Blunders in economic policymaking abound, but among the worst are energy subsidies. They stoke waste, squeeze other spending, enrich middlemen, and help the comfortably-off more than the poor, who use little energy.
Include the cost of pollution and the bill is even higher. A new IMF working paper puts it at a stonking $5.3 trillion, or 6% of global GDP — more than all government spending on health care.
The biggest subsidies are in the poorest countries (where they can reach 18% of GDP) and the lion’s share goes to coal, the dirtiest fuel, which no country taxes properly.
By contrast, renewable energy subsidies (mostly in the rich world and not covered in the IMF paper) amount to a mere $120 billion, and would vanish if fossil fuels were taxed fully. The biggest subsidizer of fossil fuels is China at $2.3 trillion, followed by America ($700 billion), Russia ($335 billion), India ($277 billion), and Japan ($157 billion).
Big numbers bring big headlines. In this case, they also introduce much greater margins for error. The common and strict definition of subsidies is “pre-tax”: directly intervening to keep a price artificially low. On that basis, the cost of fuel subsidies is an order of magnitude lower, at $333 billion. Moreover, it is down from $492 billion in 2011. The falling oil price has helped; some of the worst offenders such as India are now hacking away subsidies.
The IMF authors, however, use a broader “post-tax” definition, including tax exemptions (fuel is often untaxed) and wider costs such as pollution. Three-quarters of the damage pollution does, they say, is to the local environment (thereby hurting human health); the remainder is the cost of global warming (see chart). By the same token, the benefits that would come from ending subsidies include a halving of the death toll caused by outdoor air pollution and a cut of CO2 emissions by a fifth.
A previous study in 2013 reckoned the overall cost of fuel subsidies, including environmental harm, was $2 trillion. The new figure reflects gloomier assumptions about the damage to health from subsidized fossil fuels, particularly coal: recalculating the life-shortening effect of sulphur-dioxide emissions accounts for 45% of the extra $3 trillion. Including previously ignored emissions of nitrogen dioxide and fine particulates accounts for another 24%; other externalities such as congestion, 23%.
As the IMF authors accept, this is an area in which imponderables abound. Scientists disagree about the link between emissions and bad weather, and how to split the bill for climate change between future (presumably richer) generations and the current population. But even the most quantifiable drawbacks of fuel subsidies are dire enough.
© The Economist Newspaper Limited, London (May 23, 2015)