Between directly lowered prices, tax breaks, and the failure to properly price carbon, the world subsidized fossil fuel use by over $1.9 trillion in 2011 — or eight percent of global government revenues — according to a study released this week by the International Monetary Fund.
The biggest offender was by far the United States, clocking in at $502 billion. China came in second at $279 billion, and Russia was third at $116 billion. In fact, the problem is so significant in the U.S. that the IMF figures correcting it will require new fees, levies, or taxes totaling over $500 billion a year, or more than 3 percent of the economy.
The most significant finding is that most of the problem — a little over $1 trillion worth — is the failure to properly price carbon pollution. Global warming is the ultimate example of a “negative externality” — a market failure in which one market actor enjoys the benefits of an exchange while another actor pays the costs.
When we burn gasoline to power our cars or coal-fired electricity to run our homes, we enjoy the benefits of that energy use. But someone else — a farmer facing increased drought, coastal populations facing rising seas, or the global poor facing food supply disruptions — shoulders the burden of the added carbon pollution we’re dumping into the atmosphere. It’s the global ecological equivalent of tapping into your neighbor’s electrical wiring so that they wind up paying your utility bill.
The world’s advanced economies consume huge levels of fossil fuels, so the failure to properly build pollution costs into the consumer price of fossil fuel use — through a carbon tax or cap-and-trade-style system, or some other policy — is what makes these economic giants the biggest contributors to worldwide fossil fuel subsidies. Emerging and developing economies in Asia (which mainly means China) come in a decent second. “Pre-tax” subsidies, which are breaks built into the tax code along with other policies, contributed another $480 billion, mostly from countries in the Middle East and North Africa. The pre-tax subsidies of the advanced countries were negligible.
Finally, lots of countries have a national consumption tax called a VAT (or value added tax), and often offer breaks through it for energy purchases. The IMF had to calculate those separately for methodological reasons, and found they contributed several hundred billion dollars more, again largely from the advanced countries.
It’s worth noting that western Europe has an (admittedly troubled) carbon pollution reduction program, so the big externality subsidy created by the advanced economies can likely be blamed mostly on the United States.
In calculating the value of the externalities subsidy, the IMF assumed the global warming damages of carbon emissions at $25 per ton. They then went through the policies of various countries to see who is and isn’t making an attempt to work that price back in through taxation, and to what extent. But the report notes that various studies have pegged the price as high as $85 per ton — and other studies have put it much higher than that — in which case the size of the externality subsidy would be much larger. Beyond global warming, the IMF also attempted to account for other externalities, particularly the pollution and health effects of coal burning.
All told, the analysis found that eliminating all externality subsidies entirely would reduce carbon dioxide emissions as much as 13 percent, along with having lots of positive ripple effects by reducing fossil fuel demand and increasing investment and jobs in clean energy.
As for pre-tax” subsidies, they run the gamut from actual tax breaks for purchasing energy, to entire countries that, because they’re big oil exporters, sell petroleum to their own citizens at artificially low prices. The IMF compared the international price for petroleum products (adjusted for transport and retail costs) to the domestic consumer price in 176 countries between 2000 and 2011. The gap between the two was the effect of the subsidies. They did the same for natural gas, using 37 countries, and for coal, using 39 countries, between 2007 and 2011. Various other methods were used to fill in the gaps and do the same for electricity prices.
All told, these policies subsidized fossil fuels to the tune of $480 billion in 2011. Countries in the Middle East and North Africa contributed nearly half of that, with Central and Eastern Europe and the emerging and developing countries in Asia making up most of the rest.
What’s especially damaging is that a lot of the major contributors here spend more on pre-tax subsidies to fossil fuels, as a share of their economy, than they spend on their public health systems or public education. Brad Plumer at the Washington Post notes that Egypt “regularly spends up to 8 percent of its GDP subsidizing fossil fuels – more than it spends on education and public health combined – while running budget deficits of around … 8 percent of GDP.” Since many of these countries are developing with large impoverished populations, that kind of crowding out of public health spending and investments is a big deal.
The IMF also calculated that if pre-tax subsidies in all non-OECD countries were phased out, prices for crude oil, natural gas, and coal would drop 8 percent, 13 percent, and one percent in 2050, respectively. Removing all pre-tax subsidies worldwide would reduce global greenhouse gas emissions by as much as two percent.
One last thing to note is how this problem plays out in terms of global inequality. The IMF found that most of these subsidies benefit the upper class: In low and middle income countries, the richest 20 percent of households captured 43 percent of the subsidy benefits, on average. For gasoline subsidies specifically, they captured a whopping 61 percent.
That doesn’t mean eliminating these subsidies won’t hurt poorer households. Because their incomes are so much lower, losing those subsidies can take a significant bite out of their resources, even if the share of the benefits they’re getting is a small portion of the total value of those subsidies. What it does mean is that these countries could help the poor much more efficiently by eliminating the energy subsidies and then just providing direct assistance to people in need.