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IMF: save $1.9 trillion and reduce CO2 emissions by 4.5 billion tons

A new report from the International Monetary Fund (IMF) urged policymakers the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment.

The comprehensive study, Energy Subsidy Reform – Lessons and Implications, released 27 March, estimates that energy subsidies amount to a staggering $1.9 trillion worldwide - the equivalent of 2.5 % of global GDP, or 8 % of government revenues.

In a speech at the Peterson Institute for International Economics in Washington D.C., marking the release of the paper, IMF First Deputy Managing Director David Lipton noted that “subsidy reform can lead to a more efficient allocation of resources, which will help spur higher economic growth over the longer term.” Removing energy subsidies can also strengthen incentives for “research and development in energy-saving and alternative technologies,” he said. 

He also noted that, while intended to benefit consumers, subsidies are often inefficient and “could be replaced with better means of protecting the most vulnerable parts of the population.”

Energy subsidies reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy. “On average, the richest 20 % of households in low- and middle-income countries capture 43 % of fuel subsidies,” said Mr. Lipton.

In addition, Mr. Lipton noted that “subsidies aggravate climate change and worsen local pollution and congestion.” The study finds that eliminating pre-tax subsidies would reduce global CO2 emissions by about 1-2 % which would, by itself, represent “a significant first step in reducing emissions by delivering about 15-30 % of the Copenhagen Accord’s goal.

Mr. Lipton also recalled the commitment of the G-20 which, at the Pittsburgh Leaders Summit in 2009, pledged to eliminate inefficient fossil fuel subsidies over the medium term. “I do not know exactly what constitutes the medium term, but it is surely time to get on with fulfilling this very important commitment,” he said.

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