Press Release: IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment

IMF News, March 27, 2013

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Canonical URL: Press Release: IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment

A new IMF study, Energy Subsidy Reform – Lessons and Implications, estimates energy subsidies amount to $1.9 trillion worldwide—the equivalent of 2½ percent of global GDP, or 8 percent of government revenues.
IMF research shows that 20 countries maintain pre-tax energy subsidies that exceed 5 percent of GDP.
On average, the richest 20 percent of households in low- and middle-income countries capture 43 percent of fuel subsidies.
Eliminating pre-tax subsidies would reduce global CO2 emissions by about 1-2 percent, which would deliver about 15-30 percent of the Copenhagen Accord’s goal.
Eliminating energy tax subsidies would reduce “CO2 emissions by 4½ billion tons, a 13 percent reduction.”

Subsidies are a growing fiscal burden: for some countries the fiscal weight of energy subsidies is becoming so large that budget deficits are becoming unmanageable and threaten economic stability.
For emerging and developing countries, subsidy spending diverts scarce government resources and impairs future growth by crowding out investment in infrastructure, public health, and education.
Subsidy reform can lead to a more efficient allocation of resources and help spur higher economic growth over the longer term by strengthening incentives for research and development in energy-saving and alternative technologies.

Although intended to benefit consumers, subsidies are often inefficient and disproportionately benefit upper-income groups.
An increase in prices from subsidy reform can have a significant impact on the poor; “mitigating measures to protect them as subsidy reform is implemented” must be integral to any successful and equitable reform program.
The IMF paper emphasizes replacing inefficient subsidies with better means of protecting the most vulnerable parts of the population.

Subsidies aggravate climate change and worsen local pollution and congestion.
Eliminating pre-tax subsidies and tax subsidies (taxes that are too low to capture true societal costs including pollution and road congestion) would yield measurable reductions in CO2 emissions: about 1-2 percent from pre-tax subsidy removal and 4½ billion tons (13 percent) from eliminating tax subsidies.

The paper offers a roadmap based on best practices and country experience for designing and implementing subsidy reform.
Successful reform requires:
- Adequate planning,
- Carefully designed mitigating measures to protect vulnerable groups,
- A good communications plan.
The IMF will assist countries that wish to pursue subsidy reform, while cautioning that “subsidy reform is needed, but it is better to do it the right way, than to do it right away.”
The IMF calls attention to the G-20 commitment from the Pittsburgh Leaders Summit in 2009 to eliminate inefficient fossil fuel subsidies over the medium term and stresses it is time to fulfill that commitment.

March 27, 2013 — International Monetary Fund