The International Monetary Fund (IMF) has a new report out claiming that fossil fuel is “mispriced” and that eliminating subsidies to the fossil fuel industry and adding carbon taxes could cut greenhouse gases by 13 percent.

Energy subsidies are pervasive and impose substantial fiscal and economic costs in most regions.
On a pre- tax basis, subsidies for petroleum products, electricity, natural gas, and coal reached $480 billion in 2011(0.7 percent of global GDP or 2 percent of total government revenues). The cost of subsidies is especially acute in oil exporters, which account for about two thirds of the total. On a post-tax basis which also factors in the negative externalities from energy consumption — subsidies are much higher at $1.9 trillion (2½ percent of global GDP or 8 percent of total government revenues). The advanced economies account for about 40 percent of the global post-tax total, while oil exporters account for about one third. Removing these subsidies could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand.

Removing subsidies has proved difficult even in the developed countries like America where ExxonMobil – which often ranks as the world’s richest company – still receives subsidies due to political influence. The IMF later offered some possible steps to reform subsidies.

While there is no single recipe for successful subsidy reform, country experiences suggest that the following ingredients are needed:

  • a comprehensive energy sector reform plan with clear long-term objectives with an analysis of the impact of reforms;
  • transparent and extensive communication and consultation with stakeholders, including information on the size of subsidies and how they affect the government’s budget;
  • price increases that are phased-in over time;
  • improving the efficiency in state-owned enterprises to reduce producer subsidies;
  • measures to protect the poor through targeted cash or near-cash transfers or, if this option is not feasible, a focus on existing targeted programs that can be expanded quickly; and
  • institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.

Looking at the steps the doubt sets in when considering the American context. While stakeholders have no difficulty communicating they simply don’t have the same interests and in America money usually wins political battles. Price increases, even phased in ones, are incredibly unpopular. Anyone running on raising gas taxes is in for trouble. There are no large state-owned enterprises. Cash transfers are considered welfare which contains its own issues as austerity is set to kick in. Automatic pricing sounds good until the rules are written to be gamed in Congress.

But as skeptical as one can be on these reforms working the alternatives are even worse – doing nothing and praying for a technological breakthrough that can bypass the political system.

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