Cutting energy
subsidies will slash carbon emissions while releasing resources for
education and health, and helping boost the balance of payments of many
countries, the International Monetary Fund has said.
An IMF study Energy Subsidy Reform: Lessons and Implications
has estimated that direct energy subsidies totaled about 480 billion US
dollars or 0.7 percent of global gross domestic product and 2.0 percent
of global state revenues.
Eliminating the subsidies would cut Carbon dioxide emission by 1 to 2
percent which could deliver about 15-30 percent of targets set in the
Copenhagen Accord.
Other emissions including sulfour dioxide (S02) could also be reduced.
Since rich people consumer more energy than the poor, most of them flowed to richer people.
The study found that on average the richest 20 percent of households in
low and middle income countries captured six times the subsidies than
the poorest 20 percent.
"As most subsidy benefits are captured by higher-income households,
energy subsidies have important distributive consequences that are often
not fully understood.
"Even future generations are affected through the reduced availability
of key inputs for growth and the damaging effects of increased energy
consumption on greenhouse gas emissions and global warming."
Subsidies put strain on budgets, diverting tax revenues from investment
to consumption. Analysts say sharp increase in energy prices which are
usually subsidized by printing money triggering higher inflation and
currency collapse or so-called balance of payments crises.
"Subsidy expenditures aggravate
fiscal imbalances, and crowd out priority public spending and private
investment, including in the energy sector," the IMF study said.
"Underpriced energy distorts resource allocation by encouraging
excessive energy consumption, artificially promoting capital-intensive
industries (thus discouraging employment creation), reducing incentives
for investment in renewable energy, and accelerating the depletion of
natural resources.
"Subsidies lead to higher energy consumption, exerting pressure on the
balance of payments of net energy importers, while also promoting
smuggling to neighbors with higher domestic prices.
The study said in developed countries in particular where energy was
market-priced, energy was taxed less than other goods, resulting in
'post-tax' subsidies.
At a post-tax basis energy subsidies totaled 1.9 trillion US dollars or
2.5 percent of global GDP and 8 percent of government revenues. Advanced
economies accounted for 40 percent of the total while, oil exporters
accounted for one third.
"Removing these subsidies could lead to a 13 percent decline in CO2
emissions and generate positive spillover effects by reducing global
energy demand," the report said.
There was resistance to energy price reforms because of lack of
confidence that rulers would use the taxes for useful spending, the
report said.
In market pricing energy it was also important to ensure that the lowest
income households were protected through a targeted scheme, the IMF
study said.
