IMF Backs Fuel Subsidy Removal, As Gov'ts Spend $7trn To Lower Prices

IMF Backs Fuel Subsidy Removal, As Gov’ts Spend $7trn To Lower Prices

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About $7 trillion was spent globally on explicit and implicit fossil-fuel subsidies in 2022, the International Monetary Fund (IMF) revealed in a new report.

With the cost of subsidies rising by $2 trillion over the past two years, the IMF advised governments to remove subsidies to raise $4.4 trillion in revenue and prevent 1.6 million premature deaths annually. 

The IMF disclosed that fossil-fuel subsidies are 7.1 per cent of global gross domestic product, as well as higher than funds allocated to education yearly by governments, which is 4.3 per cent of global income and about two-thirds of healthcare funding. 

In the report, the IMF wrote: “Fossil-fuel subsidies surged to 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. 

“As the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent). 

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“Our findings come as the World Meteorological Organization says July was the hottest month on record, underscoring the urgent need to curb human-induced climate change.” 

According to the IMF, in the coming years, governments globally will spend more on subsidies due to developing countries where higher-polluting power plants, factories, and vehicles are located. 

The subsidies are categorised into explicit subsidy, which is support for producers and implicit subsidy for pump prices to cushion the impact of external costs. 

IMF said governments should invest in education and healthcare, compensate poor households, as well as cut taxes on work and investments to support firms. 

The fund said the palliatives listed above will help cushion the removal of fuel subsidies. In its words, the IMF said: “If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. 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. 

“We estimate 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. 

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“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. 

“With global energy prices receding and emissions rising, it’s the right time to phase out explicit and implicit fossil-fuel subsidies, for a healthier and more sustainable planet.” 

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