Act Local, Solve Global: The $5.3 Trillion Energy Subsidy Problem
US$5.3 trillion; 6½ percent of global GDP—that is our latest reckoning of the cost of energy subsidies in 2015.
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 subsidies
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 (Chart 1).
Energy subsidies are both large and widespread. They are pervasive across advanced and developing countries. Emerging Asia accounts for about half of the total, while advanced economies account for about a quarter (Chart 2). The largest subsidies, in absolute terms, are in China (US$2.3 trillion), the United States (US$699 billion), Russia (US$335 billion), India (US$277 billion), and Japan (US$157 billion). For the European Union, subsidies are also substantial (US$330 billion).
Larger than previously thought
The number for 2015 is more than double the US$2 trillion we had previously estimated for 2011. Over half of the increase is explained by more refined country-level evidence on the damaging effects of energy consumption on air quality and health. An accompanying blog from our colleagues Sanjeev Gupta and Michael Keen explains in more detail the differences in the estimates. A technical discussion of our estimates is provided in an IMF working paper by David Coady and others.
