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Fossil fuel subsidies

The sustained interest in energy subsidy reform reflects the increasingly recognized negative environmental, fiscal, macroeconomic, and social consequences of energy subsidies. The Addis Agenda reaffirms Member States’ commitment to rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption.

Fossil Fuel Subsidies

Pre-tax consumer subsidies arise when the price charged to the consumer is less than the opportunity cost of supplying the energy. Post-tax consumer subsidies arise when the price charged to the consumer is less than the opportunity cost of supplying the energy and the environmental damage associated with the supply 1and consumption of the energy as well as any undercharging for general consumption taxes. Post-tax consumer subsidies are typically much higher than pre-tax consumer subsidies, due to the large environmental cost. Producer subsidies exist when producers receive either direct or indirect support that increases profitability above what it otherwise would be and are typically much smaller than consumer subsidies.

In 2015, a IMF staff study estimated that post-tax energy subsidies, including both consumer and producer subsidies, are much more significant than previously assumed— it accounted for $4.9 trillion (6.5 per cent of world gross product) in 2013, and projected to have reached $5.3 trillion (remaining at 6.5 per cent gross product) in 2015. Energy subsidy reform could therefore generate substantial revenues for governments, estimated at $3.0 trillion in 2013 and projected to have reached $2.9 trillion in 2015. Environmental, social, health and other costs account for more than 80 per cent of the post-tax energy subsidies. Reforms to energy subsidies should deal with potential welfare and distributional affects as well as ensure sufficient taxation to account for the environmental damage from energy production and consumption.

Data from the IMF Energy Subsidy Database also shows that most of the post-tax subsidies are related to global warming and local air pollution. Pre-tax subsidies, including both consumer and producer subsidies, are most commonly used in Latin America and the Caribbean, Central Asia, Western Asia, Northern Africa and Sub-Saharan Africa. In the Middle East they amount to over 4 per cent of GDP. Meanwhile the lack of pricing on the impacts of local air pollution is most acute in the Commonwealth of Independent States, Asia, and Emerging Europe.

Taxing energy use

The figure shows the weighted average tax rate applied per tonne of carbon dioxide emissions different fuel products across 41 mostly OECD countries. It also shows the contributions of those fuels to carbon emissions. At the economy wide level, there are large differences in the overall level of taxation across the 41 countries considered. The effective tax rates vary widely by fuel, but this also mask the diversity of tax rates on different users of fuels within and between countries. Regardless of the basis on which governments tax energy products, in practice they have often introduced exclusions or preferences to address potentially adverse impacts (real or perceived) of higher energy prices on particular groups of consumers or producers. It is increasingly recognised, however, that such preferences change relative prices in the economy in ways that have negative environmental impacts, lead to a loss of tax revenue, and create hurdles for increased use of alternative energy sources.