## 2025. Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit)

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---

### Subsidy composition (2020)
- Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies).
- 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).
- Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies, accounting for 42 percent of the total in 2020.
- Climate damages account for 29 percent; other local externalities such as congestion and road accidents account for 15 percent; foregone consumption tax revenue accounts for 6 percent.

### Impact of efficient fuel pricing in 2025
- Efficient fuel pricing in 2025 would reduce global carbon dioxide global carbon dioxide emissions 36 percent below baseline levels.
- Efficient fuel pricing in 2025 would raise revenues worth 3.8 percent of global GDP.
- Efficient fuel pricing in 2025 would prevent 0.9 million local air pollution deaths per year.

*Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021236-print-pdf.pdf*

---

### Executive Summary and Major Findings

### Executive Summary (selected points)
- Getting fossil fuel prices right requires pricing that reflects both supply and environmental costs.
- Updated analysis for 191 countries finds large, pervasive gaps between efficient prices and user prices for fossil fuels; no country fully prices all fuels at their full supply and environmental costs.
- Largest price gaps are generally for coal, followed by natural gas, diesel, and gasoline.
- Globally, fossil fuel subsidies were $5.9 trillion or 6.8 percent of GDP in 2020 and are expected to increase to 7.4 percent of GDP in 2025.
  - Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).
- Efficient fuel pricing by 2025 would:
  - Reduce global CO2 emissions 36 percent below baseline levels, equivalent to a 32 percent cut below 2018 levels.
  - Avert 0.9 million premature deaths per year from local air pollution.
  - Raise revenues worth 3.8 percent of global GDP.
  - Deliver net economic benefits (environmental benefits less economic costs) of 2.1 percent of global GDP.

### Key Quantitative Findings
- Global subsidies and composition:
  - Total (explicit plus implicit) fossil fuel subsidies: $5.9 trillion in 2020, or 6.8 percent of GDP.
  - Projected total subsidies: 7.4 percent of GDP in 2025 (assuming current policies).
  - Explicit subsidies in 2020: $0.45 trillion.
  - Implicit subsidies in 2020: 92 percent of total subsidies.
- Contribution by damage type (2020):
  - Local air pollution: 42 percent.
  - Global warming (climate damages): 29 percent.
  - Other local externalities (congestion, accidents): 15 percent.
  - Supply costs (explicit subsidies): 8 percent.
  - General and consumption taxes (foregone): 6 percent.
- Fuel pricing shortfalls (2020, share of consumption priced below half of efficient level):
  - Coal: 99 percent.
  - (Road) diesel: 52 percent.
  - Natural gas: 47 percent.
  - Gasoline: 18 percent.
- Sectoral distribution:
  - Power generation receives 61 percent of coal subsidies and 33 percent of natural gas subsidies.
  - Electricity subsidies are evenly split across industrial and residential users where retail prices are below cost recovery.
- Regional and country highlights:
  - By region, East Asia and the Pacific accounts for 48 percent of total energy subsidies.
  - By country, the largest absolute subsidizers are China, the US, Russia, India, and the EU (in that order in absolute terms reported).

---

### Projected Environmental, Health, Fiscal, and Welfare Impacts of Efficient Pricing (by 2025)

### Emissions and climate impacts
- CO2 emissions:
  - 36 percent reduction below baseline levels in 2025.
  - Equivalent to a 32 percent reduction below 2018 levels.
  - Reduction breakdown by fuel:
    - Coal 74 percent of the CO2 reduction.
    - Petroleum 21 percent.
    - Natural gas 3 percent.
  - Regional CO2 reductions vary from 21 percent below BAU levels in 2025 in Europe to around 40 percent in the CIS and EAP.
  - If only explicit subsidies are removed, global CO2 are reduced by only 3 percent below 2025 BAU levels.

### Public health impacts
- Air pollution and health:
  - Full fuel price reform reduces global air pollution deaths from fossil fuel combustion by 32 percent below BAU levels in 2025, or 0.9 million a year in absolute terms.
  - Reduction in mortality ranges from 19 percent in SSA to 63 percent in EAP.

### Fiscal impacts
- Full price reform raises revenues of $4.2 trillion, 3.8 percent of global GDP, in 2025 (relative to BAU levels and accounting for revenue losses due to erosion of pre-existing fuel tax bases).
- Revenues generated by full price reform in 121 EME and developing countries in 2025 would amount to $3 trillion.

### Economic welfare
- Full fuel price reform would generate net economic efficiency costs of 1 percent of global GDP.
- Environmental benefits are 3.1 percent of GDP.
- Net economic efficiency gain is 2.1 percent of GDP.

