Global fossil fuel subsidies hit a record high of $7 trillion last year, fuelled by higher energy prices, with oil products accounting for almost half of the total as countries fail to factor in their environmental and health costs.
The IMF estimated that fossil fuel subsidies accounted for 7.1pc of global GDP in 2022, with explicit and implicit subsidies representing 18pc and 82pc of the total, respectively. The IMF defines explicit subsidies as undercharging for the supply costs of fossil fuels — when retail prices are below supply costs. Implicit subsidies occur when the retail price fails to include external costs — meaning countries undercharge for environmental costs and forgo consumption tax revenues.
Total subsidies, under the IMF methodology, equal the gap between efficient prices — adding supply, environmental and other costs — and retail prices multiplied by consumption.
Taking into account implicit and explicit subsidies, oil products accounts for 47pc of the total, because taxes do not reflect their environmental costs, the IMF said. Coal accounts for 30pc of total subsidies, because the carbon and air pollution caused by the fuel is under priced. Natural gas and power account for 18pc and 5pc, respectively. Undercharging for local air pollution and global warming accounted for around 60pc of total fossil fuel subsidies, according to the IMF.
The IMF looked at 170 countries. China remained the largest subsidies contributor, with an estimated $2.2 trillion last year, followed by the US with $760bn, Russia with $420bn, India with $350bn and the EU with $310bn. The east Asia and Pacific region accounts for half of total subsidies, while the Middle East and North Africa (Mena) region, and North America account for 11pc each. Explicit subsidies are concentrated in the east Asia and Pacific region, Mena and Europe. "Explicit subsidies have more than doubled since the previous IMF assessment, from $0.5 trillion in 2020 to $1.3 trillion in 2022, with sharply higher international fossil fuel prices".
But the fund sees explicit subsidies declining as energy prices slide to 0.6pc of global GDP in 2030. "As energy prices recede... governments have an opportunity to phase in robust carbon pricing or equivalent measures," the IMF said. It expects implicit subsidies to rise, led by fuel demand in emerging markets.
Reforming subsidies would bring some of the revenues needed to hit transition goals and raise welfare. According to the IMF, policies to increase the relative price of fossil to clean fuel technologies must play a pivotal role in reducing greenhouse gas emissions by 25-50pc below 2019 levels by 2030. Not achieving this goal is likely to put the Paris agreement target of limiting temperature rises to 1.5 to 2°C "beyond reach", it said. The IMF estimates that full subsidies policy reform — progressively raising fuel prices over time to reach efficient levels by 2030 — in the 170 countries would reduce projected CO2 emissions by 34pc from a 2019 level. In this "full reform" scenario around 55pc of the CO2 cuts stem from lower coal use and 31pc and 12pc from a decrease in oil and natural gas consumption, respectively. "This reflects the much larger proportionate increase in coal prices from fuel price reform compared with petroleum and natural gas and the larger shares of coal and petroleum in global CO2," the IMF said. The IMF estimated that a full reform could raise revenues of $4.4 trillion, or 3.6pc of global GDP, in 2030, compared with a business as usual scenario. It would amount to $3 trillion in emerging and developing economies, "which is broadly in line with their additional spending needs for sustainable development goals, the IMF said.
