What's the simplest way to tackle global warming? Make sure that fossil fuels are priced properly and not subsidized.
That's the core idea behind a large new report (pdf) from the International Monetary Fund, which argues that the world "misprices" fossil fuels to the tune of some $1.9 trillion per year.
Eliminating these subsidies, the IMF argues, and replacing them with appropriate carbon taxes could cut global greenhouse-gas emissions by 13 percent, curtail air pollution, and shore up the finances of many poorer countries now in debt trouble.
So let's take a closer look at the IMF's numbers. Energy subsidies, the report argues, come in two very different flavors:
--$480 billion in direct subsidies for consumption. This is what we typically think of as "fossil fuel subsidies." In 2011, governments around the world spent some $480 billion to lower the price of petroleum, natural gas, coal, and electricity for their citizens.
The vast majority of these subsidies occur in developing nations, particularly in North Africa and the Middle East:
The report argues that these subsidies are crowding out other useful public spending in these countries and depressing private investment in the energy sector. What's more, direct subsidies gobble up an enormous portion of the budget. Egypt, for instance, regularly spends up to 8 percent of its GDP subsidizing fossil fuels — more than it spends on education and public health combined — while running budget deficits of around... 8 percent of GDP.
The IMF estimates that global greenhouse-gas emissions would fall by up to 2 percent if all of these direct subsidies were scrapped. The hard part, the report notes, is doing so in a way that doesn't hurt poor consumers (more on that below).
--$1.4 trillion in "mispricing." This is the trickier part of the analysis. The IMF report argues that governments should be taxing fossil fuels appropriately in order to take account of the air pollution and climate damage they cause. Earlier economic modeling has pegged these "externalities" at around $25 per ton of carbon dioxide. So, the IMF estimates, the failure to price these fossil fuels correctly amounts to a subsidy of some $1.4 trillion worldwide.
Once this is taken into account, the IMF says, the the countries that subsidize fossil fuels most heavily are the United States ($502 billion per year), China ($279 billion per year), and Russia ($116 billion). Here's how it breaks down by region--note that richer countries now take up the biggest share:
Correcting for all of this mispricing would reduce global greenhouse-gas emissions by around 13 percent, the IMF says.
Of course, that's all much easier said than done. The United States and Russia are very far from considering a carbon tax, while the Chinese government is mulling over an extremely modest and fragmented carbon-pricing scheme. What's more, in poorer countries, scrapping these direct subsidies tends to be extremely contentious. Nigeria saw strikes and protests in 2011 after proposals to scrap a fuel-import subsidy.
To assuage some of these fears, the IMF has a long section looking at 22 countries that have successfully managed to reduce or scrap their direct subsidies over the past few decades — as when Kenya and Ghana raised their artificially low electricity prices during the 1990s.
The report notes that direct subsidies often need to be phased out slowly and be paired with measures to mitigate the impact on the poor. Many African countries expanded their safety-net programs as they deregulated their utilities, for instance. Yet the IMF notes that this should be doable, since energy subsidies tend to be an extremely inefficient way to help the poor anyway — most of their benefits go to the top one-fifth of the population.
The IMF's Carlo Cottarelli has some more commentary on how to phase out energy subsidies here. His bottom line? "Eliminating energy subsidies is not impossible."