global oil subsidies

Earth Track Blog Post

David Coady and his team at the IMF have just released an update on estimated global subsidies to petroleum products. They have done consistently important work in this area, documenting how petrol subsidies have weakened the fiscal health of many countries around the world.  The IMF work has examined "pass-through" metrics for each country to assess how much of a change in world petrol prices shows up in end-user retail prices domestically.  This data has provided quite useful insights into the price transparency of economies in the energy sector.

For the current report, as in previous ones, they rely primarily on the price gap approach.  This examines the gap between domestic prices on oil products and world reference prices (adjusted for such factors as quality, transport, and distribution to ensure the prices are comparable). 

First, a couple of caveats on their numbers.  The price gap does not pick up everything, something Coady et al. fully recognize.  They hope (as do I) that coverage of other types of supports can be improved over time.  In addition, this paper does not incorporate subsidies to other fossil fuels such as natural gas, coal, or related subsidies to carbon capture and sequestration.  Expanding the estimate to include all fossil fuels, and producer subsidies as well as the price gap (that picks up mostly subsidies to consumers) would provide the most accurate estimate of how subsidies work against attempts to address global warming.

Nonetheless, even with the narrowed set of subsidies, the values the IMF found are enormous.  At the peak of the oil price boom in mid-2008, they estimated total world fuel subsidies at more than half of a trillion dollars per year, or 0.7% of global GDP (see page 10).  This dropped to about $140 billion a year later as prices fell sharply post-recession, and as efforts by some of the subsidizing countries to pare back payouts began to take effect.   Rising fuel prices have again begun to boost subsidies, with 2010 estimates of $240 billion (0.3% of global GDP).

The IMF also took a close look at the role of tax policy and how incorporating it into their subsidy calculations would affect totals. This increased their total subsidy estimates substantially:  to as high as $1.2 trillion/year in mid-2008 (1.6% of global GDP), and $742 to $965 billion projected for 2010 (1.0 to 1.3% of global GDP)(p. 10).

The rationale for including taxes is sound.  Like all goods and services, there is no reason that petrol consumption should be exempt from tax.  The IMF's tax-inclusive subsidy values do include an estimate of baseline fiscal charges. 

In addition, however, the measure includes estimates from the economic literature on petrol-related externalities.  Included impacts were global and local pollution, congestion, and accidents.  There is a strong efficiency argument to internalize these costs through pricing, and I wouldn't advocate just ignoring them.  The trouble, however, is one of measurement and politics.  The externality values are generally much less precise than the metrics for fiscal subsidies.  A review John Dernbach and I did on US fossil fuel subsidy estimates that incorporated externalities is instructive (see bottom of Table 2).  The externality calculations were a major source of variance, were defined differently in different studies, and varied from other externality estimates by orders of magnitude.  Cleaning up the estimates can also be a challenge.  To what extent are some congestion costs already internalized through lost time?  How have non-fuel tax fees related to other aspects of transport network usage (property taxes, tolls) been accounted for?  What about adjustment for transport miles reliant on non-petrol fuels?

Ideally, the IMF could work to separate the different types of taxes and fees in their model runs.  The first level are user fees (hypothecated funds in the European vernacular) for petrol-related uses:  financing roadways, cleaning up oil spills or leaking gasoline tanks.  These should not be counted as baseline taxes at all.  The second level, assuming that fees exceed related uses (which they don't in the US) is to set taxes at a fiscal parity with other goods and services.  Subsidy runs using this level of taxation would be helpful.  An additional run with estimates for the externality charges only could also be done, but this approach would segregate the impacts of fiscal subsidies from externalities.  Politically, I think this would be quite useful.

A final point on data accessibility.  There was some mention among IMF staff I spoke with that the baseline data on which the price gap calculations were based would be made public.  They were thinking of adopting an approach similar to the extremely useful practice of data sharing that has been adopted by the US Energy Information Administration with data in downloadable Excel files that are easy for users to integrate into their own work. 

There are now at least three international agencies working on price gap calculations for fossil fuels:  the IEA, the OECD, and the IMF.  The UN has also done work in this area in the past, as has the World Bank.  It would be nice to adopt an open source model for this information so that resources could be more effectively pooled and investments made into the shared data set to expand its coverage and detail.