IMF Rejects Fossil Fuel Subsidies, Calls for Reform

By Paul Brown, Climate News Network

LONDON — Fossil fuel subsidies provided by both rich and poor countries to keep their citizens happy are holding back the world economy, accelerating climate change and damaging the health of current and future generations, according to the International Monetary Fund.

The worst offender of all is the United States, which allows annual subsidies of $502 billion on fossil fuels. China with $279 billion and Russia at $116 billion are the two next largest offenders.

Credit: stratman2/flickr.

The IMF researched 176 countries to investigate fuel subsidies. These are both direct subsidies, where consumers are sold petrol, oil, gas and coal at below the price of production, and indirect subsidies, where the tax is so low it does not pay for the damage to the planet from climate change, the cost of pollution to health, road damage by lorries (trucks), and the cost of accidents.

In developing countries a large part of the subsidy is frequently direct. India is an example, where the price of energy is kept stable by the Government even though the international price of imports is rising steeply.

But aside from India many developing countries are both losing potential revenue and damaging their development prospects. They are at the same time distorting electricity prices with subsidies and selling petrol and diesel to consumers at below cost price.

Worse, says the IMF, some developing countries spend more on subsidies for fossil fuels than they do on health and education for their citizens.  The worst example is Uzbekistan, which spends seven times as much on fuel subsidies as on the combined total for health and education.

The IMF lists the offending countries in a table based on the percentage of their budget they spend on subsidies compared with the welfare of their citizens.

Renewables Neglected

All of them spend more on providing cheap fuel than on health and education, including some of the poorest nations and some of the richest in per capita income.  Iran, Algeria, Ukraine, the United Arab Emirates, Bangladesh, Indonesia, Pakistan, and Zambia are among them.

This is a radical document written by economists who have a reputation for imposing harsh budgets on profligate nations. The Fund says in this report that while the subsidies are aimed at protecting consumers they actually do the opposite.

Underpriced energy encourages people to use excessive quantities, reduces incentives for investment in renewable energy, and accelerates the depletion of natural resources.

Increased consumption makes the balance of payments worse and promotes smuggling to neighboring states which have higher domestic prices.

The benefits of subsidies are also felt most by higher-income households. “Even future generations are affected through reduced growth and the damaging effects of increased energy consumption on greenhouse gas emissions and global warming”, says the IMF.

Although the figures for subsidies in the report run into trillions of dollars worldwide, it says they probably under-estimate the total. The reason for this is the estimate of damage caused by pollution.

Cleaner Air to Breathe

For example, the IMF uses as the price for damage done to the planet the sum of $25 for each tonne of carbon dioxide produced, which it says is “conservative.” The Stern report put the damage per tonne as high as $85.

It is the low American petrol and diesel taxes which take no account of these external costs that make the U.S. the largest fossil fuel subsidizer in the world.

The IMF analysis says that all countries would be better off if they cut fuel subsidies, making themselves more competitive in the process, as well as freeing resources to be spent on more essential development like the education and welfare of their citizens.

It says reform would reduce carbon dioxide emissions worldwide by 4.5 billion tonnes, representing a 13 percent reduction in global emissions. It would also generate significant health benefits by reducing local pollution, particularly sulphur dioxide. Another beneficial result would be a reduction in the international price of oil and gas, because demand would fall.

The report studies 22 country cases where energy reform was attempted, sometimes at the insistence of the IMF. In some cases it was a failure because governments increased the price of fuel only to reduce it again because of public unrest. In others energy efficiency and economic advances were achieved. Of 28 reform packages tried in these countries, 12 were classified as a success, 11 as a partial success and five as failures.

Paul Brown is a joint editor at Climate News Network. Climate News Network is a news service led by four veteran British environmental reporters and broadcasters. It delivers news and commentary about climate change for free to media outlets worldwide.