Global energy subsidies, including the social and environmental costs associated with heavily subsidized fossil fuels, are costing the world’s governments upward of $5 trillion annually, according to new estimates released yesterday by the International Monetary Fund.
That lost revenue is punching gaping holes in the budgets of both wealthy and poor nations, according to IMF, while the benefits of the subsidies are flowing disproportionately to the wealthy.
Energy subsidies are also exacerbating pollution problems in many of the world’s large cities and discouraging investment in newer, cleaner energy sources, states the IMF working paper titled, "How Large Are Global Energy Subsidies?"
"What we find is that energy subsidies are big and they are rising," Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, said yesterday during a rollout event and panel discussion sponsored by the Brookings Institution.
IMF reports that post-tax global energy subsidies rose $3 billion each year from 2011 to 2014, and are projected to reach $5.3 trillion this year, or roughly 6.5 percent of global gross domestic product. That’s significantly more than emerging and low-income countries spend on public health and other core social and economic priorities, according to IMF.
The world’s largest energy subsidizers are also its largest energy consumers, led by the China and the United States, which together account for a projected $3 trillion in 2015 energy subsidies, followed by India, the European Union, Russia and Japan. As a percentage of economic output, China, Russia, and a handful of Eastern European and North African countries lead the world in energy subsidies, accounting for more than 8 percent of GDP, according to IMF.
Without economic reforms, IMF says these countries and many emerging economies — such as those of Asia and sub-Saharan Africa — face high risks, both from energy price shocks and mounting environmental damage caused by pollution associated with fossil fuel combustion for electricity and transportation.
Debunking the ‘knee-jerk sense’ about poverty
Adopting policies that establish the true cost of energy could also help drive down carbon dioxide and other greenhouse gases linked to climate change by as much as 24 percent, with the deepest reductions coming in parts of the Middle East, North Africa and Asia, experts said.
While country-specific effects would be varied, IMF projects that eliminating post-tax subsidies for the most-polluting energy fuels, such as coal and gasoline, could raise government revenue by $2.9 trillion, while also slashing premature deaths from pollution-related diseases by more than 50 percent.
"After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP)," the analysis finds.
David Wessel, director of Brookings’ Hutchins Center on Fiscal and Monetary Policy, said the linking of monetary policy with broader social and economic concerns, such as climate change, is an emerging and critically important task for governments to take on. And long-held assumptions about the benefits of energy subsidies are being rightfully challenged.
"There’s a kind of knee-jerk sense that if you cut energy subsidies, you hurt the poor," Wessel said. "It turns out rich people have more air conditioners and more cars than poor people, so energy subsidy benefits may not be as distributional as we thought they were."
According to Gaspar, IMF’s latest analysis evaluates energy subsidies using three metrics: first, subsidies’ negative effect on recovering the full cost of producing and supplying energy; second, subsidies’ failure to account for the environmental damage associated with energy consumption, including climate effects from greenhouse gases; and third, subsidies’ unbalancing effect on tax policy, since energy consumption is treated differently from the consumption of other goods.
While the analysis did not examine secondary effects of subsidies, Gaspar said the results are "qualitatively robust" and allow experts to "safely conclude that energy subsidies are very large and their reform will generate substantial benefits" for both governments and the people they represent.
Those benefits include the restoration of tax revenues that can support other critical programs and projects, such as education and health care, as well as the stimulation of new business and technology development around cleaner, more sustainable energy systems.
Moreover, as climate concerns coalesce at the upcoming Conference of the Parties to the United Nations global treaty on climate change in Paris in December, "the window of opportunity is open," Gaspar said, "and countries should act now."
Subsidy reform boosts revenue in India, Indonesia
Phil Sharp, a former 10-term congressman from Indiana and current president of the economic think tank Resources for the Future, said such critical examinations of energy subsidies and their broad societal effects are helpful in keeping the issue "out front" with policymakers.
But he cautioned that governments need concrete policy proposals every bit as much as they need probing analyses, and that moving conversations about energy subsidies rhetoric to action is a heavy lift in today’s highly charged political arenas. Both in the United States and abroad, leaders will need to be attuned to the political calculus of making such reforms.
"There is a major political component to all of this," Sharp said. "So the next stage of work, whether it’s done by the IMF or someone else, is to show me how I should do this. Show me where it has been done before, and show me how it is possible without wrecking my leadership as a political party, a dictator or whatever I am."
Adele Morris, a senior fellow and policy director for Brookings’ Climate and Energy Economics Project, said one strategy for getting policymakers to act on environmental concerns is to frame the challenges in economic terms.
"Then it not just another environmental problem," she said. "It’s framing the issue as one of, ‘How do we allocate resources efficiently in our economies?’"
David Coady, an IMF deputy division chief of fiscal affairs and co-author of the white paper, said such ways of thinking are being tested in countries across the world, from India to Indonesia, with often striking results.
Both of those fast-growing economies, for example, have liberalized policies on gasoline and diesel subsidies, allowing prices to more closely mirror actual supply costs. The result has been rising tax revenues to address social and environmental concerns without destabilizing energy markets or triggering a decline in demand for petroleum products.
China, meanwhile, has agreed to begin bringing down the country’s carbon dioxide emissions by 2030, a process that will be aided by eliminating price supports for coal and oil, according to IMF experts. Such policies could see coal consumption in China begin trending downward by 2020, Gaspar said, sending a strong signal that fossil energy subsidies can be decoupled from economic growth.