---

### Detailed Findings by Fuel and Sector (selected)

### Coal and natural gas (key points)
- The last year for observed fuel consumption is 2018; fuel use for 2020 is projected.
- There is widespread underpricing of environmental costs, especially for coal and to a lesser extent natural gas.
- Supply costs for coal vary from around $1.5 per gigajoule (GJ) (Russia and the United States) to $7 per GJ (e.g., Jamaica, Ethiopia).
- Global warming damages alone are equivalent to $6.3 per GJ.
- Carbon pricing / coal excises in 2020: Canada $2.1 per GJ, EU $3.1 per GJ, Korea $2.3 per GJ.
- 22 out of the 191 countries in the database impose excises on coal.
- Supply costs for natural gas vary from around $5 per GJ (US) to around $12 per GJ (Japan and Korea).
- Carbon damages for natural gas are around one third to one half of supply costs.
- Local air pollution damages for natural gas are below $1 per GJ in all but four cases.
- 42 countries in the full database impose excises on natural gas.

### Gasoline and diesel (key points)
- Supply costs for road fuels in 2020 were around $0.50 per liter.
- Road fuel prices exceed supply costs in all but two countries (Iran and Saudi Arabia).
- For gasoline:
  - Prices exceed supply costs by around 50 percent or more in all but five countries shown.
  - Prices exceed supply costs by over 100 percent in 13 countries (France, Germany, Italy, UK, etc.).
  - Carbon damages amount to $0.15 per liter.
  - Congestion and accident externalities combined warrant charges of around $0.5-$1.0 per liter.
  - VAT component of the efficient gasoline price is around $0.2-0.4 per liter.
- For road diesel:
  - Carbon damages amount to $0.17 per liter.
  - Local air pollution damages were typically 1-3 times as large as carbon damages in 2020.
  - Road diesel prices exceed supply costs by 50 percent or more in only 12 countries shown.
  - VAT component is less significant for road diesel due to intermediate product use.
- Aggregate underpricing (Figure 2):
  - 70 percent of global gasoline consumption is priced at less than 60 percent of efficient levels.
  - 50 percent of diesel fuel is priced at less than half the efficient level.
- Transition note: local pollution damages for gasoline and diesel will likely decline as newer vehicles with stricter emissions standards permeate the fleet; transportation tax systems will need overhaul as gasoline and diesel vehicles are phased out.

### Subsidies by fuel product (2020)
- Explicit global subsidy share by fuel:
  - Petroleum 28 percent
  - Natural gas 27 percent
  - Electricity 42 percent
  - Coal 3 percent
  - Globally, only 8 percent of the explicit subsidy in 2020 reflects support for fossil fuel producers (92 percent is consumer-side subsidies).
- Total (explicit plus implicit) subsidy share by fuel:
  - Coal 41 percent
  - Petroleum 46 percent
  - Natural gas 9 percent
  - Electricity 4 percent

### Subsidies by end-use sector (2020)
- Coal use in power generation (about 2/3 of total coal use) accounts for 25 percent of global subsidies.
- Diesel in transportation accounts for 19 percent.
- Gasoline in transportation accounts for 12 percent.
- Coal use in industry accounts for 12 percent.
- Natural gas consumption and subsidies are concentrated in power generation and industrial sectors.
- Electricity subsidies are nearly evenly split between industrial and residential sectors.
- Producer subsidies are relatively small across fuels.

---

### Regional and Country Highlights (2020)

### Regional breakdown
- Explicit subsidies by region (2020):
  - MENA 33 percent
  - CIS 21 percent
  - Europe, EAP, LAC around 10 percent each
  - South Asia, North America, SSA 3-6 percent each
- Total (explicit plus implicit) subsidies by region:
  - EAP accounts for 48 percent of the subsidy
  - North America 12 percent
  - MENA and CIS 10 percent each
  - Europe 9 percent
- Relative to regional GDP (2020):
  - Total subsidies are smallest in Europe at about 2 percent of regional GDP
  - Total subsidies are 32 percent of regional GDP in CIS
  - Total subsidies are 16 and 10 percent of regional GDP in MENA and EAP respectively

### Country-level highlights (2020)
- By country (2020):
  - China contributes $2.2 trillion to total (explicit plus implicit) subsidies
  - United States $660 billion
  - Russia $520 billion
  - European Union $279 billion
  - India $247 billion
- Per capita subsidies highest in:
  - Singapore $5,411
  - Qatar $4,839
  - Luxembourg $4,704
  - Saudi Arabia $4,548
  - Russia $3,559
  - Kuwait $3,415

---

### Policy Insights and Recommendations

### Core policy design
- Efficient fuel pricing should include:
  - Unit supply cost + unit environmental cost, and then apply general consumption tax rate where applicable.
- Where fine-tuned instruments (e.g., fees on local air emissions, km-based congestion charging) are feasible, they can better target specific externalities; however, in many countries institutional constraints make broad fuel price reforms a pragmatic second-best.

