IMF Urges Phasing Out $1.9 Trillion in Global Energy Subsidies
March 31st, 2013

Energy subsidies cost governments from the U.S. to Egypt $1.9 trillion, discourage private investment and help wealthy consumers more than the poor, according to a study by International Monetary Fund staff.

In the report published today that covers 176 countries, the Washington-based IMF advocates a progressive increase in energy prices, accompanied by targeted measures to protect the poorest. Getting rid of subsidies could also help reduce carbon dioxide emissions by 13 percent, it estimated.

“Energy subsidies are large and they’re harmful,” Carlo Cottarelli, the IMF’s director of fiscal affairs, said on a conference call with reporters. “They lead to excessive consumption of energy, they absorb public-sector resources that could be used for more useful purposes” and they “benefit the rich more than the poor,” he said.

The report gives the IMF ammunition for what it describes as a “frequent topic of discussion” with member countries. Policy makers’ reluctance to let energy prices increase has stalled or derailed loans in nations such as Ukraine and Pakistan, countries the report shows spend more of their wealth on subsidies than on public health and education.

Emerging markets are not the only countries concerned, according to the report, which singles out the U.S. as the largest subsidizer, with an estimated $502 billion in 2011.

“Advanced economies do not sell energy below supply costs, but they do not tax energy enough,” Cottarelli said.

Biggest Subsidizers

Advanced economies account for 40 percent of all subsidies, according to the IMF report. China and Russia are the biggest subsidizers in absolute amounts after the U.S., it said.

The fund argues that subsidies can result in lower profit for energy producers, making it difficult for them to attract investors. They also create an incentive to smuggle, even in developed economies as illustrated by Canadians who come to the U.S. to buy cheap fuel, it said.

Still, attempts to let energy prices rise have often been slowed or defeated because of the social unrest that ensued, according to the report, which looks at 22 cases.

“The absence of public support for subsidy reform partly reflects a lack of confidence in the ability of governments to reallocate the resulting budgetary savings to benefit the broader population, as well as concerns that vulnerable groups will not be protected,” the authors wrote. “This is particularly challenging in oil-exporting countries, where subsidies are seen as a mechanism to distribute the benefits of natural resource endowments to their populations.”

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