How Large Are Global Energy Subsidies?

Vitor Gaspar Director, Fiscal Affairs Department

International Monetary Fund

The Brookings Institution

May 18, 2015

Background

The presentation draws from a new paper and two blogs

from the IMF:

• Provides a comprehensive, updated picture of energy

subsidies and the impacts of subsidy reform

• Focusing on the broader notion of post-tax energy subsidies,

instead of pre-tax subsidies

• The estimates of the environmental, revenue and welfare impacts

of eliminating energy subsidies are “partial equilibrium” in nature

• Points to the need to begin reform immediately while

adopting a gradual reform strategy

2

0

1

2

3

4

5

6

7

8

2011 2012 2013 2014 2015

Pe

rce

nt

of

Glo

bal

GD

P

In percent of global GDP

$0

$1

$2

$3

$4

$5

$6

$7

2011 2012 2013 2014 2015

US$

tri

llio

ns

(no

min

al)

In US$ trillions

Global energy subsidies are $5.3 trillion

$4.2

$4.6 $4.9

$5.2 $5.3

5.8

6.3 6.5 6.7 6.5%

Pre-tax consumer subsides arise when the price paid by consumers is below the cost of supplying energy. Post-tax consumer subsidies arise when the price

paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax reflecting the environmental damage associated with

energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues.

Global energy subsidies

Costs are far-reaching …..

• Exacerbate environmental damage

• Local pollution, traffic congestion and accidents, road

damage, and global warming

• Worsen inequality

• Most of the benefits are captured by rich households

• Better targeted policy instruments are often available or can

be quickly developed

• Retard economic growth

• Discourage energy investments and encourages energy

inefficiency

• Fiscally costly

• Which requires higher distortionary taxation and crowds out

high priority spending (education, health, infrastructure) 4

…..mostly local …..

5

Global

warming

24%

Pre-tax

subsidies

6% Local

pollution

52%

Vehicle

externalities

12%

Foregone

revenue

6%

Components of global energy subsidies, 2015

….. and from coal

6

Petroleum

28%

Natural gas

10%

Electricity

3%

Coal

59%

Product composition of global energy subsidies, 2015

Energy subsidies are pervasive

Japan $0.2

trillion

India $0.3

trillion

China $2.3

trillion

Russia $0.3

trillion

USA $0.7

trillion

EU $0.3

trillion

Geographic distribution of global energy subsidies, 2015

Energy subsidy reform can generate substantial health benefits …..

8

Reduction of fossil-fuel emissions-related deaths, 2015

0

10

20

30

40

50

60

70

Emerging Europe

E.D. Asia CIS MENAP S.S. Africa Advanced LAC

Pe

rce

nt

red

uct

ion

Global average: 57 percent

0

5

10

15

20

25

30

35

40

MENAP E.D. Asia LAC CIS S.S. Africa Emerging Europe

Advanced

Pe

rce

nt

red

uct

ion

Global average: 24 percent

….. and carbon emission reductions …..

9

Reduction of fossil-fuel related CO2 emissions, 2015

0

3

6

9

Advanced Emerging Low-income and developing

Pe

rce

nt

of

GD

P, 2

01

3

….. as well as a significant fiscal dividend

10

Corporate

income tax

revenue

Public health

spending Fiscal gain

Time is now: act local, solve global!

• Energy subsidy reform is urgently needed in many

countries for domestic reasons

• This will also contribute to carbon emission reductions

(in the run up to Paris 2015 UN Climate conference)

• Low international energy prices provide a window of

opportunity for reform

Reform process should start now

and it should be gradual

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Thank you!

• The working paper “How Large Are Global Energy

Subsidies”

• The blog “Act Local, Solve Global: Energy Tax and

Subsidy Reform”

• The blog “Global Energy Subsidies Are Big—About

US$5 Trillion Big”

• All can be found at:

http://www.imf.org/external/np/fad/subsidies/

12

13

Background slides

A number of countries have started to reform energy taxation

Carbon taxes and emissions trading systems

14 Source: World Bank, 2014, State and Trends of Carbon Pricing 2014.

Other references

• Clements, B. J., D. Coady, S. Fabrizio, S. Gupta, T. Alleyne, C. A.

Sdralevich, 2013, Energy Subsidy Reform: Lessons and Implications.

Washington D.C.: International Monetary Fund.

• Clements, B. J., D. Coady, S. Fabrizio, S. Gupta, B. Shang, 2014, “Energy

Subsidies: How Large Are They and How Can They Be Reformed”,

Economics of Energy & Environmental Policy 01/2014; 3(1).

• Parry, I., D. Heine, E. Lis, and S. Li, 2014, Getting Energy Prices Right:

From Principle to Practice. Washington D.C.: International Monetary Fund.

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