The world is significantly underestimating the costs of producing and burning fossil fuels, says a new International Monetary Fund (IMF) report How Large Are Global Energy Subsidies?, which reveals the total subsidies to the coal, oil and gas industries to be over $10million (£6.4million) per minute – up to 6.5 per cent of global GDP. This is up from an annual total figure $2trillion in 2011 (or $3.8million per minute).
Almost half of the total subsidies can be attributed to the burning of coal in China, where keeping the costs down has enabled three decades of rapid development and economic growth, while ignoring the external costs such as air pollution and climate change.
The hidden costs of air pollution is one of the main reasons why the total subsidies figure has been significantly revised upwards from previous studies, based on new information from the World Health Organization (WHO). Last year the WHO calculated that 3.2 million deaths were being caused annually by outdoor air pollution, and the new IMF report estimates that ending the fossil fuel subsidies would halve that number – saving over 1.6 million lives each year.
Global carbon dioxide emissions – totalling 32.3 billion tonnes in each of the past two years, according to the International Energy Agency (IEA) – would drop by over 20 per cent in a world without fossil fuel subsidies. The report notes the uncosted impacts of climate change as being the second largest subsidy to fossil fuels (about a quarter of the total) and describes the potential drop in emissions as ‘a major step towards the de-carbonisation ultimately needed to stabilize the global climate system’. Again, this is predominantly due to the subsidies given to the highly carbon-intensive coal industry.
The claim that subsidies allow for development and relief from poverty for poorer communities around the world – a key argument used by people in favour of keeping the existing system of subsidies – is also addressed. The report points out that ‘most of the benefits from energy subsidies are typically captured by rich households’, therefore making the use of subsidies a ‘highly inefficient way to provide support to low-income households’.
Furthermore, the report attacks the notion that the subsidies are good for the global economy, calling consequential public debt and necessary healthcare spending ‘a drag on economic growth’. The artificial lowering of fossil fuel prices ‘discourages needed investment in energy efficiency, renewables, and energy infrastructure, and increases the vulnerability of countries to volatile international energy prices’. It is estimated that ending the subsidies could benefit the global economy to the tune of $2.9trillion (£1.85trillion).
Highlighting the drop in oil prices, it claims that we have ‘a window of opportunity for countries to eliminate pre-tax subsidies and raise energy taxes, as the public opposition to reform is likely to be somewhat more muted’. Overall, the report labels fossil fuel subsidies ‘large and pervasive, in both advanced and developing economies’, and calls for urgent, yet gradual, reform to the current system.