Fossil fuels subsidised by $10m a minute, says IMF?

[Note: 2019 update in IMF working paper 2019: Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates.]

Well, ATTP tweeted it, poor trusting soul that he is, having been unwise enough to believe the Graun’s headline, which segues into text Fossil fuel companies are benefitting from global subsidies of $5.3tn (£3.4tn) a year, equivalent to $10m a minute every day, according to a startling new estimate by the International Monetary Fund. The report itself says:

A key factor in estimating the magnitude of current subsidies is which definition of “subsidies” is used. Pre-tax consumer subsidies arise when the price paid by consumers (that is, firms and households) is below the cost of supplying energy. Post-tax consumer subsidies arise when the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax that reflects the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues. Some studies also include producer subsidies, which reflect the net subsidy given to energy producers (for example, through access to subsidized inputs, preferential tax treatment, or direct budget transfers) although these are typically much smaller than consumer subsidies (OECD 2013).

The difference between pre- and post-tax subsidies is the “externalities” (see-also Agricultural land value as a percentage of GDP, and the comments thereon; note how opposed many were to the concept of externality; perhaps now it turns into a presumed tax on fossil fuels they’ll be happier).

I’m uncomfortable with regarding not imposing externality taxation as a subsidy. In particular, its not a subsidy to the company that extracts and sells the fuel (or at least, only a fraction of it is, since it probably eases their business). Its mostly a “subsidy” to the consumer, who then pays, of course, in terms of the externality. And note that most of the externalities are “local” to the country, rather than global: chiming with what I’ve said before and with Eli’s recent Heartland Institute – Convenient Cognitive Dissonance, they say Most [post-tax] energy subsidies arise from the failure to adequately charge for the cost of domestic environmental damage—only about one-quarter of the total is from climate change. Note that’s merely an issue of terminology: I strongly support the idea that externalities should be internalised, via appropriate taxation.

I’m dubious about

The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global CO2 emissions by more than 20 percent, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).

This sounds like the free money tree that the FTT people think they’ve found. Those people are definitely wrong; these people I’m less sure about. Discuss. They do say These findings must be viewed with caution (of their findings in general, not just that one).

Anyway, here’s their Key Figure:

As you see, pre-tax subsidies, which I’m sure we can all agree are definitely naughty, are declining. Oddly enough, they don’t find any space to mention that in the intro, which concentrates on the post-tax subsidies. Which are going up. Post-tax subsidies are, approximately and by eye, ten times the pre-tax ones.

They note that these large numbers are more than twice as big as their previous numbers, because of (1) expanded coverage of air pollutants… also include damages from nitrogen oxides and direct fine particulate emissions (2) recent evidence from the World Health Organization suggesting air pollution has a greater effect on mortality risk; adjustments for country-specific sulfur dioxide emission rates from coal plants; adjustments for country-specific population exposure to coal plant emissions; adjustments for differences in baseline mortality rates (less healthy populations being more vulnerable to pollution); (3) extrapolation of congestion, accidents, air pollution, and road damage for vehicles; (4) the use of country-specific conversion factors.

The split into regions is what I’ve been waiting for, and comes in figure 7:

As you’d expect, most of the pre-tax subsidies are in the banana republics: the middle east, Russia, and bits of S America with more oil than sense. The bulk of the post-tax subsidies are China, with about 50% and “advanced” (i.e. us), with another 25% (by eye).

That rather tailed off without a conclusion, didn’t it? Well, the conclusion is that explicit subsidies are a small fraction of total externalities.

Refs

* IMF Report On $5.3 Trillion In Energy Subsidies; Careful, It’s Not Quite What You Think – Timmy. He makes more forcefully the point I made rather sketchily: that these aren’t subsidies to fossil fuel companies, but to consumers. But oddly he fails to notice that the bulk of the externality is local pollution, not GW -W]
* Timmy again, pointing to Quantifying the implicit climate subsidy received by leading fossil fuel companies, which is making the same kind of mistakes.

* [2021] Unusually, Vox’s The IMF says we spend $5.3 trillion a year on fossil fuel subsidies. How is that possible? by Brad Plumer gets it right (and quotes Timmy and, I now notice, me as well).