How Large Are Global Energy Subsidies? Vitor Gaspar Director, - PowerPoint PPT Presentation

How Large Are Global Energy Subsidies? Vitor Gaspar Director, Fiscal Affairs Department International Monetary Fund The Brookings Institution May 18, 2015

Background The presentation draws from a new paper and two blogs from the IMF: • Provides a comprehensive, updated picture of energy subsidies and the impacts of subsidy reform • Focusing on the broader notion of post-tax energy subsidies, instead of pre-tax subsidies • The estimates of the environmental, revenue and welfare impacts of eliminating energy subsidies are “ partial equilibrium ” in nature • Points to the need to begin reform immediately while adopting a gradual reform strategy 2

Global energy subsidies are $5.3 trillion Global energy subsidies $7 8 In US$ trillions In percent of global GDP 6.5% 6.7 7 $6 6.5 $5.3 6.3 $5.2 5.8 6 $4.9 $5 $4.6 US$ trillions (nominal) Percent of Global GDP $4.2 5 $4 4 $3 3 $2 2 $1 1 $0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Pre-tax consumer subsides arise when the price paid by consumers is below the cost of supplying energy. Post-tax consumer subsidies arise when the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax reflecting the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues.

Costs are far-reaching ….. • Exacerbate environmental damage • Local pollution, traffic congestion and accidents, road damage, and global warming • Worsen inequality • Most of the benefits are captured by rich households • Better targeted policy instruments are often available or can be quickly developed • Retard economic growth • Discourage energy investments and encourages energy inefficiency • Fiscally costly • Which requires higher distortionary taxation and crowds out high priority spending (education, health, infrastructure) 4

…..mostly local ….. Components of global energy subsidies, 2015 Foregone Global revenue warming 6% 24% Vehicle externalities 12% Pre-tax subsidies 6% Local pollution 52% 5

….. and from coal Product composition of global energy subsidies, 2015 Petroleum 28% Coal 59% Natural gas 10% Electricity 3% 6

Energy subsidies are pervasive Geographic distribution of global energy subsidies, 2015 Russia $0.3 trillion EU $0.3 Japan $0.2 trillion USA $0.7 trillion trillion China $2.3 trillion India $0.3 trillion

Energy subsidy reform can generate substantial health benefits ….. Reduction of fossil-fuel emissions-related deaths, 2015 70 Global average: 57 percent 60 50 Percent reduction 40 30 20 10 0 Emerging E.D. Asia CIS MENAP S.S. Africa Advanced LAC Europe 8

….. and carbon emission reductions ….. Reduction of fossil-fuel related CO 2 emissions, 2015 40 35 30 Percent reduction Global average: 24 percent 25 20 15 10 5 0 MENAP E.D. Asia LAC CIS S.S. Africa Emerging Advanced Europe 9

….. as well as a significant fiscal dividend 9 Public health Fiscal gain spending Percent of GDP, 2013 6 Corporate income tax revenue 3 0 Advanced Emerging Low-income and developing 10

Time is now: act local, solve global! • Energy subsidy reform is urgently needed in many countries for domestic reasons • This will also contribute to carbon emission reductions (in the run up to Paris 2015 UN Climate conference) • Low international energy prices provide a window of opportunity for reform Reform process should start now and it should be gradual 11

Thank you! • The working paper “ How Large Are Global Energy Subsidies ” • The blog “ Act Local, Solve Global: Energy Tax and Subsidy Reform ” • The blog “ Global Energy Subsidies Are Big—About US$5 Trillion Big ” • All can be found at: http://www.imf.org/external/np/fad/subsidies/ 12

Background slides 13

A number of countries have started to reform energy taxation Carbon taxes and emissions trading systems 14 Source: World Bank, 2014, State and Trends of Carbon Pricing 2014.

Other references • Clements, B. J., D. Coady, S. Fabrizio, S. Gupta, T. Alleyne, C. A. Sdralevich, 2013, Energy Subsidy Reform: Lessons and Implications . Washington D.C.: International Monetary Fund. • Clements, B. J., D. Coady, S. Fabrizio, S. Gupta, B. Shang, 2014, “Energy Subsidies: How Large Are They and How Can They Be Reformed”, Economics of Energy & Environmental Policy 01/2014; 3(1). • Parry, I., D. Heine, E. Lis, and S. Li, 2014, Getting Energy Prices Right: From Principle to Practice . Washington D.C.: International Monetary Fund. 15