Fossil fuel subsidies more than double previous estimates

19th May 2015


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Author

Adam Tillotson

Subsidies for fossil fuels total $5.3 trillion a year worldwide, according to new estimates from the International Monetary Fund (IMF).

The figure is equal to 6.5% of global GDP and is more than is spent worldwide on health, the IMF said. The estimate is more than double the IMF’s previous figure of $2 trillion in 2011.

Over half of the difference is due to more robust evidence from countries on the damaging effects of energy consumption on air quality and health, the IMF said.

The IMF defines energy subsidies as the difference between what consumers pay for energy and its “true cost”, which includes the cost of supply and the money spent of dealing with its impacts on humans and the environment. It then adds each country’s normal value added or sales tax rate.

Fossil fuels harm people and the environment through the health effects of air pollution, traffic congestion and accidents, and road damage, the IMF said. Most of these externalities are borne by local people, with the external costs of climate change only making up a quarter of the total, it said.

Asia accounts for about half of the global total, while subsidies in advanced economies are a quarter. The largest subsidies are in China (US$2.3 trillion), the US (US$699 billion), Russia (US$335 billion), India (US$277 billion) and Japan (US$157 billion). Subsidies across the 28 member states of the EU total US$330 billion.

The IMF argues that countries that reform their energy subsidies can then reduce taxes imposed on labour, and raise spending on infrastructure, health and education, all of which would contribute to economic growth. The poor can be protected at the same time, by replacing subsidies with direct cash benefits, it said.

Energy subsidy reform would also incentivise investment in green technology because fossil fuel energy would no longer be artificially cheap, it added.

“Conditions are ripe to decisively engage in energy taxation and energy subsidy reform, further favoured by lower international oil prices and low inflation. Steps at the national level could hasten progress at the global level ahead of the Paris climate change summit in December,” it said.

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