Fossil-fuel subsidies and energy-firm outcomes in the European Union: Economic and environmental performance

Abstract

This study examines the economic and environmental impacts of fossil fuel subsidies in the European Union (EU) during the energy crisis triggered by the 2022 Ukraine war, focusing on their implications for corporate performance and sustainability. Using a panel dataset of 100 publicly listed energy firms across the EU from 2019 to 2023, including 44 fossil fuel companies and 56 renewable energy companies, and employing a Difference-in-Differences (DiD) methodology, we assess the causal effects of increased fossil fuel subsidies on financial performance and Environmental, Social, and Governance (ESG) outcomes. Our findings reveal that these subsidies did not significantly increase fossil fuel consumption or reduce price elasticity of demand, challenging their conventional justification as tools to stimulate energy use or stabilize market sensitivity. However, the surge in subsidies during 2022 significantly improved the financial performance of fossil fuel firms, as reflected by higher Return on Assets (ROA) and Return on Equity (ROE). This financial gain, however, came at the expense of ESG performance, with firms reallocating resources from sustainability initiatives to enhance short-term profitability. These results underscore a critical interaction between immediate financial stabilization and long-term environmental commitments.