Fossil Fuel Subsidy Reform Could Reduce Poverty and Emissions
How governments use savings from fossil-fuel subsidy reform can determine who benefits and who bears the cost, according to a new analysis of 124 countries.
A new study led by University of Maryland researchers finds that governments can phase out fossil-fuel subsidies without increasing poverty if they redirect some of the savings to targeted social assistance programs.
The study focuses on explicit fossil-fuel subsidies, such as government payments, tax breaks or price controls that lower the cost of fossil fuels for consumers or producers, and examines whether shifting some of that money to social assistance can protect vulnerable households without sacrificing the emissions reductions that come from ending subsidies.
Published in the Proceedings of the National Academy of Sciences, the study was led by Xiangjie Chen, a postdoctoral researcher, and Laixiang Sun, a professor, both in the Department of Geographical Sciences (GEOG). Co-authors include Nathan Hultman of UMD's Center for Global Sustainability; Kuishuang Feng, formerly of GEOG and now at the University of Hong Kong; and researchers from the German Institute of Development and Sustainability and Shandong University.
“The central policy question is not simply whether fossil-fuel subsidies should be removed, but how reform can be designed so that vulnerable households are protected from the immediate price shock,” said Sun.
In 2022, explicit fossil-fuel subsidies across the 124 countries studied approached US$1 trillion. But the benefits were distributed unevenly. Globally, the richest 10% of households received about eight times more subsidy benefits than the poorest 10%. In low-income countries, the gap exceeded 50 to 1. In the United States, the bottom half of households received just 18% of the benefits.
The researchers found that eliminating subsidies without compensation could push about 42 million people into poverty worldwide, even as it reduced carbon dioxide emissions by roughly 936 million metric tons per year.
To investigate whether governments could avoid that trade-off, the researchers developed an economic model that divided households across the 124 countries into 201 expenditure groups and combined these data with information on the actual reach of national cash-transfer and social assistance programs.
The results showed that directing subsidy savings to existing targeted cash-transfer programs could reduce global poverty by about 131 million people compared with pre-reform levels. If social assistance could reach as many people as governments demonstrated was possible during the COVID-19 pandemic, the reduction would reach about 221 million.
“What surprised us is how much difference the way governments recycle the savings can make,” said Chen, lead author of the study. “The key is to support people directly instead of subsidizing fossil-fuel consumption for everyone.”
However, returning all the savings to households can stimulate additional consumption and associated supply-chain emissions. In several emerging economies, these additional emissions could substantially reduce or eliminate the climate benefits of ending subsidies.
The researchers estimated that returning about 80% of subsidy savings through targeted programs could provide a better balance. It would reduce poverty in most countries while preserving emissions cuts, leaving the remaining funds available for priorities such as debt reduction, clean-energy investment, climate resilience or disaster preparedness.
“The goal is not to prescribe that every government recycle exactly 80%,” Sun said. “The broader lesson is that subsidy reform can deliver a triple dividend—lower poverty, lower emissions and greater fiscal space—when compensation is targeted and calibrated rather than simply replacing one broad subsidy with another.”
The findings also point to the importance of strengthening social assistance systems before the next energy crisis.
“Countries that invest now in accurate beneficiary registries, effective transfer systems and broad social-protection coverage will be much better positioned to respond quickly when prices rise—without having to choose between household welfare and climate goals,” Chen said.
Paper: Chen, X., Feng, K., Sun, L., Malerba, D., Tian, P., & Hultman, N. (2026). Reallocating fossil subsidies via social assistance reduces poverty and preserves emissions cuts. Proceedings of the National Academy of Sciences, 123(38), Article e2606441123. https://doi.org/10.1073/pnas.2606441123
Main image by Iryna in Adobe Stock
Published on Thu, 09/17/2026 - 15:08