US$5.3 trillion; 6½ percent of global GDP—that is our latest reckoning of the cost of energy subsidies in 2015. These estimates are shocking. The figure likely exceeds government health spending across the world, estimated by the World Health Organization at 6 percent of global GDP, but for the different year of 2013. They correspond to one of the largest negative externality ever estimated. They have global relevance. And that’s not all: earlier work by the IMF also shows that these subsidies have adverse effects on economic efficiency, growth, and inequality.
What are energy subsidie
We define energy subsidies as the difference between what consumers pay for energy and its “true costs,” plus a country’s normal value added or sales tax rate. These “true costs” of energy consumption include its supply costs and the damage that energy consumption inflicts on people and the environment. These damages, in turn, come from carbon emissions and hence global warming; the health effects of air pollution; and the effects on traffic congestion, traffic accidents, and road damage. Most of these externalities are borne by local populations, with the global warming component of energy subsidies only a fourth of the total.
The fiscal implications are mammoth: at US$5.3 trillion, energy subsidies exceed the estimated public health spending for the entire globe. It also exceeds the world’s total public investment spending. The resources freed from subsidy reform could be used to meet critical public spending needs or reduce taxes that are choking economic growth.
By acting local, and in their own best interest, policy authorities can contribute significantly to the solution of a global challenge. The path forward is thus clear: act local, solve global.