### Complementary measures to improve political feasibility and equity
- Targeted assistance for low-income households, displaced workers, trade-exposed firms/regions.
- Use of revenue from price reform to support equitable economic measures.
- Combination of higher fuel prices with reinforcing sectoral measures (e.g., feebates) when appropriate.
- Productive use of new revenues, complementary public investments, and just transition measures emphasized for implementation.

### Urgency
- Without drastic cuts in fossil fuel use over the next decade, the planet risks becoming locked into dangerous and irreversible climate instabilities; policymakers should urgently design and implement reforms to get energy prices right.

---

### Methodology, Data, and Sensitivities

### Methodology and measurement notes
- Coverage and updates:
  - Expanded methodology and data to 191 countries.
  - Improved country-specific estimates of fuel prices and supply costs, sectoral disaggregation, and added fuels such as LPG.
  - Integrated analysis into the Carbon Pricing Assessment Tool (CPAT) to enable future projections of efficient prices, fuel consumption, and subsidy reform impacts.
- Climate valuation:
  - Adopted a common carbon price of $60 per ton in 2020 with prices for intervening or earlier years inferred assuming prices rise annually at $1.5 per ton.
- Local air pollution valuation:
  - Focus on PM2.5-related elevated mortality risks; estimates combine baseline mortality rates from GBD, emissions factors from GAINS, population exposure using intake fractions and TM5-FASST local air quality modelling, and mortality valuation extrapolated from OECD meta-analysis to other countries.

### Sensitivity of results
- Global warming valuation: global warming is $1.7 trillion (27 percent of the total global subsidy) in 2020; increasing or decreasing the value of CO2 emissions by 50 percent would increase or decrease the global subsidy by $0.85 trillion.
- Local air pollution valuation: local air pollution is $2.4 trillion (38 percent of the global subsidy); increasing and decreasing the mortality risk value by 50 percent would increase and decrease the global subsidy by $1.2 trillion.
- Fuel price elasticities: increasing and decreasing fuel price elasticities by 50 percent would increase and decrease the CO2, air pollution mortality, and economic efficiency benefits from fuel price reform by approximately one third.

---

### Annex A — Carbon Pricing Assessment Tool (CPAT) (overview)

### Model purpose and structure
- CPAT provides, on a country-by-country basis for 191 countries, projections of fuel use and CO2 emissions by major energy sector.
- Starts with use of fossil fuels and other fuels by the power, industrial, transport, and residential sectors and projects fuel use forward in a baseline case using:
  - GDP projections;
  - Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;
  - Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources;
  - Future international energy prices.
- In baseline projections, current fuel taxes/subsidies and carbon pricing are held constant in real terms.
- Fuel demand curves are for the most part based on a constant elasticity specification.
- Carbon emissions factors by fuel product are from IEA.

### Data sources, parameterization, and caveats
- Basic model parameterization uses data compiled from the International Energy Agency (IEA) on recent fuel use by country and sector.
- GDP projections are from the latest IMF forecasts.
- International energy prices are projected forward using an average of IEA (rising) and IMF (flat) projections for coal, oil, and natural gas prices.
- Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models; fuel price elasticities are typically between about -0.5 and -0.8.
- Model caveats and limitations:
  - The model abstracts from the possibility of mitigation actions (beyond those implicit in recently observed fuel use and price data) in the baseline.
  - Assumed fuel price responses may not be valid for dramatic price changes that might drive major technological advances or non-linear technology adoption.
  - The model does not explicitly account for upward sloping fuel supply curves, general equilibrium effects, or changes in international fuel prices that might result from simultaneous reforms in large countries.

### Retail prices, supply costs, and projection methods
- Retail fuel prices are expressed as annual averages and disaggregated by end-user—industrial, residential, and power generation—for coal, natural gas, and electricity.
- Primary retail price sources: IMF and World Bank country desk datasets; where unavailable, averages across Eurostat, IEA, World Bank, Global Petrol Prices, Enerdata used.
- Pass-through method for projecting prices uses historical regressions with data limited to 2010-2019; pass through rates average around 50 to 60 percent.
- Supply costs specifics:
  - Finished petroleum products: port/hub prices from IEA; LPG priced at a 30 percent discount to gasoline; shipping and distribution margin of $0.15-$0.22 per liter; additional $0.10 per liter for land-locked and small island developing countries.
  - Natural gas: hub, import or net-back export prices with mark-ups of $3 per GJ for power generation and industrial users and $10 per GJ for residential users.
  - Coal: mark-ups $1, $5, and $10 for power generation, industrial, and residential users respectively.
- Where retail price information not available (about 150 countries for coal and 120 for natural gas), supply cost and retail price are assumed equal; taxes are generally not applied to coal or natural gas, so subsidy estimates minimally impacted.

---

*IMF Working Paper (excerpted content from wpiea2021236-print-pdf).*

### 2025. Just 8 percent of the 2020 subsidy reflects   undercharging for supply costs (explicit

### wpiea2021236-print-pdf - 2025. Just 8 percent of the 2020 subsidy reflects   undercharging for supply costs (explicit

### Subsidy composition (2020)
- Just 8 percent of the 2020 subsidy reflects   undercharging for supply costs (explicit subsidies).
- 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).

