## Global Energy Subsidies Are Big—About US$5 Trillion Big

_IMF Blog, May 18, 2015_

## Source details

**Canonical URL:** [Global Energy Subsidies Are Big—About US$5 Trillion Big](https://www.imf.org/en/blogs/articles/2015/05/18/global-energy-subsidies-are-big-about-us5-trillion-big)

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## Bibliographic details
- Authors: Sanjeev Gupta, Michael Keen
- Published: May 18, 2015

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### Summary of the issue
- Global energy subsidies remain very substantial despite recent drops in international energy prices.
- The blog distinguishes between “pre-tax” subsidies (when people and businesses pay less than it costs to supply energy) and “post-tax” subsidies (which add environmental, health and other damage costs and the benefit from favorable VAT or sales tax treatment to pre-tax subsidies).
- The urgent need for energy price reform remains across both advanced and developing countries; low international oil prices provide an opportunity to move toward more efficient pricing.

### Pre-tax vs. post-tax subsidies (conceptual framing)
- Pre-tax subsidies: reflect undercharging relative to supply costs.
- Post-tax subsidies: include pre-tax subsidies plus
  - environmental damage (global warming, local pollution, traffic congestion and accidents),
  - the benefit from favorable VAT or sales tax treatment,
  - and the broader need for revenue from energy products (energy should be subject to the standard rate of VAT or other general consumption tax).
- Energy price misalignment is treated as a form of subsidy given externalities and foregone revenue.

### Old vs. new numerical estimates
- Earlier estimate for 2011:
  - Pre-tax subsidies: US$492 billion (0.7 percent of Global GDP).
  - Post-tax subsidies (2011): around US$2.0 trillion (2.9 percent of global GDP).
- Updated estimates (most recent data year 2013, with projection for 2015):
  - Pre-tax subsidies in 2013: US$541 billion (0.7 percent of global GDP).
  - Projected pre-tax subsidies in 2015: around US$333 billion (0.4 percent of global GDP).
  - Global post-tax energy subsidies in 2013: US$4.9 trillion (6.5 percent of global GDP).
  - Projected global post-tax energy subsidies in 2015: US$5.3 trillion (6.5 percent of global GDP).

### Reasons for the increase in post-tax estimates (breakdown)
- About 40 percent comes from inflation, real income growth, and updating prices and consumption of energy products.
- About 30 percent is from estimating environmental damages using country-specific data on air pollution emission rates (for power plants and vehicles), the number of people exposed to air pollution, and traffic congestion and accidents.
- About 15 percent is from including damages for which estimates were not previously available (nitrogen oxides and direct fine particulate emissions from power plants).
- About 15 percent is from incorporating new evidence from the World Health Organization (WHO) on how pollution exposure increases risks of various diseases.

### Fiscal gains from energy price reform (estimates and implications)
- Revenue gain from eliminating post-tax subsidies in 2013 (allowing for behavioral responses and technology adoption): US$3.0 trillion (4.0 percent of global GDP).
- Projected revenue gain in 2015: nearly US$2.9 trillion (3.6 percent of global GDP).
- These revenue gains would be substantially smaller than headline subsidy estimates because higher energy prices would induce reduced energy consumption and adoption of emissions control technologies.
- Potential uses of the fiscal dividend:
  - Growth-enhancing tax cuts on labor and capital.
  - Investments in basic education and health.
- Additional benefits:
  - Reduces the need to subsidize renewable energies.
  - Most effective policy for promoting mitigation of environmental impacts across the economy.

### Estimation challenges and data improvements
- Estimating post-tax subsidies requires measuring and valuing environmental damages that are often uncertain and very country-specific, and placing monetary values on human life.
- The update incorporates:
  - More refined IMF estimates of environmental damages for fossil fuel products.
  - Updated price, consumption and income data.
  - Country-specific emission and exposure data and WHO evidence.

*Source: Global Energy Subsidies Are Big—About US$5 Trillion Big, Sanjeev Gupta and Michael Keen, May 18, 2015.*

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## References

- [blog](http://blogs.imf.org/2015/05/18/act-local-solve-global-the-5-3-trillion-energy-subsidy-problem/)
- [https://www.imf.org/wp-content/uploads/2015/05/slide12.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide12.jpg)
- [latest update of global energy subsidies](http://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0)
- [Parry and others, 2014](http://www.elibrary.imf.org/view/IMF071/21171-9781484388570/21171-9781484388570/21171-9781484388570.xml?highlight=true&result=1&rskey=kHyJS5)
- [https://www.imf.org/wp-content/uploads/2015/05/slide22.jpg](https://www.imf.org/wp-content/uploads/2015/05/slide22.jpg)

_Source: https://www.imf.org/en/blogs/articles/2015/05/18/global-energy-subsidies-are-big-about-us5-trillion-big_