The burning of fossil fuel attracts subsidies of US$5.3 trillion a year, the equivalent of 6.5% of global GDP, according to the latest report published by the IMF.
The IMF states that the majority of energy subsidies arise from a failure to account for the ‘true cost’ of consumption. Governments are routinely failing to take into consideration fossil fuels’ supply costs and the environmental impact of their use, namely, carbon emissions & global warming, and health & air pollution.
The IMF report states that coal currently benefits from the largest subsidies due to the large amount of environmental damage its consumption causes. The authors add that no country “imposes meaningful excises on its consumption”, amplifying the problem.
The report also notes that the potential of addressing energy subsidies is of global significance, with the IMF calculating that eliminating post-tax subsidies in 2015 could raise government revenue by US$2.9 trillion (3.6% of global GDP), slash CO2 emissions by more than a fifth, and cut in half premature deaths caused by air pollution.
Writing on the IMF’s energy forum website, Benedict Clements and Vitor Gaspar argue that governments should look to increase energy prices “gradually and predictably to reflect their true costs”. The authors argue that such a measure would benefit the environment, economic growth and public finances. They explain: “The fiscal gains [of 3.6%] are less than the total amount of subsidies (6.5% of GDP) because higher prices would drive down energy consumption. The fiscal gains from subsidy reform are sizeable and could be a game changer for fiscal policy in many countries… Furthermore, there would be appropriate incentives for investment in green technology because dirty energy would no longer be artificially cheap.”
The report notes that solving energy subsidies could help facilitate a successful climate change summit in Paris this year. The IMF report suggests that governments take a local approach to addressing energy subsidies, as the majority of the benefits will be felt by locals.