### Impact of efficient fuel pricing in 2025
- Efficient fuel  pricing in 2025 would reduce global carbon dioxide global carbon dioxide emissions 36   percent below baseline levels.
- Efficient fuel  pricing in 2025 would raise revenues worth 3.8   percent of global GDP.
- Efficient fuel  pricing in 2025 would prevent

*Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021236-print-pdf.pdf*

### 0.9 million local air pollution deaths per year. Accompanying spreadsheets provide detailed

### wpiea2021236-print-pdf - 0.9 million local air pollution deaths per year. Accompanying spreadsheets provide detailed

### Executive Summary
- Getting fossil fuel prices right requires pricing that reflects both supply and environmental costs.
- Updated analysis for 191 countries finds large, pervasive gaps between efficient prices and user prices for fossil fuels; no country fully prices all fuels at their full supply and environmental costs.
- Largest price gaps are generally for coal, followed by natural gas, diesel, and gasoline.
- Globally, fossil fuel subsidies were $5.9 trillion or 6.8 percent of GDP in 2020 and are expected to increase to 7.4 percent of GDP in 2025.
  - Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).
- Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies, accounting for 42 percent of the total in 2020; climate damages account for 29 percent; other local externalities such as congestion and road accidents account for 15 percent; explicit subsidies account for 8 percent; foregone consumption tax revenue accounts for 6 percent.
- Efficient fuel pricing by 2025 would:
  - Reduce global CO2 emissions 36 percent below baseline levels, equivalent to a 32 percent cut below 2018 levels.
  - Avert 0.9 million premature deaths per year from local air pollution.
  - Raise revenues worth 3.8 percent of global GDP.
  - Deliver net economic benefits (environmental benefits less economic costs) of 2.1 percent of global GDP.

### Key Quantitative Findings
- Global subsidies and composition:
  - Total (explicit plus implicit) fossil fuel subsidies: $5.9 trillion in 2020, or 6.8 percent of GDP.
  - Projected total subsidies: 7.4 percent of GDP in 2025 (assuming current policies).
  - Explicit subsidies in 2020: $0.45 trillion.
  - Implicit subsidies in 2020: 92 percent of total subsidies.
- Contribution by damage type (2020):
  - Local air pollution: 42 percent.
  - Global warming (climate damages): 29 percent.
  - Other local externalities (congestion, accidents): 15 percent.
  - Supply costs (explicit subsidies): 8 percent.
  - General and consumption taxes (foregone): 6 percent.
- Fuel pricing shortfalls (2020, share of consumption priced below half of efficient level):
  - Coal: 99 percent.
  - (Road) diesel: 52 percent.
  - Natural gas: 47 percent.
  - Gasoline: 18 percent.
- Sectoral distribution:
  - Power generation receives 61 percent of coal subsidies and 33 percent of natural gas subsidies.
  - Electricity subsidies are evenly split across industrial and residential users where retail prices are below cost recovery.
- Regional and country highlights:
  - By region, East Asia and the Pacific accounts for 48 percent of total energy subsidies.
  - By country, the largest absolute subsidizers are China, the US, Russia, India, and the EU (in that order in absolute terms reported).

### Projected Environmental and Fiscal Impacts of Efficient Pricing (by 2025)
- CO2 emissions:
  - 36 percent reduction below baseline levels.
  - Equivalent to a 32 percent reduction below 2018 levels.
- Public health:
  - 0.9 million fewer premature deaths per year from fossil fuel air pollution (32 percent reduction in such deaths relative to baseline).
- Fiscal:
  - Revenue gains equal to 3.8 percent of global GDP.
- Economic welfare:
  - Net economic benefits of 2.1 percent of global GDP (environmental benefits less economic costs).

### Policy Insights and Recommendations
- Efficient fuel pricing should include:
  - Unit supply cost + unit environmental cost, and then apply general consumption tax rate where applicable.
- Where fine-tuned instruments (e.g., fees on local air emissions, km-based congestion charging) are feasible, they can better target specific externalities; however, in many countries institutional constraints make broad fuel price reforms a pragmatic second-best.
- Complementary measures to improve political feasibility and equity:
  - Targeted assistance for low-income households, displaced workers, trade-exposed firms/regions.
  - Use of revenue from price reform to support equitable economic measures.
  - Combination of higher fuel prices with reinforcing sectoral measures (e.g., feebates) when appropriate.
- Transparent country-level methodology and spreadsheet tools enable governments to:
  - Infer efficient fuel prices fuel-by-fuel and country-by-country.
  - Assess environmental, fiscal, health, and economic impacts of price reform.
  - Quantify the magnitude and components of current fossil fuel subsidies to inform domestic and international dialogue.

