- Published 21 Nov 2025
- Last Modified 21 Nov 2025
- 9 min
Fossil Fuel vs Sustainable Energy Subsidies
Both the UK and the EU employ subsidies for fossil and renewable energy. The aim is to balance energy security and climate goals whilst underpinning a secure and smooth transition to clean energy.
The UK and EU are both navigating the green transition, so it’s no surprise that fossil fuel subsidies and renewable energy subsidies form a part of an overall strategy rather than being a case of fossil vs. sustainable energy.
Understanding how energy subsidies work to support existing production and encourage a green transition helps build knowledge about the landscape as a whole. To help with this, Professor Jacopo Torriti, Professor of Energy Economics and Policy at the University of Reading, has provided insights into these subsidies.
This article provides an extensive overview of current funding trends for each energy type. It breaks down the purpose and amount of subsidies, giving a clear picture of how and where funding is impacting the energy sector and the broad direction of future travel.
Why are There Subsidies?
Subsidies within the energy sector have existed for a long time, supporting stability, energy security, protecting consumers and the economy, and more. They have been directed towards energy sources and their infrastructure, as well as supporting the development and deployment of new sustainable energy types.
In particular, fossil fuel subsidies are already established across many domestic industries, such as the UK oil industry. Tax breaks are an important way to protect these industries while providing energy sovereignty and independence. They are also an alternative to global sources of energy supplies that might be less reliable or vulnerable to geopolitical events.
Critics of fossil fuels say that they promote an overreliance on carbon-intensive energy production, which runs counter to the broader move towards net zero.
Economic and consumer protections are also key facets of energy subsidies. If populations are exposed to energy price surges or volatility, that impacts inflation or, conversely, could push an economy towards recession as disposable income fluctuates.
The same is true for industry. Paying more for energy pushes the manufacturing prices up for raw materials and makes end products more expensive. This has the same impact on the economy that variable disposable income does for consumers.
Subsidies also exist to accelerate the transition to renewable energy sources and develop the necessary infrastructure. They support energy-intensive industries like manufacturing in their quest to use cleaner energy and meet carbon reduction targets. Subsidies also encourage private investment, further accelerating development.
As there are subsidies for both renewable energies and fossil fuels, Prof. Torriti states that both are often considered:
“Let's say that everyone working on the future of energy in the UK would think of the mix of supply. I think all decision-makers, from the Secretary of State to local-level energy planners, will have a different set of priorities, and then will work with a different set of energy mixes.”
Fossil Fuel Subsidies: UK
In the UK, around £17.5 billion is spent on fossil fuel subsidies annually on an industry that is fully established for both gas and oil. The UK works on a capacity guarantee basis, which means that the market is subsidised to guarantee grid capacity to “keep the lights on,” maintain equipment, and ensure worker safety during periods of high demand.
In the last decade, subsidies to support this amounted to around £12.5 billion from energy bills towards fossil fuel power plants. The current government intends to license expansion in both oil and gas production to reinforce the broader economy, with a focus on Scottish energy.
There are also tax reliefs for corporations that give capital investment and decommissioning costs of up to 100%. This serves to reduce taxable profit, acting as a subsidy. A VAT rate of 5% versus the normal 20% rate further subsidises fossil fuels.
In addition, an indirect allowance to the fossil fuel industry comes via savings mechanisms, which are tax-free or low tax, such as Individual Savings Accounts (ISAs) and pensions. These vehicles typically hold equities in companies that either produce fossil fuel energy or are indirectly involved.
Many factors determine whether a particular type of energy will be considered, such as reliability:
“Traditionally, fossil fuels have been seen as more reliable from a security of supply perspective, so the rating factors are more favourable, or when they [the government] enter a bid, they would run against each other [renewable vs fossil]. For this reason, we have that mix [of energy sources] that we're experiencing right now.”
Fossil Fuel Subsidies: EU
The EU still supports fossil fuel production via subsidies and tax breaks, such as during the 2022 energy crisis, which saw prices spike.
As a result, fossil fuel subsidies and emergency interventions rose to €111 billion in 2023 alone, with the money going on price caps, tax cuts, and other rebates designed to ensure consumers can afford to pay their energy bills.
Although these interventions were framed as emergency measures, they served to highlight the EU’s reliance on energy produced elsewhere and its volatility. To increase energy independence, there are also tax breaks related to fossil fuel extraction and exploration, with legacy contracts and exemptions at the national level staying for the time being.
Although the Climate, Energy and Environmental Aid Guidelines (CEEAG) aim to reduce direct support for fossil fuel production, natural gas, and other projects deemed to be strategic can bypass these guidelines and receive fast-track permits.
