A new report from the International Monetary Fund (IMF) urged policymakers the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment.
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>” […] In a speech at the Peterson Institute for International Economics in Washington D.C., marking the release of the paper, IMF First Deputy Managing Director David Lipton noted that “subsidy reform can lead to a more efficient allocation of resources, which will help spur higher economic growth over the longer term.” Removing energy subsidies can also strengthen incentives for “research and development in energy-saving and alternative technologies,” he said. He also noted that, while intended to benefit consumers, subsidies are often inefficient and “could be replaced with better means of protecting the most vulnerable parts of the population.”
“The paper shows that for some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy,” Mr. Lipton said, adding that IMF research shows that 20 countries maintain pre-tax energy subsidies that exceed 5 percent of GDP. For other emerging and developing countries, he said, the share of the scarce government resources spent on subsidies remains “a stumbling block” to higher growth and fundamentally impairs their future. “Because of low prices, there is little investment in much-needed infrastructure. More is spent on subsidies than on public health and education, undermining the development of human capital.”
Energy subsidies also reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy. “On average, the richest 20 percent of households in low- and middle-income countries capture 43 percent of fuel subsidies,” said Mr. Lipton.
At the same time, Mr. Lipton warned that an increase in prices which can result from subsidy reform can have a significant impact on the poor and that “mitigating measures to protect them as subsidy reform is implemented” must be an integral part of any successful and equitable reform program.
In addition, Mr. Lipton noted that “subsidies aggravate climate change and worsen local pollution and congestion.” The study finds that eliminating pre-tax subsidies would reduce global CO2 emissions by about 1-2 percent which would, by itself, represent “a significant first step in reducing emissions by delivering about 15-30 percent of the Copenhagen Accord’s goal.” As for advanced economies, he noted that subsidies most often take the form of taxes that are too low to capture the true costs to society of energy use (“tax subsidies”), including pollution and road congestion. “Eliminating energy tax subsidies would deliver even more significant emissions reductions said Mr. Lipton, reducing “CO2 emissions by 4.5 billion tons, a 13 percent reduction.” […]”<