As governments worldwide grapple with tightening fiscal constraints and urgent climate commitments, subsidy reform has emerged as a central pillar of national budget debates. In 2025, both developed and developing economies are evaluating how to phase out inefficient fossil fuel subsidies and redirect those funds toward sustainable growth and social protection.

Understanding Subsidy Reform

Subsidy reform encompasses the removal or restructuring of both explicit and implicit government support that keeps consumer prices below true production costs. Explicit subsidies are direct budgetary transfers or price controls, while implicit subsidies arise when prices fail to reflect environmental and health costs.

By 2022, fossil fuel subsidies ballooned to nearly $7 trillion, equivalent to 7.1% of global GDP. Over 80% of these subsidies were implicit, masking the full social impact of coal, oil, and gas consumption.

International forums—G20, the Glasgow Climate Pact, and COP27—have repeatedly pledged to phase out explicit and implicit subsidies. Yet translating these commitments into policy remains a daunting challenge, especially where subsidies underpin household energy access and industrial competitiveness.

The Fiscal and Environmental Imperative

Eliminating or reforming subsidies offers a dual dividend: freeing up fiscal space and cutting greenhouse gas emissions. The IMF estimates that full subsidy reform could free up revenues worth $4.4 trillion annually by 2030, representing 3.6% of global GDP. Of that amount, $3 trillion could be redeployed in emerging and developing economies toward health, education, and infrastructure.

• Reduce projected global CO₂ emissions by up to 43% below baseline 2030 levels.
• Achieve emission cuts primarily by curbing coal (60%), petroleum (30%), and natural gas (10%) use.
• Align national budgets with the Paris Agreement’s 1.5–2°C target trajectory.

Redirecting these funds can accelerate the clean energy transition and support green infrastructure investments, while also fortifying social safety nets that cushion vulnerable households from price shocks.

Political and Social Challenges

Despite clear benefits, subsidy reform often faces fierce resistance. Abrupt price hikes for diesel, gasoline, or electricity can fuel social unrest, erode political support, and disproportionately affect low-income communities.

• Implement phased price increases combined with clear timelines.
• Deploy targeted cash transfers to shield vulnerable demographics.
• Engage civil society and labor groups through transparent communication.

Lessons from past reforms underscore the need for robust compensatory measures for populations, including retraining programs for workers in carbon-intensive industries and community-driven renewable energy projects in affected regions.

Global Progress and Best Practices

Progress varies widely. A handful of middle-income countries have adopted carbon pricing, effectively tackling implicit subsidies. However, the G7 is currently off track to meet its pledge to eradicate fossil fuel subsidies by 2025. Renewed efforts at the WTO’s Fossil Fuel Subsidy Reform Initiative aim to close the implementation gap through peer learning and technical assistance.

• Adopt automatic price adjustment formulas for fuel to depoliticize pricing decisions.
• Integrate carbon taxes with social safety nets to ensure equity.
• Leverage mobile payment platforms for efficient cash transfer delivery.

Advanced economies contend with large entitlement programs—Medicare, Social Security—yet still allocate substantial tax expenditures to fossil fuels. Realigning these benefits demands political will and clear public messaging about long-term gains.

Integrating Subsidy Reform into Broader Budgetary Reforms

Subsidy rationalization is not an isolated effort. It dovetails with broader fiscal consolidation measures such as pension reform, healthcare restructuring, and discretionary spending reviews. Holistic budget strategies can unlock synergies, ensuring that savings from subsidy cuts bolster critical public services.

By comparing subsidy mechanisms side by side, policymakers can prioritize reforms that deliver the highest fiscal and environmental returns with minimal social disruption.

Charting the Road Ahead

With key international meetings on the horizon—including the next UN climate conference and G20 finance ministers’ summit—2025 is poised to be a decisive year. Governments must finalize budget proposals that embody ambitious international reform timelines and clearly outline how savings will be reinvested.

Recommendations for success include:

• Conduct comprehensive impact assessments before designating subsidy cuts.
• Establish multidisciplinary reform committees to coordinate fiscal, environmental, and social objectives.
• Enhance transparency by publishing real-time subsidy expenditure data.

As the world faces mounting climate risks and debt pressures, successful subsidy reform can serve as a blueprint for resilient fiscal policy and equitable transition frameworks.

Ultimately, the path to sustainable budgets lies in embracing just transition measures that leave no community behind, while steering economies toward low-carbon growth. By placing subsidy reform at the heart of national budgets, policymakers can unlock transformative finance, safeguard vulnerable populations, and deliver on the promise of a healthier planet for future generations.