Tuesday, May 26, 2015

How Large Are Global Energy Subsidies?

This paper provides a comprehensive, updated picture of energy subsidies at the global and regional levels. It focuses on the broad notion of post-tax energy subsidies, which arise when consumer prices are below supply costs plus a tax to reflect environmental damage and an additional tax applied to all consumption goods to raise government revenues. Post-tax energy subsidies are dramatically higher than previously estimated, and are projected to remain high. These subsidies primarily reflect under-pricing from a domestic (rather than global) perspective, so even unilateral price reform is in countries’ own interests. The potential fiscal, environmental and welfare impacts of energy subsidy reform are substantial.
The key findings of the study are the following:
  • Post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion (6.5 percent of global GDP) in 2015.
  • Post-tax subsidies are large and pervasive in both advanced and developing economies and among oil-producing and non-oil-producing countries alike. But these subsidies are especially large (about 13–18 percent) relative to GDP in Emerging and Developing Asia, the Middle East, North Africa, and Pakistan (MENAP), and the Commonwealth of Independent States (CIS).
  • Among different energy products, coal accounts for the biggest subsidies, given its high environmental damage and because (unlike for road fuels) no country imposes meaningful excises on its consumption.
  • Most energy subsidies arise from the failure to adequately charge for the cost of domestic environmental damage—only about one-quarter of the total is from climate change—so unilateral reform of energy subsidies is mostly in countries’ own interests, although global coordination could strengthen such efforts.
  • The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global CO2 emissions by more than 20 percent, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).

 Image result for Oil Subsidies

These findings must be viewed with caution. Most important, there are many uncertainties and controversies involved in measuring environmental damages in different countries—our estimates are based on plausible—but debatable—assumptions.7 The estimates of the environmental, fiscal, and welfare impacts from eliminating energy subsidies are based on a partial equilibrium analysis: demand responses are based on long-run estimates of own-price demand elasticities for energy products thus abstracting from transitional dynamics and cross-price effects among fuels, and there is an implicit assumption that supply prices do not adjust in response to demand changes. Linkages with the broader fiscal and macroeconomic system are also ignored. For example, using the fiscal dividend from energy subsidy reform to lower distortionary taxes or increase productive public spending could generate further substantial improvements in welfare and economic growth. However, while there is ample scope for refining the estimates of energy subsidies and reform impacts or for undertaking further sensitivity analysis, the key findings of the paper are clear: energy subsidies are very large; their removal would generate very substantial environmental, revenue, and welfare gains; and their reform should begin immediately, albeit gradually, given the uncertainty over the precise level of energy taxes required.

by David Coady ; Ian W.H. Parry ; Louis Sears ; Baoping Shang
Publication Date:     May 18, 2015

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