The easiest way to address our bourgeoning problem of global climate change, that is, according to this massive report by the International Monetary Fund (IMF), is to make sure fossil fuels are priced the way they should be and no longer subsidized. The IMF estimates that the world collectively misprices fossil fuels to the tune of $1.9 trillion PER YEAR.
From the report:
While aimed at protecting consumers, (energy) subsidies aggravate fiscal imbalances, crowd-out priority public spending, and depress private investment, including in the energy sector. Subsidies also distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources. Most subsidy benefits are captured by higher-income households, reinforcing inequality
The IMF claims that greenhouse gas emissions can be cut down by 13% (a huge number) by the elimination of these subsidies and the putting in their place appropriate measures. The plan would drastically improve air pollution and also provide poorer countries the means of dedicating these funds towards their growing debt concerns or infrastructure deficiencies.
Let’s take a look at some of the data found in the study to support the claim of mispricing, first in regards to Consumption:
The world (governments) spent roughly $480 billion to lower the price of petroleum, natural gas, coal, and electricity for their citizens last year.
The argument from the IMF is this: these subsidies are doing nothing but keeping money from worthwhile public spending in these countries, while also hurting private investment in the energy sector. If just these direct subsidies were cut, emissions would fall about 2 percent.
The more important part of the study had to do with the other moneys, to the tune of $1.4 trillion a year, that the IMF categorizes as mispriced.
The IMF report argues that:
governments should be taxing fossil fuels appropriately in order to take account of the air pollution and climate damage they cause. Standard economic models peg these “externalities” at about $25 per ton of carbon dioxide. So, the failure to price these fossil fuels correctly amounts to a subsidy of some $1.4 trillion worldwide.
Once this is taken into account, the countries that subsidize fossil fuels most heavily are the United States ($502 billion per year), China ($279 billion per year), and Russia ($116 billion). Here’s how it breaks down by region:
It’s one thing to prescribe a solution to the problem, but carrying it out isn’t going to be easy. The United States and Russia are very far from considering a carbon tax, while the Chinese government is mulling over an extremely modest and fragmented carbon-pricing scheme. What’s more, in poorer countries, scrapping these direct subsidies tends to be extremely contentious. But the IMF points out throughout the paper that the upmost concern should be how to operationalize these new truths without harming poorer countries and their citizens.