How Do Subsidies Impact Energy Prices?

Written By Teacher: Elizabeth Ward

My name is Elizabeth Ward. I am a former Early Childhood, Elementary, and English as a Foreign Language educator. I have taught third grade Science and Social Studies as well as Kindergarten in both urban and rural Oklahoma public schools. I taught online EFL to students of all ages in China for four years. I also have experience in curriculum development and content design for teachers in the physical and digital classroom. As a former teacher I have a passion for supporting teachers and making their jobs easier. I currently live in the greater Houston area with my husband and four dogs. 

Government subsidies play a major role in shaping energy markets, influencing the cost of both fossil fuels and renewable energy. These financial incentives can encourage or discourage different energy sources, affecting the transition to a low-carbon economy. Exploring this topic helps students understand the impact of policy decisions on energy prices and climate action. Learn more about the role government plays in fighting climate change with this lesson and collection of articles. 

Written By: MIT Environmental Solutions Initiative

The MIT Climate Change Engagement Program, a part of MIT Climate HQ, provides the public with nonpartisan, easy-to-understand, and scientifically-grounded information on climate change and its solutions.

The price an ordinary citizen pays for energy, whether it is a gallon of gasoline or a kilowatt-hour of electricity, almost never reflects the full cost of creating and delivering it. That’s because governments around the world subsidize both fossil fuel and renewable energy production, says Pablo Duenas-Martinez, a research scientist at the MIT Energy Initiative.

These subsidies have a huge impact on energy prices and on what kinds of energy are used.

Governments have many reasons to subsidize energy, Duenas-Martinez says, and a variety of levers for controlling its price. “Energy is one of the main drivers of economies, and as soon as you get a spike in prices of energy—particularly when you are not the one producing them—immediately there is an impact on the economy.” A country may place a price cap on energy to fix the price for consumers, he says, which can help to stem financial crises or civil unrest when the price of energy spikes.