Reallocating fossil subsidies via social assistance reduces poverty and preserves emissions cuts

Abstract

Fossil fuel subsidies are widespread, regressive, and environmentally costly, yet abrupt removal can raise poverty. To identify a practical reform pathway, we evaluate the effectiveness of compensatory policies grounded in existing national social protection systems. We develop a high-resolution global social accounting matrix to quantify how reallocating subsidies through actual social assistance impacts poverty, inequality, and CO 2 emissions. Without compensation, reform lowers emissions but increases poverty, especially for low-income households in emerging economies. Redirecting funds via social assistance disproportionately benefits the bottom half and reduces national poverty, particularly under targeted cash transfers or expanded programs where savings are large. However, full revenue recycling is not always desirable: Once vulnerable households are adequately protected, additional recycling can weaken both fiscal and climate gains. We therefore treat full recycling through social assistance as an analytical benchmark rather than a policy prescription and show that partial, targeted recycling, as illustrated by retaining roughly 20% of savings while channeling the remainder through social protection, can still reduce poverty while preserving emissions cuts. Overall, fossil fuel subsidy reform is most effective when social assistance is used to compensate low-income households, not to absorb all fiscal savings, leaving residual revenues available for other public priorities.