IMF: Ending Fossil Fuel Subsidies Could Cut CO2 13%

by | Mar 28, 2013

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Eliminating fossil fuel subsidies worth $1.9 trillion worldwide would reduce CO2 emissions by 4.2 billion tons — a 13 percent reduction — and produce “major gains” for economic growth, according to an International Monetary Fund report.

Energy Subsidy Reform – Lessons and Implications says subsidies for petroleum products, electricity, natural gas and coal equal about 2.5 percent of global GDP, or 8 percent of government revenues. Advanced economies pay out about 40 percent of the global total, the report says, listing the top three subsidizers as the US at $502 billion, China at $279 billion and Russia at $116 billion.

IMF research shows that 20 countries maintain pre-tax energy subsidies that exceed 5 percent of GDP. The study finds that eliminating pre-tax subsidies alone would reduce global CO2 emissions by about 1 to 2 percent, which according to IMF first deputy managing director David Lipton, would represent “a significant first step” in cutting emissions and achieving about 15 to 30 percent of the Copenhagen Accord’s reduction pledges.

The report found, for some countries, fossil fuel subsidies are becoming so large that they are leading to unmanageable budget deficits and threatening economic stability. In emerging and developing counties, these energy subsidies mean governments don’t invest in needed infrastructure.

Subsidies also reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy. According to Lipton, the richest 20 percent in low- and middle-income countries capture 43 percent of the subsidies.

Removing fossil fuel subsidies can also strengthen incentives for research and development in energy-saving technologies, Lipton says.

A National Research Council study published last week found the US could reduce petroleum use and cars’ greenhouse gas emissions 80 percent by 2050 compared to 2005 levels by using more efficient vehicles, alternative fuels and implementing strong government policies such as higher subsidies for alternative fuels.

Last month, the Spanish Parliament approved a law that cuts subsidies for alternative energy technologies, backtracking on its push for green power. Foreign investors in renewable energy projects in Spain have hired lawyers to prepare potential legal action.


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