IMF urges countries to reform energy subsidies

29 March 2013, Washington — Energy subsidies intended to help consumers by keeping prices low hinder government efforts to reduce budget deficits and compete with public spending on infrastructure, schools and health care, says David Lipton, first deputy managing director of the International Monetary Fund.

“For some countries, the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy,” Lipton said as he introduced the IMF’s new Reforming Energy Subsidies report March 27 at the Peterson Institute for International Economics in Washington. The report covers petroleum, electricity, natural gas and coal consumption in 176 countries during 2011.

Lipton said subsidies encourage excessive energy consumption, which aggravates climate change and worsens air pollution.

He stressed that subsidies benefit energy consumers unequally, with the richest 20 percent of households in developing countries enjoying 43 percent of subsidy benefits. “It is no wonder that the greatest beneficiaries are those with cars and air-conditioned houses,” he said.

He cited two types of energy subsidies: Pre-tax subsidies are when consumers pay prices below the cost of producing the energy, and mostly exist in developing economies. Tax subsidies exist if taxes on energy are below the level of taxes on other products or don’t account for all of the energy’s adverse impacts, such as pollution and global warming. Advanced economies account for many of the tax subsidies.

Lipton said the IMF found that 20 of the countries it studied have pre-tax subsidies of more than 5 percent of gross domestic product. In other countries, energy subsidies account for more than public spending on health care and education combined, “undermining the development of human capital,” he said.

Lipton noted that “subsidy reform can lead to a more efficient allocation of resources, which will help spur economic growth” and provide incentives for research and development of energy-saving technologies.

He urged countries to create measures to protect lower-income people as subsidy reform is implemented.

Energy should be taxed the same way as any other consumer products, the report states, adding that because emissions from some forms of energy contribute to pollution and climate change, energy taxes “should reflect these adverse effects on society.”

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