IMF: Want to fight climate change? Get rid of $1.9 trillion in energy subsidies

By: Brad Plumer

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).

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