Global subsidies for fossil fuels totaled $7 trillion in 2022, or 7 percent of global GDP, according to the International Monetary Fund’s latest working paper, published in August. This estimate is over $1 trillion more than the estimate in a 2021 working paper by the same authors, economists Simon Black, Antung A. Liu, Ian Parry, and Nate Vernon.
News that the world is spending $7 trillion on subsidizing fossil fuels, and exacerbating climate change, has garnered headlines in Reuters, Radio Free Asia, and India’s Mongabay. But the truth is a little different.
First, the paper, entitled “Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies,” was not published in a peer-reviewed journal and does not represent the official views of the IMF. The title page specifically states that “IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.”
Second, the authors derive their conclusions by confusing subsidies with externalities. They divide the $7 trillion in subsidies into what they call explicit subsidies (such as mispricing of labor, capital, and materials) and implicit subsidies (such as harm from emissions and traffic congestion). About 18 percent, or $1.4 trillion, of the subsidies are explicit, and 82 percent, or $5.6 trillion, are implicit.
Of the explicit subsidies, the largest offender is China, with subsidies of $270 billion. China has disavowed any carbon limits, and is building two coal-fired power plants a week, while attracting manufacturing production from all over the world because of its cheap energy. Next comes Saudi Arabia, at $129 billion, then Russia, Korea, and Iran, at $71 billion, $65 billion, and $63 billion, respectively. These are countries where industrial policy is the law of the land. Subsidies from the United States total $3 billion; from Canada, $2 billion.
The $5.6 trillion of the so-called implicit subsidies are what economists call “negative externalities,” such as global warming and air pollution. The authors conclude that fossil fuels could be causing large damage to the planet in the future, and negatively affecting people’s health—a difficult number to calculate. Implicit subsidies are based on estimates of the social cost of carbon, which is the damage caused by carbon-dioxide emissions. These estimates depend on a variety of assumptions, such as equilibrium climate sensitivity, choice of discount rate, and time horizon, and are not robust, according to Heritage Foundation scholar Kevin Dayaratna in testimony before the House Committee on Science and Technology.
Third, these calculations of subsidies and externalities do not include any mention of benefits from fossil fuels. Look at the Central African Republic, which in the paper’s data appendix has no explicit or implicit subsidies for fossil fuels. The implication of the paper is that the Central African Republic is a model that others should follow. But according to the World Bank, the Central African Republic “is one of the poorest and most fragile countries in the world despite its abundant natural resources.” Of its population of 6.1 million, 71 percent live below the international poverty line of $1.90 per day.
What if the Central African Republic were to use some of its resources of gold and diamonds to subsidize production of oil, and bring electricity, water, and even employment to some of its population? Yes, it would go down on the IMF scale, adding to fossil-fuel subsidies. But its people would be far better off.
This brings us to a fourth and related problem, namely that a focus on global subsidies neglects differences between countries. The paper measures “the fraction of fine particulate emissions that are ultimately inhaled (or ingested) by exposed populations,” but investments in fossil fuels in emerging economies would have vast benefits which would comfortably outweigh such costs.
Adding up the individual amounts over countries both for explicit subsidies and for externalities makes little sense because all countries are different. Some might have better air quality, so additional fossil-fuel use would not cause health problems. Others might be mired in poverty, so the addition of hydrocarbons to the air might be worth the additional availability of electricity and sewage systems.
A fifth problem with the paper is that it does not include explicit subsidies for renewables, electric vehicles, battery plants, or electric charging stations, nor does it criticize those subsidies. America will spend $1.3 trillion in renewable subsidies over the next decade from Inflation Reduction Act tax subsidies alone, according to Goldman Sachs. The European Union budget has allocated $620 billion over the 2021 to 2027 period, and additional spending is coming from individual member budgets. Apparently, subsidies for renewables are not to be faulted.
Sixth, the report discusses extensively the problems of average and marginal road-congestion costs, and of wear and tear that heavy vehicles add to roads. These costs, while important, are not caused by the gasoline and diesel nor necessarily related to subsidies. Congestion is caused by lack of road pricing, not by gasoline. Western countries are trying to get their citizens to switch to electric vehicles, and a road of electric vehicles at peak hours will have the same congestion as a road of gasoline-powered vehicles. Furthermore, electric vehicles weigh about one-and-a-half times as much as gasoline-powered vehicles and impose more stress on the roads.
Seventh, the authors state that, in addition to harmful emissions, one reason to transition away from fossil fuels is “to reduce dependence on insecure sources of energy.” America is the largest producer of oil and natural gas and is not an insecure source of energy. Europe has neglected development of its natural gas, and has closed some coal- and nuclear-power plants. But electric vehicles, wind turbines, and solar panels are primarily produced inexpensively in China (due to explicit subsidies detailed in the report), which some consider to be an insecure source not always friendly to the West.
Finally, the paper recommends a carbon tax to raise existing prices to efficient prices. Only Germany, France, and Italy, according to the paper, have efficient prices for gasoline (now close to $8 per gallon), and no countries have efficient prices for coal, natural gas, and road diesel. Irrespective of the hubris of being able to choose the ‘efficient’ price of energy, a carbon tax is regressive, disproportionately hurting the poor, farmers, and small businesses. The paper suggests compensating low-income populations, or lowering the income tax, but everyone knows that this has rarely occurred. Instead, governments raise taxes and use the extra revenue, frequently reducing GDP and employment.
Surprisingly for economists who work in an institution that purports to help the world’s poor, the authors neglect vast differences in energy needs between emerging and developed economies. The authors do not account for benefits of fossil fuels, and they omit subsidies for renewables. Their final recommendation, a tax on energy, would have harmful economic effects.
The working paper’s disclaimer—that the paper is published to elicit comments and debate and should not be regarded as IMF policy—is wise. If the IMF cares about people in poverty, it should put as much distance as possible between it and this paper.
This piece originally appeared in the National Review