Governments around the world charge prices for energy that do not account for its harmful environmental, health and other side effects, amounting to a $5.3 trillion "post-tax" subsidy this year, the International Monetary Fund said in a report on Monday.
China, according to the IMF study, was by the far the biggest subsidy culprit, accounting for $2.3 trillion — or more than 40 percent — of the total thanks to its heavy reliance on coal and widespread air pollution. The US will spend the equivalent of $699 billion this year, or 13 percent, while the EU will account for another $330 billion in subsidies, or 6 percent of the total.
The report comes as almost 200 nations are trying to work out a deal to combat global warming ahead of a summit in Paris in December. Getting rid of fossil fuel subsidies and setting policies to price carbon pollution are seen as key international measures that would help keep temperatures from rising.
The IMF has long urged governments to get rid of "pretax subsidies" that allow firms and households to buy coal, gasoline or other fuel sources below their cost of supply. Many governments, including Egypt, India, Indonesia and Jordan, have recently raised domestic prices to match those internationally, said the Washington-based institution charged with policing global economic and financial stability.
But the Fund said it had turned its focus to the post-tax subsidies that mean prices fail to reflect costs like unfair tax advantages and deaths from pollution.
In its last study on the subject in 2013, the IMF estimated these post-tax subsidies amounted to $2 trillion in 2011, or 2.9 percent of the world's gross domestic product. Almost the entire difference between the old and the new estimate is based on a radical re-accounting of what the study says are the real environmental costs of energy subsidies. It also amounts to a significant shake-up of the argument the IMF and others have made against the energy subsidies that have eaten up huge portions of government budgets in emerging economies such as India and Indonesia.
With new data about the extent of environmental damage, the IMF says these subsidies totaled $4.9 trillion in 2013 and should rise to $5.3 trillion this year, or 6.5 percent of global GDP.
"The fiscal implications are mammoth: At $5.3 trillion, energy subsidies exceed the estimated public health spending for the entire globe," IMF economists Benedict Clements and Vitor Gaspar wrote in a blog post accompanying the report.
The IMF said about three-quarters of the damages from energy affect domestic consumers, meaning it is in countries' own interests to get rid of these subsidies. Were the subsidies to be eliminated this year they would raise government revenues round the world by $2.9tn, cut global CO2 emissions by more than 20 per cent and reduce the estimated 1m people who die premature deaths from air pollution by more than half. They would also raise “global economic welfare” by $1.8tn, or 2.2 per cent of GDP.
Because of the way they were measured, the IMF economists’ estimates are likely to provoke intense debate and be disputed by some.
Shattering Myth
British economist, Nicholas Stern, author of the UK government’s influential 2006 review on the economics of climate change, called the IMF analysis “very important” and said it “shatters the myth that fossil fuels are cheap by showing just how huge their real costs are”.
He also said the IMF calculations were “conservative” as they only took into account some of the environmental costs. “A more complete estimate of the costs due to climate change would show the implicit subsidies for fossil fuels are much bigger even than this report suggests,” he said.
If environmental costs and the impact of oil-friendly tax rates were not included the actual global cost of “pre-tax” subsidies round the world would go down to $333 billion this year, the IMF economists said, thanks largely to lower oil prices.
To arrive at their far larger $5.3tn “post-tax” estimate for subsidies this year, the economists added in the estimated costs of things such as health problems from air pollution and climate change.
More than half the total for 2015, or $2.7 trillion, came from an estimate of the cost of “local pollution”, while a further $1.3tn was attributed to the price of global warming and $967 billion apportioned to other local factors. The final $333 billion represents the gap between what consumers pay and international supply costs.
