This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

Post

IMF Study: Global Energy Subsidies Will Cost $5.3 Trillion in 2015

imf

That’s more than double the previous estimate.

The cost of fossil fuels is much higher than previously thought, according to a new study by the International Monetary Fund.

The global post-tax subsidy for energy, which accounts for the environmental and health toll, will be an estimated $5.3 trillion in 2015, more than 6 percent of global GDP. The figure is more than double the IMF’s own post-tax subsidy analysis just a few years ago.

Credit: IMF

The analysis defines post-tax subsidies as the difference between what the consumer pays for energy and its true cost, including environmental and health damages. It also includes a country’s sales tax rate that the authors said should be levied at the point of consumption.

The IMF researchers say the figure is higher than previous estimates because of more refined country-level data on the effects of air pollution and health outcomes of burning fossil fuels. Most of the increase is due to the tracking of a greater range of air pollutants and a more detailed assessment of mortality risks in individual countries.

Coal and petroleum make up the most of the global post-tax energy subsidies. Post-tax subsidies for coal will be nearly 4 percent of global GDP in 2015. Worldwide, coal is undercharged for its environmental impacts, the study states, “yet no country really imposes meaningful taxes on coal use from an environmental perspective.”

Most of the external costs are felt locally, the authors argue, so any reform would accrue to the local population in the form of benefits such as reduced mortality. Eliminating the subsides altogether could reduce carbon-dioxide emissions by more than 20 percent and cut premature global air pollution deaths by 55 percent.

The study’s call for reform is strongest with regards to developing Asia and the Middle East. Developing Asia is responsible for about half of global energy subsides, according to the study. The IMF calls for global coordination on reducing subsidies, but acknowledges that individual countries, such as India, Malaysia, Mexico, Morocco, Thailand and Tunisia, have made strides. From 2011 to 2015, global energy subsides have been cut by $190 billion.

Credit: IMF

Given current low oil and natural gas prices, it’s a good time to start unpacking energy subsidies, the IMF argues. In the short term, environmental taxes could be the most effective. But the politics are messy.

“Subsidy reform could potentially lead to a large redistribution of welfare,” the authors state, “which may be why it has proven to be so difficult in practice.”

greentech mediaGreentech Media (GTM) produces industry-leading news, research, and conferences in the business-to-business greentech market. Our coverage areas include solar, smart grid, energy efficiency, wind, and other non-incumbent energy markets. For more information, visit: greentechmedia.com , follow us on twitter: @greentechmedia, or like us on Facebook: facebook.com/greentechmedia.

Katherine Tweed's picture

Thank Katherine for the Post!

Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.

Discussions

Roger Arnold's picture
Roger Arnold on May 20, 2015 5:21 am GMT

It’s worth noting that, while $5.3 trillion is an enormous number, the vast bulk of that is due to the external costs of fossil fuel consumption. And the lion’s share of those costs are the economic effects of climate change. The price of fossil fuel does not include any provision for external costs, so its technically correct to label them a “subsidy”. But they probably are not what most people would think of when they hear the term “subsidy”. 

Joris van Dorp's picture
Joris van Dorp on May 20, 2015 2:39 pm GMT

This study deserves critical attention.

For example, the authors consider the cost of traffic accidents, traffic congestion and even road damage to be a ‘subsidy’ for the consumption of petrol and diesel fuel, and they arrive at a figure of many hundreds of billions of dollars per year. 

I can’t think of a reason why one would consider the cost of traffic accidents, congestion or road damage an ‘energy subsidy’. It seems absurd.

Unless these authors are deliberately trying to ‘pump up’ the global energy subsidy cost figure as high as they possible can. But why would they? Cui bono?

P.S., this study is not in fact ‘by the IMF’. It is a working paper only, and the content of the report reflects the opinions and conclusions of the authors, not the IMF.

Bob Meinetz's picture
Bob Meinetz on May 20, 2015 3:17 pm GMT

Joris, the study doesn’t deserve critical attention as much as inattention.

