Governments around the world spent up to $480 billion on direct energy subsidies in 2011 on a pre-tax basis. Consumers were charged less than the true cost of petroleum, natural gas and coal. As citizens, though, they made up the difference through higher taxes, less public spending — on health and education — and less private investment. Adding fuel to the fire, energy subsidies have enormous effects on long-pressing issues such as fiscal imbalances, climate change and social inequality.
The International Monetary Fund believes the world would be better off in many ways if fossil fuels were priced at market cost. That would lower energy consumption and create incentives for investment in renewable energy, it says. Carbon dioxide emissions would be cut by 13% to 4.5 billion tons, it estimates. Its newly published “Energy Subsidy Reform: Lessons and Implications” is the Funds’ first incursion in to the intersection of climate change and the energy market.
The more immediate benefit of cutting energy-related subsidies could be to reduce budget deficits. Stopping subsidies would save money for governments from Japan to the U.S. Oil and gas companies in the U.S. receive an estimated $4 billion in subsidies a year, largely through exploration tax credits. The likes of ExxonMobil, Chevron, BP, Shell, and ConocoPhillips won’t give them up easily, they will put rising profits at risk.
The report makes it clear that energy subsidies are spread across developing and emerging economies. The countries of the Middle East and North Africa stands out. The region accounts for 50% of global energy subsidies.
Pre-tax Energy Subsidies by Region in 2011
Take Saudi Arabia, a country that uses fuel subsidies to keep its population from demanding a direct share of the kingdom’s oil wealth. The world’s biggest exporter of crude has a domestic fuel subsidy bill exceeding 162 billion riyals ($43 billion) a year, according to Mohammad Al-Sabban, an independent Saudi-based economist and energy consultant and former senior economic adviser at the ministry of petroleum and minerals. “Reviewing fuel prices in Saudi Arabia is inevitable if not a priority. Rapid growth in consumption is a real problem that can’t continue in any way. There is a general conviction on that on all levels in the kingdom,” he told Bloomberg News in December. The motive for his statement is an ever-greater fiscal burden as the country’s population is rising at 3.2% a year.
Antoinette Sayehm, director of the IMF’s African Department, believes that money spent on subsidies “must be used better to invest in the critical physical and social infrastructure required to sustain growth in sub-Saharan Africa.” In Nigeria, for example, subsidies are equivalent to 1.8% of the country’s GDP.
Contrary to common belief, and in many cases the pretext, fossil-fuel subsidies don’t necessarily benefit the poor. Most fuel products are consumed by the wealthy, who can afford cars, airconditioning and electrical appliances. The richest 20% of households in low and middle income countries capture 43% of total fuel subsidies; the poorest 20% of households get 7%.
While the IMF recognizes the political difficulty of doing that any time soon, it does recommend that some of those subsidies should be immediately switched to support renewable energy sources. Renewable energy was subsidized to the tune of only $88 billion in 2011, according to the International Energy Agency (IEA), almost an order of magnitude lower than the money pumped into fossil-fuel subsidies. While that wouldn’t necessarily help cut government budget deficits, more use of renewable energy could help on climate change and on reducing social inequality .