Global energy subsidies to hit US$5.3 trillon this year: IMF

The IMF headquarters in Washington, DC. (Photo: AFP/Saul Loeb)

WASHINGTON: The International Monetary Fund (IMF) voiced alarm on Monday (May 18) about energy subsidies across the world, saying they were expected to reach US$5.3 trillion (S$7 trillion) in 2015, more than government health spending.

"These estimates are shocking," the IMF said in a report, noting the figures were among the largest negative factors for economic growth it had ever estimated, piling up adverse effects on efficiency, growth and inequality. The report estimated that this year's energy subsidies represent 6.5 per cent of the global economy, likely exceeding government health spending across the world.

Long an opponent of energy subsidies, the IMF defines them as the difference between the amount of money consumers pay for energy and its "true costs", plus a country's normal value-added or sales tax rate. In addition to what is required to produce and distribute energy, the "true costs" include environmental effects like carbon emissions that lead to global warming and the health effects of air pollution.

According to the Fund, China is by far the largest spender on energy subsidies, at US$2.3 trillion a year, followed by the United States at US$699 billion and Russia at US$335 billion.

The report said that overall energy subsidies had more than doubled since 2011, the year covered by a similar IMF report in 2013. The IMF explained that more than half of the increase was due to more precise evidence of the damaging effects of energy consumption on air quality and health, such as premature deaths.

"The IMF has long argued that getting energy prices right can help national governments achieve their goals not only for the environment but also for inclusive growth and sound public finances," the report said.

The 188-nation Fund recommended countries increase energy prices gradually to reflect their true costs, an action it estimated would yield fiscal gains of about 3.5 per cent of gross domestic product. The additional gains would give governments room to reduce some taxes, raise growth-spurring public spending on infrastructure, health and education, and finance cash transfers for the poor, it said.

The IMF in March conditioned its US$40 billion bailout program for Ukraine in part on the government undertaking energy sector reforms, including reductions in energy subsidies.