Both you and Roger correctly call into question the liberal use of the term subsidy to apply to post-taxation external costs. I can’t find any definition of subsidy which doesn’t specifically identify it as a monetary or pecuniary grant, so in fact the study begins and ends with an invalid premise.

Assigning hard values to soft costs of anything is a pointless academic exercise which reveals more about the authors’ values than those of the factors they’re investigating. For example: does the study recommend a Pigouvian tax deduction for the added utility which energy brings to the lives of people who use it, and if not, why not?

Joris van Dorp's picture
Joris van Dorp on May 21, 2015 8:26 am GMT

multiple post deleted

Joris van Dorp's picture
Joris van Dorp on May 21, 2015 8:27 am GMT

multiple post deleted

Joris van Dorp's picture
Joris van Dorp on May 20, 2015 7:58 pm GMT

Certainly.

But this study caused some headlines in the printed press and some coverage on the newsradio at my end In recent days. These media noted the study and the trillion dollar energy subsidy figures. It was implied that these high costs were ‘yet more evidence’ that even the most expensive ‘green’ energy pipe dreams were in fact a bargain. The myth that politics and vested interest are ‘holding back cheap green energy’ gained new traction. That is why the study deserves critical attention in my view. Because it has delivered a crushing blow to ongoing attempts to steer the public energy discussion back to a semblance of realism and responsibility.

This ‘study’ will certainly find its place in the pseudo-green propagandists bag of ‘scientific literature proving RE will save us’ and thusly do a lot of damage, I suspect.

It would be good if this undisciplined new field of subsidy cost juggling is straightened out a bit. In recent years, things have become crazier than ever.

Roger DePoy's picture
Roger DePoy on May 21, 2015 1:43 pm GMT

There are several regions in the country where renewables may have some degree of parity with fossil fuel derived electricity when the sun is shining or the wind is blowing. In many other areas, the entry cost of renewables results in such a paltry rate of return that it is a significant barrier to entry. And its intermittent basis means you still have to be connected to the grid.

Has anyone modeled the cost to the economy when the consumer is paying double the rate of their fossil fuel or nuclear produced electricity, and this enormous buying power is not available to be pumped in to consumer goods purchasing? I don’t pose this question to be snarky…I believe that it is a problem of monstrous proportions that has not generally been addressed.

Joris van Dorp's picture
Joris van Dorp on May 21, 2015 5:26 pm GMT

“I believe that it is a problem of monstrous proportions that has not generally been addressed.”

I would agree with you. It is apparantly so difficult to put numbers on this problem that, at least in my country, different government agencies are contradicting each other about relevant aspects of it. We have one agency concluding that rooftop solar is already saving households money, all things considered, while another agency reports that solar power is hopeless in the Netherlands and is a pointless drain of resources. And one agency is reporting that the planned switch to ‘green’ energy will create thousands of net extra jobs, while another concludes jobs will be lost.

Meanwhile, a cacophony of NGO’s and QuaNGO’s is fueling the bonfire of confusion by picking and choosing and mixing and matching the various research results, concluding everything from imminent economic collapse to a complete switch to ‘green’ energy within decades without any extra cost at all. There are now even court cases mounted against the state demanding that it increases support for various ‘green’ pipe dreams. Politicians are proposing one thing today, and the opposite tomorrow, whatever they think sounds best in the heat of the moment. It’s a madhouse. The public is increasingly alienated by all of this and is beginning to tune out. I don’t blame them.

To approach the problem for my own information, I try to keep things simple.

In my country, we consume about 100 TWh of electricity each year. That means that each 1 cent/kWh increase in electricity cost will suck 1 billion euros annually out of the non-energy economy. A switch to completely ‘green’ electricity will increase the cost of electricity by something like 20 to 35 cents/kWh, with most of that going to the funding of wind, solar and giant electricity transmission and storage facilities. 

