Fossil-fuel subsidies rose to a record $7tn in 2022 as governments supported consumers and businesses during the global spike in energy prices caused by Russia president Vladimir Putin’s invasion of Ukraine and the economic recovery from the pandemic according to the IMF.
A new blog by the IMF said even as the world struggles to restrict global warming to 1.5 degrees C, subsidies for oil, coal and natural gas are costing the equivalent of 7.1% of global gross domestic product. That’s more than what governments spend annually on education (4.3% of global income) and about two thirds of what they spend on healthcare (10.9%).
Fossil-fuel subsidies rose by $2tn over the past two years as explicit subsidies (undercharging for supply costs) more than doubled to $1.3tn.
Consuming fossil fuels imposes enormous environmental costs - mostly from local air pollution and damage from global warming. The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel.
The IMF analysis showed that consumers did not pay for over $5tn of environmental costs last year. This number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of our baseline assumption that global warming costs are equal to the emissions price needed to meet Paris Agreement temperature goals.
These implicit subsidies are projected to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies.
The IMF blog said, “We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6m premature deaths annually, raise government revenues by $4.4tn and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones.”
Yet, removing fuel subsidies can be tricky. Governments must design, communicate and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits.
A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work, investment and fund public goods such as education, healthcare and clean energy. M