Why are governments still subsidizing fossil fuels?
The fight against climate change commands the support of governments across much of the world. Targets for carbon abatement have gotten more ambitious and policies to address the challenge are proliferating. Yet one measure of progress shows how badly these efforts still fall short. Last year, global fossil-fuel subsidies expanded to a new record — $7 trillion, roughly 7% of global gross domestic output.
This remarkable number comes from a recently updated assessment by the International Monetary Fund, drawing on detailed disaggregated data for 170 countries. Rightly, it uses a comprehensive definition of subsidy, combining outright support (spending that offsets production costs) and implicit support (underpricing for environmental harms and forgone tax revenue).
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Explicit subsidies have more than doubled since the previous assessment for 2020, to more than $1 trillion, thanks partly to efforts to soften the blow of higher energy prices after Russia attacked Ukraine. Implicit subsidies, some 80% of the total, surged as well — and unlike the explicit kind, they’re on track to rise further, both in dollar terms and as a share of global output, by the end of the decade.
One result of these enormous supports is that policies are often at cross-purposes. Keeping fossil fuels cheap offsets the other taxes, subsidies, and regulations governments use to reduce emissions and promote clean energy. In effect, with some of their policies, governments push fossil-fuel demand in the right direction; then, with generous subsidies for pollution and climate change, they push it back.
The gap between efficient prices and actual prices is especially egregious in the case of coal — which is both a potent driver of global climate change and in many countries a main cause of local air pollution. According to one authoritative estimate, outdoor air pollution resulted in 4.5 million premature deaths in 2019. The IMF finds that 80% of global coal consumption was priced at less than half its true cost in 2022.
Insisting that people pay full price for fuel would not only reduce consumption and slash emissions. It would also align that purpose with greater economic efficiency. First, it would make plain that some fossil fuels are worse than others, differences that can and should be priced accordingly. It would also provide a transparent basis for more effective international cooperation. Because air pollution and climate change both count in the calculations, efficient fossil-fuel prices vary from country to country according to local circumstances — but the gap between true costs and actual prices provides a consistent yardstick. Finally, cutting subsidies raises revenue, which allows for higher spending on worthwhile goals, lower government borrowing and/or cuts in other taxes.
No doubt governments will blame politics for the current dysfunction: Making fossil fuels more expensive is unpopular. This excuse is hardly compelling, since the existing subsidies could be put to better and more popular use. Still, if politics is indeed the obstacle, the rise in fossil-fuel prices since 2020 provides an opportunity. Instead of letting prices subside in due course all the way back to the pre-Ukraine norm, governments could withdraw or offset their existing subsidies at the same time, narrowing the gap with true costs without forcing prices higher.
The new assessment shows that the numbers involved aren’t rounding errors. They’re enormous — and enormously counter-productive. Working to reduce and then eliminate fossil-fuel subsidies should be an overriding priority for governments everywhere.
— Bloomberg Opinion
