lever
Removing fossil-fuel subsidies
Risk category
Social acceptance, Political risk, Grid/transmission risk, Currency/macroeconomic risk, Policy and regulatory risk

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