IMF Working Paper on Global Fossil Fuel Subsidies: India’s Fiscal Burden and the Case for Phasing Out Untargeted Subsidies to Meet 2070 Net-Zero Commitments
SDG 7: Affordable and Clean Energy | SDG 12: Responsible Consumption and Production | SDG 13: Climate Action
Ministry of Finance | Ministry of Petroleum and Natural Gas
The IMF working paper titled ‘Underpriced and Overused: Fossil Fuel Subsidies Data 2025 Update’ documents a pervasive underpricing of energy, with total subsidies reaching $7.4 trillion (6.4% of global GDP) in 2024. The report distinguishes between explicit fiscal outlays and Implicit Subsidies, which represent the undercharging of environmental externalities like air pollution and climate change. While explicit support has stabilized at 0.6% of GDP, implicit costs are rising and currently account for 90% of the global total.
Key strategic findings from the 2025 global update include:
Inefficiency of Subsidies: Fossil fuel subsidies are a highly regressive tool; globally, the poorest 20% of households receive just 8 cents for every dollar spent on explicit subsidies, while the richest 20% capture 41%.
Sectoral Drivers: Petroleum and coal account for 46% and 38% of total global subsidies respectively, driven primarily by their high environmental and health costs.
Potential for Revenue: Full energy price reform could raise additional government revenue of 3.3% of global GDP while cutting CO2 emissions by 46% below baseline levels by 2035.
Health Milestones: Eliminating implicit subsidies through corrective taxes could prevent 1.1 million premature deaths annually from local air pollution.
Key India-specific details from the 2025 data include:
India’s Subsidy Profile: In 2024, India’s explicit subsidies were $36 billion (0.8% of GDP), while its Implicit Subsidies were substantially higher at $393 billion (9.1% of GDP).
Total Fiscal Burden: India’s total energy subsidy (explicit + implicit) is estimated at $429 billion, representing 10% of its GDP.
Health and Environmental Costs: Local air pollution damages in India are estimated at $3–6 per gigajoule (GJ), reflecting high emission rates and significant population exposure.
What are “Implicit Subsidies” in the context of energy pricing? Implicit subsidies occur when the retail price of a fuel fails to reflect its true “socially efficient” cost, which includes both the direct supply cost and external costs (externalities). These externalities encompass the social damage caused by carbon emissions, health impacts from local air pollution, and for road fuels, broader costs like traffic congestion and accidents. By not pricing these impacts, governments “implicitly” subsidize fossil fuel use, distorting market signals and discouraging the transition to cleaner energy alternatives.
Key Recommendations for India:
Phasing out explicit subsidies while implementing corrective taxes to reflect the full environmental and health costs of fuel consumption.
Strengthening social protection systems to provide targeted cash transfers to the most vulnerable deciles, ensuring the political viability of reforms.
Increasing public investment in clean energy alternatives to promote a fairer distribution of benefits and long-term fiscal sustainability
Policy Relevance
The data highlights a critical opportunity for the Ministry of Finance to reallocate fiscal resources toward developmental priorities. Transitioning from untargeted price supports to targeted compensation mechanisms could fully shield low-income households—who would face a 0.46% reduction in real purchasing power from explicit subsidy removal—using only a small portion of the revenues saved. Addressing the $393 billion in implicit costs through corrective taxes is essential to improve public health and provide the price signals necessary to accelerate India’s journey toward its 2070 Net Zero commitment.
Follow the full news here: Underpriced and Overused: Fossil Fuel Subsidies Data 2025 Update