Indirect subsidies apply too, with diesel, natural gas, and aviation fuels all falling under the EU Energy Taxation Directive. This provides indirect incentives to keep producing energy from fossil fuels.
Sustainable Energy Subsidies: UK
Although the UK has fossil fuel production embedded into its infrastructure, allowances and incentives for renewables are still ongoing efforts.
In particular, there is a growing wind energy industry, as Prof. Torriti confirms:
“Wind has had a priority lane over other generation technologies. Particularly, offshore wind, the way contracts are designed, there's been a price you can bid in for more offshore wind contracts, then that price you might see as favourable.”
The creation of Great British Energy in May 2025 looks to be significant. It’s a state-owned renewable investment company that has some £8.3 billion to split across renewables.
GBE is funded using windfall taxes on oil and gas companies, as well as through borrowing. It will also develop strategic partnerships with both private and public bodies to further encourage renewable energy investment.
Its first initiative was to invest £100 million to install solar panels in schools and NHS facilities. The aim is to reduce energy costs, which would support local energy generation and create new jobs.
These initiatives can have different focuses, too, as Prof. Torriti explains:
“Every time the state puts in some money for energy generation, they have different criteria to prioritise, and reliability is the first one. In a sense, the value for money is based on how reliable that source will be.”
These initiatives and priorities aren’t always just applicable to the UK as a whole, as some may focus on specific regions, as Prof Torriti elaborates:
“What we're seeing with RESPs (or regional energy strategy plans) is a more decentralised decision-making. Regions will be able to come up with their own plans, and the National Energy System Operator will have a big role to play there.
“They’ll assist by saying, ‘well, that area needs a bit more of X and a bit less of Y.’ That's a development in the decision-making, or in the governance of energy, which will have an impact on which renewables get prioritised over others.”
There are also initiatives at the consumer level designed to support renewable energy. For example, the Boiler Upgrade Scheme, which offers up to £7,500 per property to install air or ground heat source pumps. In addition to this, biomass pumps receive up to £5,000.
Legacy support and incentives also continue with schemes such as Contracts for Difference, or CfD. They offer a fixed payment for any renewably generated electricity and replaced Renewables Obligation Certificates in 2017.
Both of these aim to incentivise and encourage investment in renewable energy and give long-term support to investors in renewable infrastructure.
Sustainable Energy Subsidies: EU
Data for renewable energy investment by country does not paint an EU-wide picture. However, within the EU, about 30% of energy-related subsidies went towards renewables efforts in 2023.
Tactics to increase renewable energy production have included initiatives such as the REPower EU framework, which was created in 2022 as a response to geopolitical and energy insecurity.
This initiative will reduce the EU’s dependence on fossil fuels and speed up the transition to renewable energy generation. Between 2022 and 2027, approximately €210 billion is due to be invested. This includes €20 billion in technology grants and revenues sourced from the Emissions Trading Systems auctions, as well as the use of Brexit-adjusted capital reserves held by the EU.
In particular, solar capacity is to be doubled and some 10 million heat pumps installed, serving to enhance energy efficiency and independence.
Meanwhile, the Just Transition Mechanism (JTM) supports regions that will be most affected by the move away from fossil fuels and towards renewables. It’s due to make use of €55 billion until the end of 2027.
As well as supporting affected regions, the JTM invests and provides financial aid for projects that help with the green transition and provides loans to public entities for the same purpose.
Conclusion
Although fossil fuels remain deeply embedded in both the UK and the EU, there are positive moves towards a transition to renewables.
It’s not just a case of fossil fuel vs renewable energy, nor is there a clear-cut winner for which type of energy to pursue, as Prof. Torriti explains:
“I don't think you'll find a single document that says ‘we're prioritising X technology over Y technology.’ But there are multiple priorities, all at different levels.”
Continuity in energy supply needs to be assured, and the transition to sustainable energy supported.
Strategic initiatives like the UK’s GBE and the EU’s REPowerEU signal commitment and long-term underpinning of such efforts. They also support issues such as energy independence, job creation, and economic resilience.
Learn more about renewable energy with RS.
Professor Jacopo Torriti is a Professor of Energy Economics and Policy at the University of Reading. He is the Flexibility Theme Lead of the Energy Demand Research Centre (EDRC), serves as a member of the Panel of Technical Experts of the Department for Energy Security and Net Zero, DSO Performance panel, and the Strategic Advisory Team on Energy and Decarbonisation for the Engineering and Physical Sciences Research Council (EPSRC).
Prof. Torriti has authored several books, including ‘Appraising the Economics of Smart Meters’ (2020), ‘Energy Fables’ (2019), and ‘Peak Energy Demand and Demand Side Response’ (2015).