### Methodology and Measurement Notes
- Coverage and updates:
  - Expanded methodology and data to 191 countries.
  - Improved country-specific estimates of fuel prices and supply costs, sectoral disaggregation, and added fuels such as LPG.
  - Integrated analysis into the Carbon Pricing Assessment Tool (CPAT) to enable future projections of efficient prices, fuel consumption, and subsidy reform impacts.
- Climate valuation:
  - Adopted a common carbon price of $60 per ton in 2020 with prices for intervening or earlier years inferred assuming prices rise annually at $1.5 per ton.
- Local air pollution valuation:
  - Focus on PM2.5-related elevated mortality risks; estimates combine baseline mortality rates from GBD, emissions factors from GAINS, population exposure using intake fractions and TM5-FASST local air quality modelling, and mortality valuation extrapolated from OECD meta-analysis to other countries.
- Transportation externalities:
  - Congestion costs estimated via extrapolation from city-level average delay data, adjustments to marginal vs average delay relationships, vehicle occupancy, value of travel time (assumed 60 percent of nationwide average market wage in 2020), fuel economy, and elasticity partitioning between reduced driving versus improved fuel economy/shifting to EVs.
  - Accident externalities apportioned into external vs internal costs, monetized with mortality valuation approach and extrapolated non-fatal costs from case studies.
- Definitions:
  - Explicit subsidy (per sector): {[sectoral unit supply cost] - [price paid by fuel user]} × [sectoral fuel consumption], counted as zero if price > supply cost.
  - Total explicit and implicit subsidy (per sector): {[sectoral efficient fuel price] - [price paid by fuel user]} × [sectoral fuel consumption], counted as zero if price > efficient level.
  - Implicit subsidies include undercharging for environmental costs and foregone general consumption taxes; producer subsidies included in explicit subsidies.
- Caveats:
  - Environmental cost valuations are uncertain (e.g., SCC sensitivities, mortality valuation extrapolations); results should be viewed as indicative and alternative parameter assumptions can be explored via the accompanying spreadsheet tools.

### Metadata and Technical Identifiers
- JEL Classification Numbers: Q31; Q35; Q38; Q48; H23
- Keywords: fossil fuel subsidies; efficient fuel prices; supply costs; climate change; local air polution mortlaity; revenue gains; spreadsheet tools.
- Author’s E-Mail Addresses: IParry@imf.org; Sblack@imf.org; NVernon@imf.org

*IMF Working Paper (excerpted content).*

### 2020. Figure 2 indicates the cumulative fraction of global fuel consumption (aggregating over

### wpiea2021236-print-pdf - 2020. Figure 2 indicates the cumulative fraction of global fuel consumption (aggregating over

### Overview of fuel pricing and underpricing
- The last year for observed fuel consumption is 2018; fuel use for 2020 is projected.
- There is widespread underpricing of environmental costs, especially for coal and to a lesser extent natural gas.
- Consumption-weighted averages (Figure 2): 99 and 47 percent of coal and natural gas consumption respectively is priced at below half of its efficient level.

### Coal and natural gas (key findings)
- Supply costs for coal vary from around $1.5 per gigajoule (GJ) (Russia and the United States) to $7 per GJ (e.g., Jamaica, Ethiopia).
- Global warming damages alone are equivalent to $6.3 per GJ.
- Carbon pricing / coal excises in 2020: Canada $2.1 per GJ, EU $3.1 per GJ, Korea $2.3 per GJ.
- Local air pollution damages vary substantially; in 4 cases local air pollution damages exceed 150 percent of climate damages, and in 6 cases local air pollution damages are less than 50 percent of climate damages.
- 22 out of the 191 countries in the database impose excises on coal.
- Supply costs for natural gas vary from around $5 per GJ (US) to around $12 per GJ (Japan and Korea).
- Prices fall short of supply costs in nine countries and exceed supply costs in seven countries; in two cases prices moderately exceed efficient levels.
- Carbon damages for natural gas are around one third to one half of supply costs.
- Local air pollution damages for natural gas are below $1 per GJ in all but four cases.
- 42 countries in the full database impose excises on natural gas.

### Gasoline and diesel (key findings)
- Supply costs for road fuels in 2020 were around $0.50 per liter.
- Road fuel prices exceed supply costs in all but two countries (Iran and Saudi Arabia).
- For gasoline:
  - Prices exceed supply costs by around 50 percent or more in all but five countries shown.
  - Prices exceed supply costs by over 100 percent in 13 countries (France, Germany, Italy, UK, etc.).
  - Carbon damages amount to $0.15 per liter.
  - Congestion and accident externalities combined warrant charges of around $0.5-$1.0 per liter.
  - VAT component of the efficient gasoline price is around $0.2-0.4 per liter.
- For road diesel:
  - Carbon damages amount to $0.17 per liter.
  - Local air pollution damages were typically 1-3 times as large as carbon damages in 2020.
  - Road diesel prices exceed supply costs by 50 percent or more in only 12 countries shown.
  - VAT component is less significant for road diesel due to intermediate product use.
- Aggregate underpricing (Figure 2):
  - 70 percent of global gasoline consumption is priced at less than 60 percent of efficient levels.
  - 50 percent of diesel fuel is priced at less than half the efficient level.
- Transition note: local pollution damages for gasoline and diesel will likely decline as newer vehicles with stricter emissions standards permeate the fleet; transportation tax systems will need overhaul as gasoline and diesel vehicles are phased out.

