Energy subsidies cost governments from the U.S. to Egypt $1.9 trillion, discourage private investment and help wealthy consumers more than the poor, according to a study by International Monetary Fund staff.
In the report published today that covers 176 countries, the Washington-based IMF advocates a progressive increase in energy prices, accompanied by targeted measures to protect the poorest. Getting rid of subsidies could also help reduce carbon dioxide emissions by 13 percent, it estimated.
“Energy subsidies are large and they’re harmful,” Carlo Cottarelli, the IMF’s director of fiscal affairs, said on a conference call with reporters. “They lead to excessive consumption of energy, they absorb public-sector resources that could be used for more useful purposes” and they “benefit the rich more than the poor,” he said.
The report gives the IMF ammunition for what it describes as a “frequent topic of discussion” with member countries. Policy makers’ reluctance to let energy prices increase has stalled or derailed loans in nations such as Ukraine and Pakistan, countries the report shows spend more of their wealth on subsidies than on public health and education.
Emerging markets are not the only countries concerned, according to the report, which singles out the U.S. as the largest subsidizer, with an estimated $502 billion in 2011.
“Advanced economies do not sell energy below supply costs, but they do not tax energy enough,” Cottarelli said.
Advanced economies account for 40 percent of all subsidies, according to the IMF report. China and Russia are the biggest subsidizers in absolute amounts after the U.S., it said.
The fund argues that subsidies can result in lower profit for energy producers, making it difficult for them to attract investors. They also create an incentive to smuggle, even in developed economies as illustrated by Canadians who come to the U.S. to buy cheap fuel, it said.
Still, attempts to let energy prices rise have often been slowed or defeated because of the social unrest that ensued, according to the report, which looks at 22 cases.
“The absence of public support for subsidy reform partly reflects a lack of confidence in the ability of governments to reallocate the resulting budgetary savings to benefit the broader population, as well as concerns that vulnerable groups will not be protected,” the authors wrote. “This 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.”
In Egypt, efforts to secure a $4.8 billion IMF loan that would address energy prices have been stalled for five months because of political unrest. The instability forced the government to backtrack on its economic program last month and adjust budget deficit goals.
While subsidies are often seen as helping the poor, they benefit more the well off, the IMF said. On average, the richest 20 percent of households in low and middle-income groups capture six times more in total fuel subsidies than the poorest 20 percent, the IMF’s study showed.
The fund said governments should communicate better on the magnitude of subsidies and how they are paid for, as many people are not aware of the real cost of energy. Other IMF recommendations include an automatic pricing mechanism, which would separate energy pricing from political decisions.
The $1.9 trillion total figure was calculated by adding two categories -- pre-tax subsidies and tax subsidies.
Pre-tax subsidies amount to the difference between the real cost of energy and the price paid by consumers. They reached a total of $480 billion in 2011 and were concentrated in developing economies, especially oil exporters.
Tax subsidies exist when taxes on energy are below what the IMF called their “efficient level” as they are in most advanced economies. That’s when the levy is lower than on other consumer products, or not high enough to reflect the toll some energy products have on society, such as pollution, according to the IMF.