Counting the Cost of Energy Subsidies

SUMMARY

Energy subsidies are projected at US$5.3 trillion in 2015, or 6.5 percent of global GDP, according to a recent IMF study. Most of this arises from countries setting energy taxes below levels that fully reflect the environmental damage associated with energy consumption.

 
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  • Energy subsidies sizeable worldwide and projected to stay high
  • China top subsidizer in dollar terms, Ukraine in percent of GDP, and Qatar in per capita terms
  • Countries can reap fiscal and environment gains by reforming energy subsidies
  • The country-level estimates underlying these global figures are now publicly available.

    Energy subsidies are substantial

    Energy subsidies are dramatically higher than previously thought. Estimates for global energy subsidies in 2011 have been revised to US$4.2 trillion, more than double the US$2.0 trillion previously reported in a 2013 IMF book, Energy Subsidy Reform: Lessons and Implications.

    The upward revision is partly due to factoring in new World Health Organization estimates on harm to health from pollution exposure. Additional country-level data on emissions and the damage they cause have also become available, as detailed in a more recent IMF book, Getting Energy Prices Right: From Principle to Practice.

    Subsidies are projected to remain high, despite sharp declines in international energy prices. The estimate for 2015 is US$5.3 trillion (6.5 percent of global GDP). High growth in energy consumption, especially coal, inflation and real income growth, and persistent undercharging for environmental costs are all key factors.

    Subsidies are pervasive

    Energy subsidies are sizable in nearly all countries, advanced and developing economies alike. China is the top subsidizer in dollar terms, Ukraine in percent of GDP and Qatar in per capita subsidies (Chart 1). Subsidies in dollar terms in part reflect the size of the economy.

    The bulk of energy subsidies in most countries are due to undercharging for domestic environmental damage, including local air pollution—especially in countries with high coal use and high population exposure to emissions—and broader externalities from vehicle use like traffic congestion and accidents. In many top subsidizers in percent of GDP and in per capita terms, these also reflect the setting of domestic energy prices below their supply cost.

    The reform gains are large

    Eliminating global energy subsidies could reduce deaths related to fossil-fuel emissions by over 50 percent and fossil-fuel related carbon emissions by over 20 percent. The revenue gain from eliminating energy subsidies is projected to be US$2.9 trillion (3.6 percent of global GDP) in 2015. This offers huge potential for reducing other taxes or strengthening revenue bases in countries where large informal...

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