The true economic cost of subsidised fossil fuels could be as much as US$5.3 trillion, or 6.5% of global GDP, underlining the need for the world’s major economies to wean the world off coal and other fuels, International Monetary Fund (IMF) economists said in a new report.
The report said that the damage that fossil fuels are wreaking on the global environment and human health amounts “to the one of the largest negative externalities ever estimated,” underlining the need for urgent and decisive reform.
“While the large size of our new estimates may be surprising, it is important to put in perspective just how many health problems are linked to energy consumption and air quality,” said an IMF blog summarising the report.
IMF economists have more than doubled a 2011 estimate of the economic costs related to subsidised fuels blamed both for particulate pollution and climate change, adding that the fiscal, environmental and welfare impacts of energy subsidy reform “are potentially enormous”.
Eliminating post-tax subsidies in 2015 could raise government revenue by US$2.9 trillion (3.6% of global GDP), cut global CO2 emissions by more than 20%, and reduce premature air pollution deaths by more than half, the report said, quoting figures from the World Health Organisation (WHO)
In China alone, around 1 million people die prematurely per year due to outdoor air pollution, caused by the burning of polluting fuels, particularly coal, petrol and diesel.
Public awareness in China of the poor quality of transport fuel has risen sharply following the release of the ‘Under The Dome’ documentary that generated hundreds of millions of clicks and was strongly critical of the country’s big energy companies.
A new report presented at the WHO’s annual meeting in Geneva this week estimates that deaths due to air pollution have increased fourfold across the globe over the past decade, with China and India by far the worst affected countries.
Coal and other highly-polluting fossil fuels, such as those used in transport, receive annual subsidies of around US$2.3 trillion in China, and on a global scale the true economic cost of price intervention in energy markets exceeds estimated public health spending worldwide, the IMF economists said.
The cost of subsidising fossil fuels also exceeds the world’s total public investment spending, the report said, adding that the resources freed from subsidy reform could be used to meet critical public spending priorities or reduce taxes that are a drag on economic growth.
Benefits
After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2% of global GDP), the report said.
Despite fears among some observers that withdrawing subsidies will hit the poor hardest or spark social unrest, the IMF economists’ report said recent experience showed that economies can avoid adverse effects from letting energy prices rise.
“The recent experience of India is instructive,” said the report’s authors, pointing to the full liberalisation of diesel prices following a period of gradual subsidy reform and efforts to limit the cost of subsidies to liquid petroleum gas.
The authors said that steps to reduce subsidies at a national level would likely complement commitments and pledges submitted to UN climate talks that will be held in Paris at the end of this year.
Climate economist Nick Stern said the report “shatters the myth that fossil fuels are cheap by showing just how huge their real costs are. There is no justification for these enormous subsidies for fossil fuels, which distort markets and damages economies, particularly in poorer countries.”
