Fossil Fuel Subsidies Surged to Record $7 Trillion

IMF Blog, August 24, 2023

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Fossil-fuel subsidies surged to a record $7 trillion last year.
Subsidies cost the equivalent of 7.1 percent of global gross domestic product.
Governments spend 4.3 percent of global income on education and 10.9 percent on healthcare, for comparison.
Fossil-fuel subsidies rose by $2 trillion over the past two years.
Explicit subsidies (undercharging for supply costs) more than doubled to $1.3 trillion.
Updated estimates cover 170 countries of explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes).
The vast majority of subsidies are implicit; consumers did not pay for over $5 trillion of environmental costs last year.
This implicit-subsidy figure would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of the baseline assumption that global warming costs equal the emissions price needed to meet Paris Agreement temperature goals.

Consuming fossil fuels imposes enormous environmental costs—mostly from local air pollution and damage from global warming.
Implicit subsidies are projected to grow as developing countries increase their consumption of fossil fuels toward the levels of advanced economies, given higher-polluting power plants, factories, and vehicles and dense populations near pollution sources.
Scrapping explicit and implicit fossil-fuel subsidies would:
- Prevent 1.6 million premature deaths annually.
- Raise government revenues by $4.4 trillion.
- Put emissions on track toward reaching global warming targets.
- Redistribute income because fuel subsidies benefit rich households more than poor ones.

Removing explicit subsidies and imposing corrective taxes would increase fuel prices, leading firms and households to factor environmental costs into consumption and investment decisions.
Expected outcomes of such price adjustments include significantly cutting global carbon-dioxide emissions, cleaner air, less lung and heart disease, and more fiscal space for governments.

Design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscores the benefits.
Use a portion of increased revenues to compensate vulnerable households for higher energy prices.
Use the remainder of increased revenues to:
- Cut taxes on work and investment.
- Fund public goods such as education, healthcare, and clean energy.

With global energy prices receding and emissions rising, now is the opportune time to phase out explicit and implicit fossil-fuel subsidies for a healthier and more sustainable planet.

IMF Blog (Chart of the Week) — August 24, 2023

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