The world’s governments will spend $5.3 trillion (€4.8 trillion) subsidising the cost of oil, gas and coal this year, thereby undermining their attempts to combat global warming and wealth inequality and fund public health.
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That is the finding of a powerful new report by the International Monetary Fund (IMF) into global energy subsidies. Its authors describe the finding as ‘one of the largest negative externalities ever estimated’. They say eliminating the subsidies would raise global government revenues by $2.9 trillion, cut global CO2 emissions by more than 20%, and halve the number of people killed prematurely by air pollution.
The estimate of $5.3 trillion compares with a calculation by the IMF two years ago which put the global figure at $1.9 trillion. But this did not include environmental and health costs, which have now been added, with the result that the total underpayment has more than doubled. Even that has been described as ‘conservative’ by the British economist Nicholas Stern, who says the subsidies for fossil fuels are ‘much bigger than even this report suggests’.
There are three key findings from the study. First, energy subsidies are ‘dramatically higher’ than previously estimated. Second, the argument that removing subsidies would damage a country’s competitiveness is flawed and countries would benefit from enacting energy subsidy reforms unilaterally. Third, the potential fiscal, environmental and welfare impacts of energy subsidy reform are substantial and, if handled sensitively, could further improve welfare and economic growth. It also recommends higher prices for traditional motor fuels as the most effective and economical way of reducing traffic congestion.
The report suggests the world’s attitude to energy subsidies is misguided. It says: ‘All consumers – both rich and poor – benefit from subsidies by paying lower prices. Governments could get more “bang for their buck” by removing or reducing subsidies and targeting the money directly to programmes that help only the poor.’
It also analyses why efforts to reduce energy subsidies have failed, saying the price increases that result from subsidy reform have often led to widespread public protests. However, it says ‘subsidies encourage excessive energy consumption and reduce the incentive for investment in energy efficiency and other forms of cleaner energy.’
The figure of $5.3 trillion represents 6.5% of global economic output, more than the 6% that governments spend on public health each year.
‘This report coincided with the decision by the Commission not to ask member states to tackle their fossil fuel subsidies but instead to delay it by at least a year until the Energy Union comes into existence,’ James Nix of Green Budget Europe wrote in an article for EurActiv. ‘This leaves a policy vacuum on energy and climate change in the run-up to the vital Paris climate conference later this year, and the EU may find itself in the embarrassing position of having stressed the need to reform fossil fuel subsidies but moving backwards itself.’
Commenting on the IMF report, T&E’s Belgian member IEW said: ‘It’s a form of high-level schizophrenia: the international community commits to fighting climate change in order to preserve the natural environment for future generations, yet at the same time continues to spend trillions of dollars encouraging consumption of fossil fuels.’
