Act Local, Solve Global: The $5.3 Trillion Energy Subsidy Problem

By Benedict Clements and Vitor Gaspar

(Versions in 中文, Français日本語Русский and Español)

US$5.3 trillion; 6½ percent of global GDP—that is our latest reckoning of the cost of energy subsidies in 2015. These estimates are shocking. The figure likely exceeds government health spending across the world, estimated by the World Health Organization at 6 percent of global GDP, but for the different year of 2013. They correspond to one of the largest negative externality ever estimated. They have global relevance. And that’s not all: earlier work by the IMF also shows that these subsidies have adverse effects on economic efficiency, growth, and inequality.

What are energy subsidies

We define energy subsidies as the difference between what consumers pay for energy and its “true costs,” plus a country’s normal value added or sales  tax rate. These “true costs” of energy consumption include its supply costs and the damage that energy consumption inflicts on people and the environment. These damages, in turn, come from carbon emissions and hence global warming; the health effects of air pollution; and the effects on traffic congestion, traffic accidents, and road damage. Most of these externalities are borne by local populations, with the global warming component of energy subsidies  only a fourth of the total (Chart 1).

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Carbon Pricing: Good for You, Good for the Planet

By Ian Parry

The time has come to end hand wringing on climate strategy, particularly controlling carbon dioxide (CO2) emissions.  We need an approach that builds on national self-interest and spurs a race to the top in low-carbon energy solutions. Our findings here at the IMF—that carbon pricing is practical, raises revenue that permits tax reductions in other areas, and is often in countries’ own interests—should strike a chord at the United Nations Climate Summit in New York next week. Let me explain how.

Ever since the 1992 Earth Summit, policymakers have struggled to agree on an international regime for controlling emissions, but with limited success. Presently, only around 12 percent of global emissions are covered by pricing programs, such as taxes on the carbon content of fossil fuels or permit trading programs that put a price on emissions. Reducing CO2 emissions is widely seen as a classic “free-rider” problem. Why should an individual country suffer the cost of cutting its emissions when the benefits largely accrue to other countries and, given the long life of emissions and the gradual adjustment of the climate system, future generations?

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Paying the Price for the Future We Want

By Min Zhu

Putting an accurate price on pollution is something the world has been struggling with now for decades. Getting prices to reflect environmental damage will help slow pollution by encouraging people and firms to change their behavior and shift away from activities and products that pollute the planet. Paying true prices is something we need to do if we want to keep economic development on an environmentally sustainable track.

Behind the concept of sustainable development lies a bold vision of the future, or “The Future We Want,” as Ban Ki-Moon puts it. It is about the vitality of our global economy, the harmony of our global society, the nurturing of our global inheritance.

It is about laying the foundation so that every single person can flourish and reach their true potential.

Eyes on Rio

This week the world is looking to Rio de Janeiro as those of us gathered there for the Rio+20, United Nations Conference on Sustainable Development affirm our commitment to sustainable development—the idea that we should strive for economic growth, environmental protection, and social progress at the same time.

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