IMF Survey : Counting the Cost of Energy Subsidies

IMF News, July 17, 2015

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Energy subsidies are projected at US$5.3 trillion in 2015, or 6.5 percent of global GDP.
Global energy subsidies in 2011 have been revised to US$4.2 trillion, more than double the US$2.0 trillion previously reported in 2013.
The revenue gain from eliminating energy subsidies is projected to be US$2.9 trillion (3.6 percent of global GDP) in 2015.
The net gain from reform, after subtracting the cost of higher energy prices to consumers from the fiscal and environmental gains, is projected at US$1.8 trillion (2.2 percent of global GDP).

Much of the estimated subsidy arises from countries setting energy taxes below levels that fully reflect the environmental damage associated with energy consumption.
The upward revision to subsidy estimates reflects:
- 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, as detailed in Getting Energy Prices Right: From Principle to Practice.

Subsidies are sizable in nearly all countries, advanced and developing economies alike.
China is the top subsidizer in dollar terms.
Ukraine is the top subsidizer in percent of GDP.
Qatar has the highest energy subsidies per capita.
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, subsidies also reflect setting domestic energy prices below supply cost.

Eliminating global energy subsidies could:
- Reduce deaths related to fossil-fuel emissions by over 50 percent.
- Reduce fossil-fuel related carbon emissions by over 20 percent.
Fiscal and public-finance implications:
- Advanced economies: revenue gained could halve corporate income tax or cover one quarter of public health spending.
- Emerging economies: the revenue is worth double their corporate income tax revenues or public health spending.
- Low-income countries: the revenue is about one and half times corporate income tax revenues or public health spending.
The net gain from reform could be much larger if the fiscal gain is used for growth-enhancing tax cuts on labor and capital or investments in education, health, and infrastructure.

It is generally in countries’ own interest to move ahead unilaterally with energy subsidy reform.
Top subsidizers in percent of GDP and in per capita subsidies stand to gain the most; benefits will mostly accrue locally through reduced pollution and increased revenues.
Taxing fuels to reflect environmental costs is administratively straightforward in many countries because it can build off established road fuel excises.
Energy subsidy reform can contribute to carbon emissions reduction and help countries make pledges ahead of the Paris 2015 UN climate conference; top subsidizers in dollar terms should play a leading role to achieve significant global carbon emissions cuts.
A gradual approach to reform may be desirable given the size of required price increases and uncertainty around optimum tax levels on negative externalities; gradualism allows time to refine estimates, let households and firms adjust, and implement measures to protect the poor.
Low international energy prices have opened a window of opportunity for countries to move towards more efficient pricing of energy.

Source: IMF Survey : Counting the Cost of Energy Subsidies (July 17, 2015).