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29 Mar, 2013 10:44

IMF calls to get rid of $2tn fossil fuel subsidies

IMF calls to get rid of $2tn fossil fuel subsidies

While the world is tackling global warming, almost $2 trillion was spent in fossil fuel subsidies in 2011. A study by the IMF claims ending subsidies could lower carbon dioxide emissions by 13%.

The survey argues the subsidies reinforce inequality by disproportionately benefiting the wealthiest, largest consumers of energy. Getting rid of them could ease pressure on budgets and decrease global carbon emissions.

"Subsidies cause overconsumption of petroleum products, coal, and natural gas, and reduce incentives for investment in energy efficiency and renewable energy," the report reads."This over-consumption in turn aggravates global warming and worsens local pollution."

According to the report, energy subsidies come in two very different flavors - direct subsidies for consumption and inappropriate taxing of fossil fuels in order to take account of the air pollution and climate damage they cause.  

In 2011, governments around the world spent some $480 billion to lower the price of petroleum, natural gas, coal, and electricity for their citizens. Some countries, particularly in North Africa and the Middle East, regularly spend more on subsidizing fossil fuels than on education and public health combined.

Scrapping all these direct subsidies could lower the global greenhouse-gas emissions by up to 2 percent, the report argues.

The other part of the report offers even more opportunities for tackling global warming. Standard economic models show fossils should be taxed at $25 per ton of carbon dioxide. But the failure to price these fossil fuels correctly amounts to a subsidy of some $1.4 trillion worldwide.

Eliminating these energy tax subsidies worldwide would reduce carbon dioxide emissions by 4.5 billion tons – a 13 percent reduction, the IMF study says.

However, the elimination of such subsidies would increase the cost of energy, which critics say would disproportionately affect lower-income households.

"It doesn’t bother Barbra Streisand if her electricity bill goes up, but it sure affects people who are worried about their jobs going away," Dan Kish, senior vice president for policy at the pro-free-market Institute for Energy Research in Washington, told the Christian Science Monitor.  

The problem could be solved by conditional cash transfer programs to low-income groups though, or by keeping energy subsidies for items heavily used by the poor.

“This IMF study makes the point very clearly that containing energy costs, particularly for the poor can readily be done without these distorting subsidies that only preserve the status quo, impede research and innovation, and support an energy mix that is detrimental to local communities and the global environment,” the Christian Science Monitor quotes Daniel Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, as saying.