IMF calls for energy subsidy reform

March 29, 2013 at 8:58 AM
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WASHINGTON, March 29 (UPI) -- The International Monetary Fund, in a new report, calls for eliminating energy subsidies worldwide.

Energy subsidies are estimated to be $1.9 trillion, the equivalent of 2 1/2 percent of global gross domestic product or 8 percent of government revenues, says the IMF report "Energy Subsidy Reform: Lessons and Implications."

The IMF assessment, which reviewed energy policies in 176 countries, shows that almost half of fossil fuel subsidies occur in OECD countries. The top three energy subsidizers, in absolute terms, are the United States at $502 billion, China at $279 billion and Russia at $116 billion.

The report represents the first time the IMF has put a price on the global fiscal cost of energy subsidies.

Subsidies cause over-consumption of petroleum products, coal and natural gas and reduce incentives for investment in energy efficiency and renewable energy," the IMF said. "This over-consumption in turn aggravates global warming and worsens local pollution."

In advanced economies, such as the United States, "prices remain below the levels needed to fully capture the negative externalities of energy consumption on the environment, public health and traffic congestion," the report states.

Speaking at the Peterson Institute for International Economics in Washington to release the report, IMF First Deputy Managing Director David Lipton said, "For some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy."

While subsidies are intended to benefit consumers, the measures are often inefficient and "could be replaced with better means of protecting the most vulnerable parts of the population," he said.

Energy subsidies also tend to reinforce global inequality because they largely benefit upper-income groups, which are the biggest consumers of energy.

"On average, the richest 20 percent of households in low- and middle-income countries capture 43 percent of fuel subsidies," IMF says.

"Because of low prices, there is little investment in much-needed infrastructure," Lipton said. "More is spent on subsidies than on public health and education, undermining the development of human capital."

Subsidy reform, Lipton said, can lead "to a more efficient allocation of resources, which will help spur higher economic growth over the longer term." Removing energy subsidies can strengthen incentives for research and development in energy-saving and alternative technologies.

U.S. President Barack Obama and congressional Democrats want to remove about $4 billion in annual tax provisions awarded to the oil and natural gas sectors, The Hill reports. But oil and gas interests maintain that the provisions are cost-recovery mechanisms and business deductions that are also claimed by other industries.

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