International monetary Fund has said that Fossil-fuel subsidies surged to a record $7 trillion last year as governments supported consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the pandemic. In blog post the IMF said “as the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 per cent of global gross domestic product. That’s more than governments spend annually on education, 4.3 per cent of global income and about two thirds of what they spend on healthcare,10.9 per cent. Our findings come as the World Meteorological Organisation says July was the hottest month on record, underscoring the urgent need to curb human-induced climate change. As the Chart of the week  shows, fossil-fuel subsidies rose by $2 trillion over the past two years as explicit subsidies, undercharging for supply costs, more than doubled to $1.3 trillion. That’s according to our new paper , which provides updated estimates across 170 countries of explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes).

“Our analysis shows that consumers did not pay for over $5 trillion of environmental costs last year. This number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of our baseline assumption that global warming costs are equal to the emissions price needed to meet Paris Agreement temperature goals. These implicit subsidies are projected to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies. If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. This would lead firms and households to consider environmental costs when making consumption and investment decisions. The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments. We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones.

“Yet removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy.With global energy prices receding and emissions rising, it’s the right time to phase out explicit and implicit fossil-fuel subsidies, for a healthier and more sustainable planet. Globally, fossil fuel subsidies were $5.9 trillion or 6.8 percent of GDP in 2020 and are expected to increase to 7.4 percent of GDP in 2025 as the share of fuel consumption in emerging markets continues to climb. Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies).

“Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies, accounting for 42 percent, followed by global warming costs (29 percent), other local externalities such as congestion and road accidents (15 percent), explicit subsidies (8 percent) and foregone consumption tax revenue (6 percent). Explicit subsidies are mostly concentrated in the Middle East and North Africa (MENA) region and Commonwealth of Independent States (CIS) while total (explicit plus implicit) subsidies are concentrated in the East Asia and Pacific (EAP). Relative to regional GDP however, total subsidies for Europe are smallest at about 2 percent, while subsidies are 32 percent of regional GDP in CIS and 16 and 10 percent respectively in MENA and EAP.

“Raising fuel prices to their fully efficient levels reduces projected global fossil fuel CO2 emissions 36 percent below baseline levels in 2025—or 32 percent below 2018 emissions. This reduction is in line with the 25-50 percent reduction in global GHGs below 2018 levels needed by 2030 to be on track with containing global warming to the Paris goal of 1.5-2C. Globally, around 74 percent of the CO2 reduction comes from reduced use of coal, while 21 and 3 percent respectively are from reductions in consumption of petroleum and natural gas.

Full price reform raises revenues of $4.2 trillion, 3.8 percent of global GDP, in 2025 (relative to baseline levels and accounting for revenue losses due to erosion of pre-existing fuel tax bases). Revenue gains vary substantially across regions, largely mirroring the distribution of (explicit and implicit) subsidies. The revenues generated by full price reform in 121 EME and developing countries in 2025 would amount to $3 trillion, which is broadly in line with their additional spending needs for Sustainable Development Goals.

In 2009, the Group of 20 advanced and emerging market economies called for a phase out of inefficient fossil fuel subsidies in all countries and reaffirmed this again in 2012. At COP26 in 2021, 197 countries agreed to accelerate efforts to phase-out inefficient fossil fuel subsidies. Despite the potential gains, many countries have had difficulty reforming subsidies. When reforms are made, prices increase, and this has often led to widespread public protests. The absence of public support for subsidy reform is in part due to a lack of confidence in the ability of governments to shift the resulting budgetary savings to programs that would compensate the poor and middle class for the higher energy prices they face. This problem is particularly challenging in oil-exporting countries, where subsidies are seen as a mechanism to distribute the benefits of natural resource endowments to their populations and where the capacity to administer targeted social programs is typically limited. Governments are also often concerned that higher energy prices will contribute to a higher rate of inflation and adversely affect their competitiveness. Subsidy reform can also be complex when it includes efforts to reduce inefficiencies and production costs, as is often the case for the electricity sector”.