Therefore, the move to fully ‘green’ electricity will cost our 17 million head economy between 20 and 35 billion annually. That’s about 1000 to 2000 euros annually per man, woman and child. This would decimate our prosperity and create implausible levels of social upheaval.

And it it would only address electricity production, while more than two thirds of our energy consumption is non-electric. So it wouldn’t do much to solve greenhouse gas emissions either.

‘Green’ energy is largely a scam in the opinion of increasing numbers of people, with the ‘green’ coming out of the pockets of the poor and going into the pockets of the well-off.

If climate change, resource scarcity, energy cost, and air pollution are to be addressed in full, permanently, only nuclear technology is necessary and sufficient, in my opinion and that of increasing number of others.

Roger Arnold's picture
Roger Arnold on May 22, 2015 10:20 am GMT

“..one agency is reporting that the planned switch to ‘green’ energy will create thousands of net extra jobs, while another concludes jobs will be lost.”

Both are probably right. What’s going on is a reallocation of GDP. A larger fraction is required for energy, leaving less available to other sectors. That translates to new jobs created, at the expense of existing jobs.Whether that’s good or bad depends on whether the jobs created return more or less value to society than the jobs lost.

If the new jobs are viewed as merely delivering the same net result that was previously delivered by fewer workers and a smaller fraction of GDP, then the drop in productivity has generated a net loss to society. On the other hand, if the new, more costly way of supplying energy is seen as necessary in order to avoid a massive die-off and deliver a livable planet to future generations, then the value is incalculable. The only issue then is whether it truely is necessary, or is the most economically efficient way to achieve the same ends.

Joris van Dorp's picture
Joris van Dorp on May 22, 2015 1:14 pm GMT

Agreed.

The risk here is that the incalculable value of having a livable planet appears to be abused by some activists who are using it to defend spending incalculable amounts of money on costly and ineffective pseudo-green pipedreams, while, as you note, the question should be how a livable planet can be maintained most economically (in order to make a livable planet affordable not just for rich countries having money to burn, but also for the developing countries who do not have such money.)

Bruce McFarling's picture
Bruce McFarling on May 23, 2015 7:19 am GMT

I can’t find any definition of subsidy which doesn’t specifically identify it as a monetary or pecuniary grant,”

Investopedia: “A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction.”

BusinessDictionary: “1.Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government …”

Permission to make free use of a scarce public resource certainly is not what most people think of as a subsidy, because most people have not considered that they are making free use of a scarce public resrouce when they dump CO2 out of the exhaust pipe of their cars. The current status quo is taken for granted by most people.

The fact that people don’t think of something as a subsidy does not actually prove it is not. After all, most people in the United States do not think of parking mandates or parking provided on public right of way as a subsidy to driving, but it clearly is a pecuniary benefit, in providing for free and at a substantial budgetary cost something that the motorist would otherwise be willing to pay for.

And if this study’s result are valid, the fact that the money handouts and tax breaks are the most obvious government benefits does not turn out to imply that they are the largest government benefits. 

 

 

Bruce McFarling's picture
Bruce McFarling on May 23, 2015 7:21 am GMT

The irony is that if you look at what part of this the IMF itself actually attacks as a matter of policy, it tends to be the subsidies in places like Africa, where it is the subsidies in places like North America and China that present the largest distortion to the world economy.

 

Grace Adams's picture
Grace Adams on May 27, 2015 8:00 pm GMT

Jim Baird elsewhere on the Energy Collective has entered a contest here to propose a way to provide both cheap electric power and fresh water with Ocean Termal Energy Conversion used to electrolyze seawater to hydrogen to be piped up to a hydrogen fuel cell to be turned into fresh water and electric power way up hill. He claims that the whole process can produce as much electric power as is now produced from burning fossil fuel (14 Terrawatt hours a year and also combat global warming by stuffing over heated sea water down 4000 meters near the bottom of the ocean. The process also has a byproduct of sodium bicarbonate to help reduce ocean acidification. See if you can find it.

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »