The world spent a staggering $4.7 trillion and $5.2 trillion on fossil fuel subsidies in 2015 and 2017, respectively, according to a new report from the International Monetary Fund. That means that in 2017 the world spent a whopping 6.5 percent of global GDP just to subsidize the consumption of fossil fuels.
China was “by far, the largest subsidizer” in 2015 at $1.4 trillion, the IMF said. The U.S. came in second at $649 billion. In other words, the U.S. spent more on fossil fuel subsidies in 2015 than it did on the bloated Pentagon budget ($599 billion in 2015). Russia spent $551 billion, the EU spent $289 billion, and India spent $209 billion. Emerging markets in Asia accounted for 40 percent of the total while the industrialized world accounted for 27 percent, with smaller percentages found in other regions.
The subsidy figure the IMF uses incorporates a variety of supports for fossil fuels, including not pricing for local air pollution, climate change and environmental costs, as well as undercharging for consumption taxes and undercharging for supply costs.
By fuel, coal is receives the most largesse, account for 44 percent of the global total. Oil was shortly behind at 41 percent, and natural gas and electricity output received 10 percent and 4 percent, respectively.
There is a long list of reasons why slashing fossil fuel subsidies is not only a good idea, but very much needed. The climate crisis is worsening. Paying for wasteful consumption saps already cash-strapped governments of much needed funds for other needs. Local air pollution also negatively impacts human health, and in some cases, to very extreme levels. “Energy pricing reform therefore remains largely in countries own interest, given that about three quarters of the benefits are local,” the IMF said.
If fuel prices were set at “fully efficient levels” in 2015, global CO2 emissions would have been 28 percent lower, deaths from air pollution would have been 46 percent lower, and tax revenues would have been 3.8 percent of global GDP higher, the IMF said.
The problem is that government support for fossil fuels is often popular. Everyone likes cheap gas or cheap electricity. This makes it difficult to withdraw support, and in many countries, politically dangerous.
There have been some notable changes in recent years, as the crash in oil prices in 2014 made oil dramatically less expensive, opening up a window for governments to trim subsidies without risking public outrage. The pressure to cut expenditures was particularly acute for oil exporters, who saw their budgets blow up when crude collapsed. Some variation of price increases on gasoline, diesel and electricity occurred in Bahrain, Egypt, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, according to the IMF. In particular, Saudi Arabia hiked gasoline prices by 67 percent at the end of 2015.
Another category of subsidy cuts came in form of a move to market-based pricing (i.e., allowing prices to rise), which occurred in China, Côte d’Ivoire, Jordan, Madagascar, Mexico, Oman, and United Arab Emirates, India, Indonesia, Thailand, and Tunisia, the IMF said.
The problem is, however, that when global crude oil prices rebounded in 2017 and 2018, there was a quick move to put price supports back into place, in an effort to head off public ire. Notably, Indonesia froze fuel prices to stop them from rising. In Brazil, in response to a nationwide truckers’ strike last year, the government lowered fuel prices. In fact, despite the economic orthodoxy promised by new Brazilian President Jair Bolsonaro, he went back and forth over whether or not to let prices rise. Similar experiences occurred in a handful of other countries.
The pressure to fix prices or subsidize fuel in some way was made worse by the fact that the U.S. Federal Reserve hiked interest rates multiple times over the last two years, strengthening the dollar and thereby putting downward pressure on emerging market currencies. Because oil is priced in dollars, weaker currencies made oil vastly more expensive, which fed frustrations for millions of people.
The Fed did an about-face earlier this year when it appeared that the global economy was slowing down, shelving plans for more rate increases. That took some currency pressure off of emerging markets for a period of time, though the dollar has still strengthened a bit in 2019.
The IMF called on governments around the world to cut back fossil fuel subsidies, though it also conceded that removing price support is incredibly difficult, and, thus, would probably continue.
By Nick Cunningham of Oilprice.com
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