With $7trn spent globally, IMF wants fuel subsidies scrapped

The International Monetary Fund (IMF) has disclosed that $7 trillion was spent by governments across the world on fossil-fuel subsidies in 2022.

In a report obtained on Friday, but released on August 24, 2023, the IMF said fossil-fuel subsidies rose by $2 trillion over the past two years.

According to the IMF, the amount spent on fossil-fuel subsidies last year was equivalent to 7.1 per cent of global gross domestic product.

It is also more than governments spend annually on education (4.3 per cent of global income) and about two-thirds of what they spend on healthcare (10.9 per cent).

“Fossil-fuel subsidies surged to a record $7 trillion last year as governments supported consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the pandemic.

“As the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent).

“Our findings come as the World Meteorological Organization says July was the hottest month on record, underscoring the urgent need to curb human-induced climate change,” the fund said.

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The subsidies are split into explicit (direct subsidy to producers) and implicit (subsidy on fuel price) subsidies, with the latter projected to rise due to higher-polluting power plants, factories, and vehicles in developing countries.

IMF said populations living and working close to these pollution sources will increase their consumption of fossil fuels toward the levels of advanced economies.

The report said the environmental costs of fuel subsidies are not being taken seriously, advising that the removal of explicit subsidies and imposition of corrective taxes will make firms and households consider environmental costs when making consumption and investment decisions.

IMF projected that removing explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually and raise government revenues by $4.4 trillion, but the fund suggested that there must be palliatives to cushion the fallout through tax cut on work and investment, compensation to vulnerable households, fund education, healthcare, and clean energy.

“If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. This would lead firms and households to consider environmental costs when making consumption and investment decisions. The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments.

“We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones.

“Yet removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy.

“With global energy prices receding and emissions rising, it’s the right time to phase out explicit and implicit fossil-fuel subsidies, for a healthier and more sustainable planet,” IMF said in the report.

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