18 May 2015: A study by the International Monetary Fund (IMF) concludes that, despite the decline in energy prices, global energy subsidies are “dramatically higher than previously estimated.” The working paper, which presents updated information on regional and global energy subsidies, argues that subsidy reform is in countries’ own interests given related fiscal, environmental and welfare benefits.

Focusing on post-tax energy subsidies (equal to pre-tax and tax subsidies), the study finds these totalled US$4.9 trillion in 2013 and projects they will reach US$5.3 trillion in 2015, equal to 6.5 of global gross domestic product (GDP). Previous estimates had placed global post-tax subsidies at US$2 trillion in 2011.

According to the report, 59% of global energy subsidies in 2015 go to coal, 28% to petroleum, 10% to natural gas and 3% to electricity. In absolute terms, the countries spending the most on subsidies in 2015 are China (US$2.3 trillion), the US (US$0.7 trillion), the EU, Russia and India (US$0.3 trillion each). The countries with the highest shares of subsidies in relation to the GDP, from 13-18%, are located in emerging and developing economies of Asia, the Middle East, North Africa and Pakistan (MENAP) and the Commonwealth of Independent States (CIS).

According to the study, energy subsidies: exacerbate environmental damage by causing pollution, traffic congestion and global warming; worsen inequality due to capture of most benefits by rich households; discourage needed energy investments in renewable energy and energy efficiency; and impose high fiscal costs. It notes that understanding the magnitude of energy subsidies helps highlight the benefits to be achieved through reform.

IMF points out that, since “most energy subsidies arise from the failure to adequately charge for the cost of domestic environmental damage,” with only one-quarter arising from climate change, unilateral price reform is in countries’ national interests. Among the global quantifiable benefits of subsidy reform the report includes: US$2.9 trillion in saved government revenue; a more than 20% reduction in carbon dioxide (CO2) emissions; and US$1.8 trillion in improved welfare.

The study links the urgency of global energy subsidy reform to: the need for countries to commit to emission reductions ahead of the UN Paris Climate Change Conference in December; the opportunities for reform brought about by low energy prices; fiscal pressures in many countries; and the perverse environmental, fiscal, macroeconomic and social consequences of subsidies.

Key findings of the report, titled ‘How Large Are Global Energy Subsidies,’ were presented by Vitor Gaspar, Director, IMF Fiscal Affairs Department, at the Brookings Institution in Washington D.C., US, on 18 May 2015. He said that the “time is now to act local” and “solve global,” noting that low international energy prices have opened a window of opportunity for reform that should start immediately but be gradual. [IMF Publication Webpage] [Publication: How Large Are Global Energy Subsidies?] [Brookings Event Webpage] [IMF Gaspar Presentation] [IMF Reforming Energy Subsidies Website] [IMF Blog Post]