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.