A Systematic Approach to Fossil Fuel Subsidy Rationalization

Removing or phasing out the subsidy can help promote more efficient fossil fuel use and accelerate the shift to low-carbon energy sources. Photo credit: ADB.

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A step-by-step guide explains the rationalization process and the key considerations and analytical requirements of each stage.


The benefits of fossil fuel subsidy rationalization (FFSR) are well-known. Yet, in practice, governments encounter a wide range of political economy obstacles when they attempt to reduce subsidy spending. Strong opposition from key interest groups in the extractive, power, and energy-intensive manufacturing sectors, as well as governmental concerns about protests sparked by anticipated negative social equity impacts, can lead to watered down reform proposals, or even result in policy reversals.

Yet, disentangling the subsidy knot is a challenge to which governments all over the world must respond to meet the targets of the 2015 Paris Climate Agreement.

To address obstacles and concerns effectively, governments must take a strategic approach and build a broad political and societal consensus in favor of rationalization within government, across key stakeholders, and among the general populace.

To support policy makers in their efforts to develop strategies for FFSR, the Asian Development Bank (ADB) has published a toolkit, which guides them through a series of analytical and practical steps to tackle the challenges of subsidy rationalization and engineer strategies to successfully and permanently eliminate this subsidy, avoiding protests or policy reversals.


The COVID-19 pandemic, the Russian invasion of Ukraine, and consequent global supply issues have magnified the gap between the financing needed to achieve the Sustainable Development Goals and available resources. Governments must, as a matter of urgency, explore new ways of mobilizing domestic revenue and enhancing fiscal space if they are to achieve Agenda 2030 and their commitments under the Paris Agreement.

Wasteful spending in many developing member countries (DMCs) of the Asian Development Bank (ADB) on fossil fuel subsidies is substantial. In 2021, explicit subsidies were worth the equivalent of 1% of GDP in Bangladesh, 0.6% in India, 5% in Kazakhstan, 0.8% in Malaysia, and 2.4% in Pakistan (IMF 2022).

An eminently reasonable option for DMCs to enhance fiscal space is to rationalize fossil fuel subsidies. The ADB toolkit emphasizes the importance of a whole-economy approach to FFSR, and the need for careful consideration of potential adverse effects, particularly on social equity and international competitiveness.

Figure 1: Steps in the Preparation and Strategic Design of a Rationalization Strategy

FFS = fossil fuel subsidy, FFSR = fossil fuel subsidy rationalization.
Sources: Authors, drawing on C. Beaton et al. 2013. A Guide to Fossil Fuel Subsidy Reform for Policy-Makers in South East Asia. Geneva: International Institute for Sustainable Development/Global Subsidies Initiative; B. Clements et al., eds. 2013. Energy Subsidy Reform: Lessons and Implications. Washington, DC: International Monetary Fund; and OECD. 2021. OECD Companion to the Inventory of Support Measures for Fossil Fuels 2021. Paris: Organisation for Economic Co-operation and Development.

The first part of the guide describes the systematic approach necessary to prepare the ground well for FFSR. This involves drawing up a subsidy inventory, analyzing the underlying mechanisms of fossil fuel subsidies, stakeholder mapping and predicting impacts of subsidy rationalization, and drawing up a priority list for reform.

Informed by this analysis, the second part of the guide explores the development of an FFSR strategy, focusing on three key considerations for the design of the process:

  1. Institution-building. Creating pricing mechanisms to depoliticize fuel pricing, designing support mechanisms for targeted social welfare, and supporting industry to become fuel-efficient and reduce emissions, as well as building capacity within government.
  2. Timeframe. Considering the pacing, timing, and sequencing of subsidy rationalization.
  3. Consensus building and stakeholder engagement. Designing FFSR through cooperation across government and in consultation with stakeholders, as well as developing a targeted strategic communications campaign.

Finally, once FFSR has been implemented, the toolkit looks at monitoring of rationalization and adjustment, with policy reviews and lessons learned informing subsequent rationalization processes.

The guide also includes a detailed biography and links to online resources and methodologies and country cases to direct policy makers to additional information and international support.


Jacqueline Cottrell
Green Fiscal Policy Consultant and Freelance Associate, Green Budget Germany

Jacqueline Cottrell is a specialist in green fiscal policy and greening of public financial management, reform of environmentally harmful subsidies, and green budgeting. Since 2004, she has been a fiscal policy consultant, delivering policy and strategic advisory, human capacity development, and research. She collaborates with a wide range of international organizations, including GIZ, AFD, Expertise France, European Commission, United Nations agencies, and ADB, and published works in the fields of environmental economics, including on the rationalization of environmentally harmful subsidies.

Asian Development Bank (ADB)

The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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