IMF report: A $5 trillion case for ending fossil fuel subsidies?

The IMF’s new report has found that global fossil fuel subsidies could cost $5.3 trillion in 2015 alone. The findings reflect a growing chorus calling for reforms in energy subsidies.

The hidden health and environmental costs of using fossil fuels are far greater than previously thought, researchers at the International Monetary Fund (IMF) have found.

In a report released Monday,  IMF economists estimated that global energy subsidies this year could cost more than $5 trillion, about $10 million a minute — greater than the combined health spending of governments worldwide in 2013. The IMF’s findings represent the latest in a growing chorus of prominent voices calling for reform in fossil fuel subsidies as part of a broader debate about the costs of energy.

"The efficiency costs of failing to charge for environmental and other damage and secure a contribution to revenues are even larger than we previously thought," Sanjeev Gupta and Michael Keen, both senior officers at the IMF’s fiscal affairs department, wrote for the organization’s blog. “So the urgent need for energy price reform — in a wide range of both advanced and developing countries — remains."

The report uses new data from the World Health Organization and other sources to update the IMF's 2013 findings. It distinguishes between pretax subsidies, which occur when people and businesses pay less than it costs to supply the energy; and post-tax subsidies, which include tax breaks as well as the environmental destruction, health costs, and other damage caused by energy use.

The report estimates that pretax subsidies will decline to about $330 billion in 2015, while post-tax subsidies will rise to $5.3 trillion, or about 6 percent of the global GDP, according to the report.  

At the same time, the IMF listed the global benefits of eliminating fossil fuel subsidies: a 20-percent drop in carbon emissions, a more than 50-percent reduction in deaths attributed to air pollution, and a significant net welfare gain of $1.4 trillion in 2013.

“This very important analysis shatters the myth that fossil fuels are cheap by showing just how huge their real costs are,” Nicholas Stern, a climate economist at the London School of Economics, told The Guardian. “There is no justification for these enormous subsidies for fossil fuels, which distort markets and damages economies, particularly in poorer countries.”

The findings, which the IMF itself has called “shocking,” is the latest to come out in favor of ending fossil fuel subsidies. The Guardian reported:

Barack Obama and the G20 nations called for an end to fossil fuel subsidies in 2009, but little progress had been made until oil prices fell in 2014. In April, the president of the World Bank, Jim Yong Kim, told the Guardian that it was crazy that governments were still driving the use of coal, oil and gas by providing subsidies. “We need to get rid of fossil fuel subsidies now,” he said.

The movement has also gained momentum in the lead-up to the UN Climate Change Conference in Paris later this year. In 2014, nearly 30 countries, including Egypt, Indonesia, and India, implemented some form of fossil fuel subsidy reform, according to the Global Subsidies Initiative.

Still, some have been skeptical of the feasibility of ending fossil fuel subsidies, as well as its overall benefits. Alex Trembath, a senior analyst at the Breakthrough Institute, noted in a blog post published before the release of the IMF report that because subsidies alone aren’t responsible for the dominance of fossil fuel use, phasing them out may not have the desired transformative effects on the environment.

“I’d argue it’s a combination of abundance, energy density, storability, transportability, variety of applications, and, yes, infrastructure lock-in [that keeps fossil fuels dominant],” he wrote. “If we want solar panels and nuclear reactors and electric vehicles to replace fossil fuels, they simply have to do a better job at powering the global economy.”

Mr. Trembath added that while fossil energy subsidies in many countries are unnecessary, subsidies in developing nations are usually in place to support low-income populations.

“Justifications for removal [of fuel subsidies] often do not adequately reflect the specific environments of developing country economies,” according to a Nigerian fuel subsidy study published in 2012.

In its report, the IMF acknowledged that eliminating fossil fuel subsidies would have to be offset by an increase in energy taxes, which would mean higher costs for consumers. But, it argued:

...the key findings of the paper are clear: energy subsidies are very large; their removal would generate very substantial environmental, revenue, and welfare gains; and their reform should begin immediately, albeit gradually, given the uncertainty over the precise level of energy taxes required.

IMF economists also pointed out that each nation stands to gain from its own efforts at fuel subsidy reform.

“The icing on the cake is that the benefits from subsidy reform—for example, from reduced pollution—would overwhelmingly accrue to local populations,” Benjamin Clements and Vitor Gaspar, also with the IMF’s fiscal affairs department, wrote. “By acting local, and in their own best interest, policy authorities can contribute significantly to the solution of a global challenge.”