According to a working paper recently released by the International Monetary Fund, fossil fuel subsidies increased to a record high of $7 trillion in 2022 due. Governments’ efforts to shield consumers and business from the global increase in energy prices costs caused by the Russian invasion of Ukraine and the recovery efforts from the coronavirus pandemic were the cited drivers of this trend.
This record increase in fossil fuel subsidies represent 7.1 percent of global GDP which could have been used for a lot of good. The paper assumes of an efficient fossil fuel prices that reflect supply and environmental costs and subsidies are taken to be implied by charging below efficient fuel prices. Some worrying findings:
- Explicit subsidies (undercharging for supply costs) have increased more than twice the amount since 2020 but may only account for 18% of total subsidy;
- The bulk of the subsidy, however, or about 60 percent is due to underpricing for global warming and local air pollution;
- The gap between efficient prices and retail fuel prices remains large and pervasive. For example, 80 percent of global coal consumption was priced at below half of its efficient level in 2022.
Removal of fossil fuel subsidies would be the way to go. Analyses from the IMF paper include full fossil fuel price reform could help reduce global carbon dioxide emissions to an estimated 43 percent below baseline levels in 2030 (in line with keeping global warming to 1.5-2oC), raise revenues worth 3.6 percent of global GDP, and prevent 1.6 million local air pollution deaths per year. But it also cautions governments to be clear and careful in designing, communicating, and implementing a comprehensive reform package that emphasizes the benefits. This includes using fossil tax revenues to protect vulnerable households, fund the social sectors (education and health), and invest in clean energy.