A closed gasoline station in Egypt. Two-fifths of Egyptians live on less than $2 a day. A big rise in fuel costs due to subsidy cuts would feed through to higher transport costs, which would push up the price of food. A new International Monetary Fund study calls for energy subsidy money to be redirected to better use. (AMR ABDALLAH DALSH/REUTERS)
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.
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.”
Although a new world climate treaty has proved elusive since the 2009 Copenhagen talks, increased analysis and resources from the IMF and World Bank could make a difference as nations set policies with climate effects in mind, and try to put together a $100 billion-a-year climate-fighting fund, said Andrew Light, head of international climate policy at the Center for American Progress.
“Jumping on this [by the bank and IMF] could actually close the gap between what countries have said they are going to do and where we need them to be. . . . It is a welcome development,” Light said.
The IMF study reviewed energy policies in 176 countries. The conclusion, the IMF said, is that each year a massive annual transfer takes place that devotes some 2.7 percent of world economic output to keeping energy prices lower than they should be.
In poorer nations, the subsidies usually involve direct efforts to keep gasoline cheap at the pump and electricity rates low. Globally, those types of direct subsidies cost about $480 billion and have overwhelmed public finances in nations such as Egypt and Pakistan. Throughout Africa, an IMF official noted, governments spend as much on energy subsidies as they do on health care, and prices are so misaligned that they have undercut investment in new power sources. Eliminating those subsidies, the IMF estimated, would reduce energy use and trim perhaps 2 percent from the world’s annual carbon dioxide emissions.
In the developed world, the IMF says the subsidies are even larger but less overt, reflecting that government tax policies do not capture the costs of pollution and other externalities. Using economic models and other studies performed as part of the larger global warming debate, the IMF puts those indirect subsidies at $1.4 trillion — $25 for each ton of carbon dioxide produced — and suggests they be offset through an “efficient” tax that makes energy users pay the full cost of the product.
The study will probably prove controversial, putting the IMF on record in favor of policies that would raise the cost of living for nearly everyone on the planet.
The fund has often criticized the subsidies wired into the government budgets of many developing countries, arguing, as Lipton said, that they benefit the person with “three cars and four air conditioners” more than the poor. He said cash transfers to the needy would be cheaper than mispricing power for everyone, and government savings could be directed to health and education programs or deficit reduction.
But the call for a broad recognition of the externalities of energy consumption injects the IMF directly into the climate change debate at a time when developed countries are fighting to keep their manufacturing firms competitive and reduce unemployment.
The United States is enjoying an energy renaissance with the development of new drilling and other technologies, and the focus has been on how that might revive the country’s economic fortunes — not on how to calculate news taxes that ought to be applied. In developing countries, the trade-offs are more elemental: between inefficient electricity supplies or none at all, between social stability and the riots that sometimes accompany efforts to impose market prices.
The IMF study did not analyze all aspects of the energy industry — and explicitly excluded tax breaks for drilling or exploration. It also did not look at government support for the alternative energy industry, which the fund said had only a minor effect globally.