China spending US$2.27 billion on fuel subsidies

THE IMF is urging countries to reform their energy policies. It says those with the top subsidies, in terms both of per cent of GDP and per capita, stand to gain the most . . .  

CHINA is expected to spend more than US$2.27 billion on fuel subsidies in 2015, the largest subsidy to be allocated by a single country, according to the International Mone- tary Fund (IMF).

Despite sharp declines in international energy prices, the cost of fuel subsidies globally is projected to reach US$5.3 trillion, or 6.5 per cent of global GDP, in 2015. And subsidies are projected to remain high in coming years.

The subsidies are not straight subsidies per se, according to the IMF, but rather reflect the way countries set energy taxes below levels that fully reflect the environmental damage associated with energy consumption.

Subsidies are projected to remain high because of high growth in consumption of energy, especially coal-fired energy, inflation and real income growth. Another key factor, the IMF says, is persistent undercharging for environmental costs.

In a note published in July, the IMF says energy subsidies are dramatically higher than previously thought. “Estimates for global energy subsidies in 2011 have been revised to US$4.2 trillion – more than double the US$2 trillion reported in a 2013 IMF book, Energy Subsidy Reform: Lessons and Implications”, the note says.

The IMF believes the upward revision is partly due to factoring in new World Health Organisation estimates on harm to health from pollution exposure.

The multilateral agency says the bulk of energy subsidies in most countries are due to undercharging for domestic environmental damage, including local air pollution, especially in countries with higher coal use and higher population exposure to emis-sions. The subsidy numbers also take into consideration the economic cost of vehicle use — like traffic congestion and accidents.

The IMF says that eliminating global energy subsidies could reduce deaths related to fossil-fuel emissions by more than 50 per cent and reduce fossil-fuel related carbon emissions by more than 20 per cent. The prospective revenue gain from eliminating energy subsidies is projected to be US$2.9 trillion (3.6 per cent of global GDP) in 2015. 

“This offers huge potential for reducing other taxes or strengthening revenue bases in countries where a large informal sector con- strains broader fiscal instruments,” the paper says.

Advanced economies would gain enough revenue to halve corporate tax or cover one quarter of public health spending. In emerging economies, the revenue is worth double corporate income tax revenue or double spending on public health.

In low-income countries, the gain would be about one-and-a-half times corporate income tax revenue or public health spending.

The net gain from reform, after subtracting the cost of higher energy prices to consumers from fiscal and environmental gains, is project- ed at US1.8 trillion (2.2 per cent of global GDP) and could be much larger if the fiscal gain is used for growth-enhancing tax cuts on labour and capital — or badly-needed investments in education, health and infrastructure.

The IMF urges countries to reform their energy policies, pointing out that those with the top subsidies in per cent of gross domestic product and in per capita subsidies stand to gain the most.

It says that taxing fuels to reflect environmental costs is also straightforward administratively, as it can build off road fuel excises, which are well established in most countries.

Energy subsidy reform can also contribute to carbon emissions reduction and help countries make pledges ahead of the Paris 2015 UN climate conference.

The IMF says low international energy prices have opened a window of opportunity for countries to move towards more efficient pricing of energy.