### Global fossil fuel subsidies (2020 and projections)
- Global fossil fuel subsidies amounted to $5.9 trillion in 2020, or 6.8 percent of GDP.
- Projected to rise (on current policies) to 7.4 percent of GDP in 2025.
- In 2020, explicit and implicit subsidies accounted for 8 and 92 percent of the total respectively.
- Explicit subsidies:
  - Peaked in 2018 at $760 billion.
  - Fell to $450 billion in 2020.
  - Projected to rise and then remain at about $600 billion from 2021 to 2025.
- Implicit subsidies are projected to mildly increase in absolute terms and as a percent of global GDP out to 2025.
- Regional dynamics: emerging market economies account for a progressively rising share of global fuel consumption; the share of global subsidies from EMEs increases from 60 to 69 percent between 2015 and 2025, and for BRICs from 44 to 54 percent.

### Subsidies by fuel product (2020)
- Explicit global subsidy share by fuel:
  - Petroleum 28 percent
  - Natural gas 27 percent
  - Electricity 42 percent
  - Coal 3 percent
  - Globally, only 8 percent of the explicit subsidy in 2020 reflects support for fossil fuel producers (92 percent is consumer-side subsidies).
- Total (explicit plus implicit) subsidy share by fuel:
  - Coal 41 percent
  - Petroleum 46 percent
  - Natural gas 9 percent
  - Electricity 4 percent

### Subsidies by component (2020)
- Components of total (explicit and implicit) subsidies:
  - Undercharging for local air pollution 42 percent
  - Global warming 29 percent
  - Broader externalities from road use 15 percent
  - Supply costs 8 percent
  - General consumption taxes 6 percent
- For coal:
  - Local air pollution 58 percent of total subsidies for coal
  - Global warming 40 percent
- For petroleum:
  - Local air pollution 39 percent
  - Broader externalities 33 percent
  - Global warming 16 percent
- For natural gas:
  - Global warming 59 percent of the total subsidy

### Subsidies by end-use sector (2020)
- Coal use in power generation (about 2/3 of total coal use) accounts for 25 percent of global subsidies.
- Diesel in transportation accounts for 19 percent.
- Gasoline in transportation accounts for 12 percent.
- Coal use in industry accounts for 12 percent.
- Natural gas consumption and subsidies are concentrated in power generation and industrial sectors.
- Electricity subsidies are nearly evenly split between industrial and residential sectors.
- Producer subsidies are relatively small across fuels.

### Regional and country breakdown (2020)
- Explicit subsidies by region (2020):
  - MENA 33 percent
  - CIS 21 percent
  - Europe, EAP, LAC around 10 percent each
  - South Asia, North America, SSA 3-6 percent each
- Total (explicit plus implicit) subsidies by region:
  - EAP accounts for 48 percent of the subsidy
  - North America 12 percent
  - MENA and CIS 10 percent each
  - Europe 9 percent
- Relative to regional GDP (2020):
  - Total subsidies are smallest in Europe at about 2 percent of regional GDP
  - Total subsidies are 32 percent of regional GDP in CIS
  - Total subsidies are 16 and 10 percent of regional GDP in MENA and EAP respectively
- By country (2020):
  - China contributes $2.2 trillion to total (explicit plus implicit) subsidies
  - United States $660 billion
  - Russia $520 billion
  - European Union $279 billion
  - India $247 billion
- Per capita subsidies highest in:
  - Singapore $5,411
  - Qatar $4,839
  - Luxembourg $4,704
  - Saudi Arabia $4,548
  - Russia $3,559
  - Kuwait $3,415

