27 march 2013

[4C note: While the motives of the International Monetary Fund are no doubt mixed, its appeal to end energy subsidies is in line with a basic demand of the international climate movement and would, if implemented, be a major step toward expansion of the renewable energy supply and a carbon-free world.]

IMF: Governments need to end energy subsidies

by Howard Schneider, The Washington Post, March 27, 2013

Government subsidies of gasoline, electricity and other energy sources amount to about $1.9 trillion a year and should be ended or offset with taxes used to battle climate change and pay for social programs, the International Monetary Fund said Wednesday in a major foray into the global warming debate.

From top energy users such as the United States and China to the poorest of the poor, the fund said countries should be more aggressive in developing energy tax and pricing policies that reflect the true cost of fossil fuel use, including such “externalities” as pollution and the steps needed to mitigate the effects of a warming climate.

For the United States, the IMF estimated that would require a $1.40 levy per gallon of gas and other fees totaling more than $1,400 per person each year — around $500 billion in total, or more than 3 percent of the country’s annual economic output.

Not recognizing those costs, the IMF argues, has had profound consequences for energy markets and the world economy: encouraging overconsumption; leaving some nations short of funds to address health, education and other needs; and distorting investment decisions worldwide.

“It is time for subsidies to end and carbon taxation to be put in place,” IMF First Deputy Managing Director David Lipton said in an interview Tuesday, before the release of a study researched or reviewed by about 30 staff members and vetted by the IMF’s executive board. “You don’t want overconsumption based on getting something for less than it costs and forcing someone else to pay.” The “someone else” in this case is either taxpayers left with the bill for direct government subsidy programs or those harmed by pollution, climate change and other side effects of energy use.

Both the IMF and the World Bank, its sister agency, are intensifying their attention to climate change, an issue officials believe is one of the world’s key long-term economic challenges.

The issue has become central to the emerging agenda of new World Bank President Jim Yong Kim, who now routinely presses national leaders in meetings for their climate change plans, and compares the effort needed with the U.S. race to the moon in the 1960s. The bank last year released a report forecasting what the world would look like if average temperatures rise 4 degrees in coming decades, instead of the 2-degree increase set as an international goal. The consequences, the bank said, would be catastrophic for some nations.

‘A welcome development’

While the IMF’s day-to-day business focuses on more nuts-and-bolts issues that affect the financial stability of its member nations, IMF officials said energy subsidies have become an immediate concern.

“Climate change has long-term implications for economic development,” said Carlo Cottarelli, head of the IMF’s fiscal affairs department. “But in the short run, you see the impact on public finances. . . . It takes away resources that could be used to reduce deficits and public debt or increase public spending on more useful purposes.”

IMF signals push to scrap energy subsidies

By Robin Harding in Washington, The Financial Times March 27, 2013

The world could solve a large part of its fiscal problems by scrapping $1.9tn* in energy subsidies, the International Monetary Fund said on Wednesday.

The fund’s call suggests higher fuel prices could become a central condition of IMF help in the future, with subsidies proving a sticking point in its talks with countries such as Egypt, Pakistan and Ukraine.

David Lipton, first deputy managing director of the IMF, said countries should scrap fuel subsidies and charge for the cost of pollution – but that the fund was not yet ready to make carbon taxes a condition of its lending programmes.

“There are 20 countries that spend more than 5 per cent of GDP on energy subsidies,” said Mr Lipton. “It leads to a fiscal problem because the subsidies are so big that it threatens the fiscal sustainability of the country.”

For the first time, the IMF has put a price on the worldwide fiscal cost of energy subsidies. It says that regular subsidies, where the price of fuel is lower than the cost of producing it, amount to $480bn, mainly in developing countries.

“Our projections are that eliminating the $480bn of pre-tax subsidies would cut carbon emissions by 1 to 2 per cent for the world. It’s that big,” said Mr Lipton.

But indirect subsidies, where countries do not fully charge energy users for the costs of pollution and congestion, add another $1.4tn*, with 40 per cent in the developed world, the IMF says. Those figures are likely to be controversial because they count untaxed carbon emissions as a subsidy but do not include tax breaks for renewable energy such as wind.

In absolute terms the top three energy subsidisers are the US, at $502bn; $279bn in China; and $116bn in Russia, according to the fund.

Mr Lipton said that fuel subsidies reduce energy production in developing countries, cause them to use inefficient technologies that demand too much energy, and raise costs for the industrial sector.

“A lot of countries have inadequate energy production or inadequate electricity generation because the subsidies make production less remunerative,” he said. “So they end up with less energy overall.”

Subsidies also fail to help the poorest people because they do not use much energy anyway. “If you have no car and no air conditioning you can’t get too much subsidy,” said Mr Lipton.

The IMF is calling on developing countries to replace fuel subsidies with cash payments to the poorest people. Introducing the payments first can help to make scrapping the subsidy more politically palatable, it says.

Subsidies are largest in the Middle East and North Africa, where they amount to 8.5 per cent of regional output and 22 per cent of government revenues.

“Egypt is a country where the subsidies are something like 7 or 8 per cent or GDP, in a country that traditionally has had 8 or so per cent budget deficits, so it accounts for virtually the entire budget deficit,” said Mr Lipton.

“Using a good portion of that 8 per cent for infrastructure and modernisation – that it would leave the country better off is, I think, a quite reasonable proposition.”

* This article was amended from the original to correct the value of energy subsidies to $1.9tn, from $2.4tn. The value of indirect subsidies was corrected to $1.4tn, from $1.9tn.

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