IMF urges energy-subsidy reform to ease squeeze on budgets

WASHINGTON, March 27 Wed Mar 27, 2013 1:14pm EDT

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WASHINGTON, March 27 (Reuters) - Developing and industrialized countries should rein in energy subsidies that totaled $1.9 trillion in 2011 to ease budgetary pressures and free up resources for public spending in areas such as education and health care, International Monetary Fund economists said in a research paper published on Wednesday.

In the paper, "Energy Subsidy Reform - Lessons and Implications," the economists looked at a database of 176 countries and analyzed ways to reform energy subsidies by examining case studies done in 22 countries.

In 2011, energy subsidies intended to keep energy prices low for consumers accounted for 2.5 percent of global GDP, or 8 percent of all government revenue, the IMF said.

"The paper shows that for some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy," IMF First Deputy Director David Lipton said in a speech on Wednesday.

The paper said that subsidies are expensive for governments, and instead of helping consumers, they detract from increased investment in infrastructure, education and health care, which would help the poor more directly.

Subsidies have been a counterproductive way to help the poor because the rich, who consume more energy, benefit most from them, the IMF said. The richest 20 percent of households in low- and middle-income countries received six times more in fuel subsidies than the lowest 20 percent.

According to IMF research, 20 countries have pre-tax energy subsidies that exceed 5 percent of GDP. The top three global subsidizers are the United States at $502 billion, China at $279 billion, and Russia at $116 billion.

For advanced economies, such as the United States, removing subsidies for fossil fuels could inject much needed revenue into cash-strapped government coffers, the IMF said.

"Insufficient energy taxation, including in the largest economy in the world, the United States, is a problem not only for the environment, but many advanced economies are in need of additional resources to support the effort to lower public debt, which is very high now in those economies," said Carlo Cottarelli, director of the IMF's fiscal affairs department.

Over the longer term, reforming energy subsidies could spur stronger economic growth because it would encourage a more efficient distribution of resources, and encourage investment in energy efficient alternative technologies, Lipton said.

The world's largest economies, the Group of 20, agreed to phase out subsidies for oil and other carbon dioxide-spewing fossil fuels in the "medium term" ahead of the U.N. climate change summit in Copenhagen in 2009, but have made little progress thus far.

At the summit, world leaders agreed to reduce global greenhouse gas emissions by 50 percent by 2050.

Eliminating pre-tax subsidies would reduce global carbon dioxide emissions by 1-2 percent, what Lipton calls "a significant first step in reducing emissions by delivering about 15-30 percent of the Copenhagen Accord's goal.

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