### Reform benefits: environmental, fiscal, health, and welfare impacts (comparison for 2025)
- Scenario: prices of all fuel products for all countries are set to their efficient levels in 2025; compared with BAU that holds current fuel taxes/subsidies and carbon pricing fixed in real terms at their 2021 levels.
- Climate impacts:
  - Raising fuel prices to efficient levels reduces projected global fossil fuel CO2 emissions 36 percent below BAU levels in 2025—or 32 percent below 2018 emissions.
  - Reduction breakdown by fuel:
    - Coal 74 percent of the CO2 reduction
    - Petroleum 21 percent
    - Natural gas 3 percent
  - Regional CO2 reductions vary from 21 percent below BAU levels in 2025 in Europe to around 40 percent in the CIS and EAP.
  - If only explicit subsidies are removed, global CO2 are reduced by only 3 percent below 2025 BAU levels.
- Air pollution and health:
  - Full fuel price reform reduces global air pollution deaths from fossil fuel combustion by 32 percent below BAU levels in 2025, or 0.9 million a year in absolute terms.
  - Reduction in mortality ranges from 19 percent in SSA to 63 percent in EAP.
- Fiscal impacts:
  - Full price reform raises revenues of $4.2 trillion, 3.8 percent of global GDP, in 2025 (relative to BAU levels and accounting for revenue losses due to erosion of pre-existing fuel tax bases).
  - Revenues generated by full price reform in 121 EME and developing countries in 2025 would amount to $3 trillion.
- Economic welfare:
  - Full fuel price reform would generate net economic efficiency costs of 1 percent of global GDP.
  - Environmental benefits are 3.1 percent of GDP.
  - Net economic efficiency gain is 2.1 percent of GDP.

### Sensitivity of results
- Global warming valuation: global warming is $1.7 trillion (27 percent of the total global subsidy) in 2020; increasing or decreasing the value of CO2 emissions by 50 percent would increase or decrease the global subsidy by $0.85 trillion.
- Local air pollution valuation: local air pollution is $2.4 trillion (38 percent of the global subsidy); increasing and decreasing the mortality risk value by 50 percent would increase and decrease the global subsidy by $1.2 trillion.
- Fuel price elasticities: increasing and decreasing fuel price elasticities by 50 percent would increase and decrease the CO2, air pollution mortality, and economic efficiency benefits from fuel price reform by approximately one third.

### Policy implications and conclusion
- Reforming fossil fuel prices to reflect externalities is strongly justified by analysis: pricing externalities, addressing pervasive mispricing, and capturing substantial potential benefits.
- Implementing reform requires complementary measures to increase acceptability, effectiveness, and credibility:
  - Productive use of new revenues
  - Complementary public investments
  - Just transition measures
- Urgency: without drastic cuts in fossil fuel use over the next decade, the planet risks becoming locked into dangerous and irreversible climate instabilities; policymakers should urgently design and implement reforms to get energy prices right.

*Source: IMF staff, wpiea2021236-print-pdf (2020).*

### Annex A. Carbon Pricing Assessment Tool (CPAT)

### Annex A. Carbon Pricing Assessment Tool (CPAT)

### Overview of CPAT model
- CPAT provides, on a country-by-country basis for 191 countries, projections of fuel use and CO2 emissions by major energy sector.
- Starts with use of fossil fuels and other fuels by the power, industrial, transport, and residential sectors and projects fuel use forward in a baseline case using:
  - GDP projections;
  - Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;
  - Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources;
  - Future international energy prices.
- In baseline projections, current fuel taxes/subsidies and carbon pricing are held constant in real terms.
- Impacts of carbon pricing on fuel use and emissions depend on:
  - their proportionate impact on future fuel prices in different sectors;
  - a simplified model of fuel switching within the power generation sector;
  - various own-price elasticities for electricity use and fuel use in other sectors.
- Fuel demand curves are for the most part based on a constant elasticity specification.
- Carbon emissions factors by fuel product are from IEA.

### Data sources and parameterization
- Basic model parameterization uses data compiled from the International Energy Agency (IEA) on recent fuel use by country and sector.
- GDP projections are from the latest IMF forecasts.
- Data on energy taxes, subsidies, and prices by energy product and country is compiled from publicly available and IMF sources, with inputs from proprietary and third-party sources.
- International energy prices are projected forward using an average of IEA (rising) and IMF (flat) projections for coal, oil, and natural gas prices.
- Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models; fuel price elasticities are typically between about -0.5 and -0.8.
- Non-carbon externalities per unit of fuel use in different sectors are based on methodologies described in the main text and Annex B.

### Model caveats and limitations
- The model abstracts from the possibility of mitigation actions (beyond those implicit in recently observed fuel use and price data) in the baseline, to provide a clean comparison of policy reforms to the baseline.
- Assumed fuel price responses may not be valid for dramatic price changes that might drive major technological advances or non-linear technology adoption (e.g., carbon capture and storage).
- Fuel price responsiveness is approximately similar across countries in the model; in practice responsiveness may differ across countries due to the structure of the energy system and regulations.
- The model does not explicitly account for:
  - upward sloping fuel supply curves;
  - general equilibrium effects (e.g., changes in relative factor prices with feedback to the energy sector);
  - changes in international fuel prices that might result from simultaneous climate or energy price reform in large countries.
- Despite simplifications, parameter values are chosen so results are broadly consistent with those from more detailed energy models.

