Reform energy subsidies: IMF

IMF says global reform would lead to major gains for economic growth and the environment.

from the International Monetary Fund

 A new report from the International Monetary Fund (IMF) urged policymakers the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment. The comprehensive study, Energy Subsidy Reform — Lessons and Implications, released today, estimates that energy subsidies amount to a staggering $1.9 trillion worldwide — the equivalent of 2½ percent of global GDP, or 8 percent of government revenues.

In a speech at the Peterson Institute for International Economics in Washington DC, marking the release of the paper, IMF First Deputy Managing Director David Lipton noted that “subsidy reform can lead to a more efficient allocation of resources, which will help spur higher economic growth over the longer term.” Removing energy subsidies can also strengthen incentives for “research and development in energy-saving and alternative technologies,” he said. He also noted that, while intended to benefit consumers, subsidies are often inefficient and “could be replaced with better means of protecting the most vulnerable parts of the population.”

“The paper shows that for some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy,” Lipton said, adding that IMF research shows that 20 countries maintain pre-tax energy subsidies that exceed 5 percent of GDP.

For other emerging and developing countries, he said, the share of the scarce government resources spent on subsidies remains “a stumbling block” to higher growth and fundamentally impairs their future. “Because of low prices, there is little investment in much-needed infrastructure. More is spent on subsidies than on public health and education, undermining the development of human capital.”

Energy subsidies also reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy. “On average, the richest 20 percent of households in low- and middle-income countries capture 43 percent of fuel subsidies,” said Lipton.

At the same time, Lipton warned that an increase in prices which can result from subsidy reform can have a significant impact on the poor and that “mitigating measures to protect them as subsidy reform is implemented” must be an integral part of any successful and equitable reform program.

In addition, Lipton noted that “subsidies aggravate climate change and worsen local pollution and congestion.” The study finds that eliminating pre-tax subsidies would reduce global CO₂ emissions by about 1-2 percent which would, by itself, represent “a significant first step in reducing emissions by delivering about 15-30 percent of the Copenhagen Accord’s goal.”

As for advanced economies, he noted that subsidies most often take the form of taxes that are too low to capture the true costs to society of energy use (“tax subsidies”), including pollution and road congestion. “Eliminating energy tax subsidies would deliver even more significant emissions reductions said Mr. Lipton, reducing “CO₂ emissions by 4½ billion tons, a 13 percent reduction.”

Reducing subsidies is not easy, he said, but many countries now see the benefits of doing so and intend to try. He emphasized that “subsidies have adverse effects on public finances, economic growth, equity and the environment” and noted that the paper offers a roadmap, based on best practices and country experience. “With adequate planning, carefully designed mitigating measures, and a good communications plan, the job can be done” said Mr. Lipton. In addition to drawing attention to the issue, Mr. Lipton noted that the IMF would help those who want to go forward, while also emphasizing that “subsidy reform is needed, but it is better to do it the right way, than to do it right away.”

Mr. Lipton also recalled the commitment of the G-20 which, at the Pittsburgh Leaders Summit in 2009, pledged to eliminate inefficient fossil fuel subsidies over the medium term. “I do not know exactly what constitutes the medium term, but it is surely time to get on with fulfilling this very important commitment,” he said.

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