IMF seeks more fuel subsidy cuts, says climate above consumer pain

The International Monetary Fund is pushing for more fuel subsidy cuts, arguing that while fuel prices would rise if governments removed subsidies, this would lead firms and households to consider environmental costs when making consumption and investment decisions.

Fossil-fuel subsidies reached a record $7 trillion last year as governments supported consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the pandemic, according to the IMF.

Fossil-fuel subsidies rose by $2 trillion over the past two years as explicit subsidies (undercharging for supply costs) more than doubled to $1.3 trillion. The IMF provided data on explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes) across 170 countries.

Nigeria paid $4.7 billion as explicit subsidies, covering petroleum and electricity subsidies. It paid $18.2 billion as implicit subsidies in 2022.

Nigeria scrapped petrol subsidy in May, causing prices to rise more than three fold. The Fund said the huge amount paid as fuel subsidies globally threatens the environment and ending it will cause households to consider environmental costs of fossil fuel use.

“Fossil fuels attacking the climate”

Fossil fuel include petroleum fuel such as petrol, diesel, kerosene and gas. It also includes coal. The IMF said huge payment of fossil fuel subsidies took a toll on the environment and said its analysis showed that consumers did not pay for over $5 trillion of environmental costs last year.

“This number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of our baseline assumption that global warming costs are equal to the emissions price needed to meet Paris Agreement temperature goals,” it said.

It projects implicit subsidies to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies.

The organization said while fuel prices would rise if governments removed explicit subsidies and imposed corrective taxes, this would lead firms and households to consider environmental costs when making consumption and investment decisions.

The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments, it said.

It estimates that scrapping explicit and implicit fossil-fuel subsidies would “prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion”, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones.

“Yet removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy,” it concluded.