In 2009, as oil prices fell 70%, G20 leaders called for an end to fossil fuel subsidies. But then monetary stimulus and wild west speculation in the finance sector drove a sharp rebound in commodity prices, exploration and associated revenues, and no reforms happened. As prices began to fall again in 2014, a push for phasing out subsidies has been proceeding once more.
Last April, the president of the World Bank, Jim Yong Kim, told the Guardian that it was crazy that governments were still driving the use of coal, oil and gas by providing subsidies. “We need to get rid of fossil fuel subsidies now,” he said.
The World Bank and IMF have both noted that existing fossil fuel subsidies overwhelmingly go to the rich (who consume the most energy), with the wealthiest 20% of people getting six times as much as the poorest 20% in low and middle-income countries.
The IMF estimated energy subsidies in 2015 at $5.3 trillion ($600 million per hour) or 6.5% of global GDP and that most of this cost arises from fossil fuel taxes which are set far below the full cost accounting of the associated environmental damage, air and water pollution and public health costs, leaving prices “woefully below levels that reflect their true costs.” See: Fossil fuels subsidized by $10m a minute: says IMF
The IMF estimates that eliminating global energy subsidies would reduce deaths related to fossil-fuel emissions by over 50% and fossil-fuel related carbon emissions by over 20%. But for conservatives, there is a pecuniary reason to end energy subsidies. They make bad financial sense.
Ending subsidies to fossil fuel would level the playing field and enable renewable energies to compete and win market share on their own merits as well (go free market forces!). Then the smartest, most efficient (full cost accounting) solutions can prevail. And importantly for budgets, the revenue saved from subsidies will provide cash needed for funding and investment in other critical areas even with a reduction in overall tax rates.
The math is clear, no honest fiscal conservative can legitimately argue for a continuation of energy subsidies. Full stop. See IMF: counting the costs of energy subsidies:
The revenue gain from eliminating all energy subsidies is projected to be US$2.9 trillion (3.6 percent of global GDP) in 2015. This offers huge potential for reducing other taxes or strengthening revenue bases in countries where large informal sector constrains broader fiscal instruments.
Advanced economies would gain enough revenue to halve corporate income tax or cover one quarter of public health spending. In emerging economies, the revenue is worth double their corporate income tax revenues or public health spending. In low-income countries, it is about one and half times corporate income tax revenues or public health spending.
The net gain from reform, after subtracting the cost of higher energy prices to consumers from the fiscal and environmental gains, is projected at US$1.8 trillion (2.2 percent of global GDP) and could be much larger if the fiscal gain is used for growth-enhancing tax cuts on labor and capital or badly needed investments in education, health, and infrastructure.
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