Fossil fuel subsidies—especially for diesel and gasoline—have traditionally aimed to reduce energy costs for the population. However, the social and fiscal implications of these subsidies are significant: while intended to support affordability, they frequently deliver uneven benefits across income groups and may not effectively reach the most vulnerable. At the same time, they place a heavy burden on public budgets—a strain that is further exacerbated in today’s challenging context of heightened oil price volatility and economic uncertainty. In this context, reform is not only timely but also strategic, as these subsidies lock countries into outdated, polluting technologies and delay the transition to cleaner, more efficient transport systems.

Defined by the World Trade Organization as direct contributions or preferential pricing mechanisms by governments, fossil fuel subsidies can take various forms—ranging from direct transfers and tax breaks to regulated pricing schemes. In Latin America and the Caribbean (LAC), these subsidies are particularly prevalent in the transport sector, with diesel frequently subsidized to support freight and public transport, benefiting lower-income populations.

However, between 2015 and 2021, fossil fuel subsidies in the region consumed between 0.6% and 1.3% of GDP, an unsustainable burden in a region with pressing development needs and limited fiscal space.

From Burden to Opportunity: Reform with Equity and Impact

The challenge is not just to remove subsidies, but to rethink them in ways that protect vulnerable groups and maximize development outcomes—social, environmental, gender-related, and economic. To contribute to the reform discussions, UNDP LAC’s latest publication, Opportunities to Accelerate the Transition to Low-Emission Public Transportation by Redirecting Fossil Fuel Subsidies, outlines a transformative roadmap for governments to align public spending with climate and development goals:

Step 1: Set the Rules—Build Strong Policy and Institutional Frameworks

Effective subsidy reform begins with sound policy and institutional frameworks – clear rules and guidelines that are easy to understand and follow.  This involves adopting a gradual phase-out strategy and transparent, development-oriented fuel pricing systems; while assessing the fiscal and social impacts of reform and ensuring fair compensation mechanisms are in place.

In Paraguay, for instance, the state-owned oil company PETROPAR has developed a pricing methodology to disclose the opportunity costs of subsidies. Countries like Costa Rica and Ecuador have integrated clean transport into national strategies. Costa Rica’s National Decarbonization Plan (2018–2050) and Ecuador’s Energy Agenda (2016–2040) set clear, measurable goals for sustainable mobility.

Robust regulatory frameworks—backed by tools such as subsidy mapping, fiscal modeling, and social impact assessments—ensure that reforms are economically sound and socially inclusive.

Step 2: Redirect Funds to Drive Clean and Inclusive Mobility

Instead of subsidizing fossil fuel consumption, governments can create greater long-term value by investing in clean and efficient public transport.

In Uruguay, the GEF-UNDP MOVÉS initiative supported electric bus pilots, strengthened institutional capacity for sustainable mobility planning, and provided technical assistance, funding, and business model analysis to promote electric fleets.

Colombia offers tax incentives for low-emission vehicles, while Paraguay links public subsidies to operator performance in the Asunción metropolitan area—tying access to public funds to compliance with service standards and penalties. This approach laid the groundwork for innovative business models using blended finance in partnership with the national development bank.

Strategic planning tools, like Total Cost of Ownership (TCO) analysis, help governments compare long-term costs of different technologies, factoring in both capital and operating expenses. These assessments, alongside pilot projects, can build the case for investing in electric and hybrid fleets.

To scale these solutions, countries can tap into blended finance and capital markets, while leveraging de-risking mechanisms and investment structures such as guarantees, green bonds, public-private partnerships (PPPs), concessions, and innovative leasing models.

Step 3: Mobilize Institutions and People—A Political and Social Imperative

Subsidy reform is not just technical—it’s deeply political and socially sensitive. Strong institutional capacity is essential for planning, coordinating, and executing reforms.

In Uruguay, the MOVÉS initiative succeeded in part due to a cross-sectoral working group that ensured alignment across agencies. Similar interministerial teams can help other countries manage the complexities of reform while maintaining momentum.

Public engagement is also key. Transparent communication campaigns that explain the benefits of reform and offer clear social protections can help build public trust. Inclusive outreach—especially to affected communities—is vital to ensure that reforms are equitable and maintain affordability for the most vulnerable.

Seizing the Moment: UNDP’s Commitment to Lasting Change

Uruguay offers a concrete example of how well-designed incentives can drive the energy transition in public transport. As part of its GEF-UNDP MOVÉS initiative, the government implemented a robust subsidy scheme that covers the price difference between diesel and electric buses—up to approximately US$55,000 per vehicle per year, for a maximum of seven years (Article 349 of Law 19.670). This incentive was based on cost comparison studies conducted by Uruguay’s Transport Planning Commission (CTP), which evaluated electric, diesel, and hybrid fleets using Total Cost of Ownership (TCO) analysis. The program aimed to electrify at least 4% of the national bus fleet, demonstrating how evidence-based subsidies can create market certainty, promote technological uptake, and lay the foundation for scalable public transport decarbonization.

Reforming fossil fuel subsidies in LAC isn’t just about fiscal discipline—it’s a strategic opportunity to transform public transport. Redirecting these funds can drive investments in low-emission technologies, upgrade urban infrastructure, attract private capital, and improve air quality, while creating jobs, advancing innovation, and promoting social inclusion. By seizing this moment, the region can lead the way towards a cleaner, more equitable future. . UNDP stands ready to support countries in this transition—working at both the policy and institutional levels to design effective reform strategies, while providing financial advisory services to help scale up investments in sustainable and inclusive public transport systems.