### Retail prices (Annex B)
- Retail fuel prices are expressed as annual averages and disaggregated by end-user—industrial, residential, and power generation—for coal, natural gas, and electricity.
- Primary retail price sources: IMF and World Bank country desk datasets. If unavailable, a simple average across third-party sources (Eurostat, IEA, World Bank, Global Petrol Prices, Enerdata) was used.
- Missing price data handling:
  - For natural gas and coal, if power generation sector price missing but industrial sector price available, the industrial price was used, and vice versa.
  - If still missing, retail price assumed equal to supply cost plus any known taxes, including import duties (weighted by the portion imported) and pre-retail taxes (such as an ETS).
- Prices projected forward using a pass-through method based on regression of historical retail prices (left-side) on historical spot prices (right-side), with regression restrictions:
  - historical data limited to years 2010 to 2019 to avoid COVID impacts and pre-2010 policy changes;
  - countries with fewer than 5 observations for 2010-2019 excluded;
  - coefficient on spot prices limited to between 0 and 1; constant term re-estimated given this constraint.
- For countries with fewer than 5 observations:
  - if no spot price data for any year 2010-2019, supply cost plus tax used as retail price;
  - if 1 to 4 years of data, pass-through equal to the regional average was assumed.
- Pass through rates average around 50 to 60 percent.

### Supply costs (Annex B)
- Finished petroleum products:
  - supply costs consist of port (or hub) prices from the IEA, with countries mapped to either the United States, NW Europe, or Singapore;
  - LPG is priced at a 30 percent discount to gasoline;
  - shipping and distribution margin of $0.15-$0.22 per liter added for all countries (average of unsubsidized OECD countries);
  - additional $0.10 per liter added to land-locked and small island developing countries.
- Natural gas:
  - supply costs based on hub, import or net-back export prices with upward adjustments for transportation and distribution;
  - large natural gas consuming countries used domestic prices from Argus, the IEA, or Enerdata when available;
  - for LNG exporters without a well-functioning domestic market, a country-specific liquefaction and shipping fee was deducted to net-back prices from delivery abroad;
  - countries without domestic prices mapped to a regional hub (US, Netherlands TTF, or Northeast Asian LNG);
  - mark-ups for within-country transportation, distribution, marketing, and margins applied: $3 per GJ for power generation and industrial users and $10 per GJ for residential users, with slightly lower assumptions for Russia and the US when country-specific data available.
- Coal:
  - export or import-parity price inferred using prioritized methods: (i) country-specific export or import prices; (ii) the pre-tax end-user price; or (iii) the price at the nearest hub;
  - mark-ups applied for transportation, processing, and distribution with higher mark-ups for residential coal use: $1, $5, and $10 for power generation, industrial, and residential users respectively;
  - supply costs for countries with significant domestic production adjusted downward to reflect large transportation costs associated with coal.
- Electricity:
  - supply costs provided by IMF country desks or calculated using CPAT.
- Where retail price information not available (about 150 countries for coal and 120 for natural gas), supply cost and retail price are assumed equal; taxes are generally not applied to coal or natural gas, so subsidy estimates minimally impacted.
- Supply costs influence revenue components of efficient prices (consumption tax rate multiplied by sum of supply costs and environmental externalities), but this effect tends to be small.

### Miscellaneous data and projections
- Consumption tax component of efficient energy prices computed using the standard VAT (or general sales tax) in each country (from IMF sources) and applied to the sum of supply and environmental cost for final consumption only (not intermediate use).
- Additional data on income used for projection purposes are from IMF (2021).
- Estimates of producer subsidies for fossil fuels by country are from the OECD and major energy producers (IEAa, 2021) and then projected forward using expected production from Rystad.

### Comparison with other fossil fuel subsidy methodologies (Annex C)
- Two general approaches:
  - Price-gap approach (used by IMF and IEA): measures a subsidy as the difference between the retail price and a calculated supply cost/reference price—subsidy if retail price is less than supply cost.
  - Inventory approach (used by OECD): measures the nominal value of individual subsidy measures (accelerated depreciation, loan guarantees, direct financial support).
- IEA subsidy estimates cover 42 non-OECD countries (compared to over 190 for the IMF) and use a price-gap approach.
- Key methodological differences and comparability notes:
  - Small discrepancy: IEA includes VAT in the supply cost while the IMF includes VAT when calculating the implicit subsidy but not the explicit.
  - IEA accounts for underpricing of natural gas and coal for electricity generators as an electricity subsidy, while IMF accounts for it as natural gas and coal subsidies respectively.
  - IMF’s implicit subsidies include the cost of externalities and are therefore not comparable to IEA implicit measures.
- Empirical comparison takeaways:
  - Changes in subsidy estimates over time are strongly correlated between IMF and IEA.
  - Underlying energy price and subsidies for energy exporters are consistently higher for IMF estimates; no clear pattern for energy importers.

*Source: wpiea2021236-print-pdf - Annex A. Carbon Pricing Assessment Tool (CPAT).*

### References

### References

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*Content derived from the "References" section of wpiea2021236-print-pdf.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021236-print-pdf.pdf_