Over the past year, climate campaigners didn’t grow tired of claiming that the fossil fuel industry received “a whopping $5.2 trillion in subsidies” in 2017, equivalent to 6.5 percent of global GDP. Quoting an International Monetary Fund (IMF) report that suggests the US alone wastes $649 billion annually, Rolling Stone declared that “the United States has spent more subsidizing fossil fuels in recent years than it has on defense spending.“
Like much else that we hear about energy these days, the story was dramatically exaggerated. In reality, $424 billion is spent globally on fossil fuel subsidies — money that is spent to reduce prices. That’s about one-twelfth of the headline grabbing claim.
Such subsidies are bad because they underprice energy resulting in more air pollution, CO₂ emissions, and vehicular congestion, and because they are inefficient and unfair. They siphon funding from areas like health and education.
None of the perpetrators of substantial subsidies are from the rich world: In 2017, Iran, China and Saudi Arabia each spent about $40 billion a year, while Russia, Egypt, Indonesia, Venezuela and India each spent $15-20 billion. Kiribati politicians travel the world proclaiming outrage about climate change, while hypocritically subsidizing fossil fuels at a cost that is nearly one-third of all government health expenditure.
Subsidies are used as political weapons to avoid unrest. They mostly benefit the well-off who are more likely to own cars and use more electricity than the poor. One estimate from Harvard University showed that before Venezuela’s economy collapsed, the richest Venezuelans were benefitting over seven-times more from subsidies than the poorest. Giving away cheap gas makes for good short-term politics, but is bad both economically and environmentally. Fossil fuel subsidies should be scrapped.
Then how does the IMF get away with claiming that subsidies are 12-times higher than they are – and that the USA is one of the worst perpetrators? By subverting the definition of subsidies.
Criticizing countries like India and China (or Kiribati) for the $424 billion spent on real subsidies is unlikely to attract the attention of rich world elites. To implicate developed country governments and create outrage, the IMF adds everything that they believe should be included in the cost of fossil fuels, and say that by not including these costs in the price of fuel, countries are “subsidizing” fossil fuels.
So what’s included in this outsized re-definition? First, the IMF comes up with a price-tag of $2.3 trillion for air pollution. Burning coal is incredibly polluting, so the IMF claims coal is subsidized because it doesn’t pay for all the air pollution it causes.
It’s valid to consider the unpriced costs of any policy – but it’s wrong to call this a “subsidy”. And, it is the entirely wrong way to fix air pollution. We should not tax coal but tax coal pollution (along with any other pollution) — essentially forcing coal power to clean up its act. Doing so would cost less than a tenth of the IMF’s $2.3 trillion estimate.
The IMF calculates that China’s coal air pollution costs $720 billion per year. This is a vast exaggeration: two recent studies show China’s total air pollution costs $27-38 billion, or one-twentieth as much. And this is the cost for all air pollution, with another study showing less than half can be blamed on coal. So, the IMF has claimed that coal air pollution is 40 times costlier than it is, and then mislabeled this as a “subsidy”.
Next, the IMF claims that gasoline and diesel-driven cars cause a huge amount of congestion and traffic accidents. Sure they do – but so do electric vehicles. This is an argument for congestion charges and better road design, safety measures and speed limit enforcement. The absurdity is revealed when we realize that according to this logic, governments could reduce their fossil fuel “subsidies” by building more roads.
The authors go on to claim that every nation should implement a consistent VAT across all products. Because they don’t, the IMF counts “missing” VAT in countries like the USA as a subsidy. Not only is this an even more bizarre definition of “subsidy”, but it suggests the IMF’s political views on taxation should overrule the decisions of democratically elected governments.
Finally, the authors claim there’s a whopping cost of more than $1.3 trillion from global warming. They are correct that climate change has a real cost and should be included in the price of fossil fuels. That doesn’t make it a subsidy though – and it’s very odd they use a carbon tax more than five-times higher than the best estimate for the real world.
In trying to give grist to environmental campaigners in the West, the IMF’s politically motivated report distracts from the important issue of encouraging the world to dismantle the $424 billion left in fossil fuel subsidies. It might not generate as many headlines, but the IMF should be in the business of careful and sensible economics.