BIG mistakes in economic policymaking abound. But it would be hard to find a worse one than energy subsidies. Recent research has shown that they enrich middlemen, depress economic output and help the rich, who use lots of energy, more than they do the poor.
But now a new working paper by the International Monetary Fund highlights another cost too: damage to the environment. Including this, the authors reckon that the total drag on the global economy caused by fuel subsidies now amounts to a stonking $5.3 trillion each year, or 6% of global GDP—more than world spends on health care. Poorer countries dole out the largest amount of subsidies; some spend up to 18% of their GDP a year on them. The lion’s share goes to coal, the most polluting fuel. By contrast renewable-energy subsidies, mainly given out in the rich world, amount to a mere $120 billion. And they would vanish if fossil fuels were taxed properly.
Defining subsidies is tricky. The simplest measure is the amount of taxpayers’ money used directly to keep a price artificially low. A broader one includes the costs borne by others, such as pollution, and exemptions from taxes. The IMF uses the wider definition to reach its $5.3 trillion figure. Seen more narrowly, the cost would be $333 billion. But this is only lower than last year because of falling oil prices.
A previous study in 2013 reckoned that the overall damage, including environmental costs, was $2 trillion. The much higher estimate released this week reflects more thorough study of the other health and environmental costs of subsidising fossil fuels. These include the costs of congestion and premature deaths caused by poor air quality, the long-term impact of global warming and the effects of extreme weather such as floods and storms. It estimates the long-term damage done by a tonne of CO2, for example, at $42. Many green-minded people think that figure (borrowed from the American government) is too low. But some economists argue that the inclusion of hypothetical climate-change costs is too sweeping.
The fall in the oil price provides a once-in-a-generation opportunity to fix bad energy policies
Abrupt change is unlikely—making coal users pay its full cost would mean doubling prices. Subsidies attract a tenacious and vocal lobby. But the fall in the oil-price has provided a chance to cut subsidies. India, for example, has recently stopped using handouts to reduce the price of diesel. Egypt, Indonesia and Thailand are also reforming. Ending them altogether, and taxing fossil fuels properly, the IMF reckons, would halve the number of deaths from outdoor air pollution, cut carbon-dioxide emissions by a fifth and save up to $2.9 trillion. It would also leave governments with lots of room to cut taxes, or raise spending on more useful things.