Climate Change: IMF Calls for Phase Out as Fossil-fuel Subsidies Gulp $7 Trillion in 2022
The International Monetary Fund (IMF) has said that fossil-fuel subsidies gulped $7 trillion in 2022 as governments supported consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the Covid-19 pandemic.
IMF said that with spikes in emissions as global energy prices drop, it was high time subsidies for fossil-fuel are phased out for a sustainable planet.
According to IMF, as the world struggles to keep global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States experience extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global Gross Domestic Product (GDP).
It noted “That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent.”
“With global energy prices receding and emissions rising, it’s the right time to phase out explicit and implicit fossil-fuel subsidies, for a healthier and more sustainable planet.”
The international financial institution disclosed this in its new paper on fossil fuel subsidies.
The IMF’s findings come as the World Meteorological Organisation says July was the hottest month on record. This, the international financial institution says, underscores “the urgent need to curb human-induced climate change.”
The IMF informed that fossil-fuel subsidies rose by $2 trillion over the past two years as explicit subsidies (undercharging for supply costs) more than doubled to $1.3 trillion.
“That’s according to our new paper, which provides updated estimates across 170 countries of explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes),” it stated.
Energy transition
Fossil-fuel, particularly oil and gas, is said to be the major emitters of carbon emissions. Climate change is not a phenomenon to be debated on, but a fact that must be dealt with through multilateral approach, and synergy. From the ice melting in the Antarctica region to rising sea levels, flooding, and desertification in various parts of the world, evidence abound that the global climate is changing.
Energy transition is a global push towards cleaner energy from fossil fuels, which are harmful to the climate. Reducing global carbon dioxide (CO2) emissions to net zero by 2050 is consistent with efforts to limit the long-term increase in average global temperatures to 1.5˚C.
According to the International Energy Agency (IEA), “The energy sector is the source of around three-quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change, perhaps the greatest challenge humankind has faced.”
Fossil-fuel consumption imposes environmental costs
The IMF in the paper is of the view that consumption of fossil-fuel imposes enormous environmental costs —mostly from local air pollution and damage from global warming.
“The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel.
“Our analysis shows that consumers did not pay for over $5 trillion of environmental costs last year. This number would be almost double if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of our baseline assumption that global warming costs are equal to the emissions price needed to meet Paris Agreement temperature goals,” the international financial institution noted.
The IMF projected implicit subsidies to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies.
The International financial institution explained that if governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase.
“This would lead firms and households to consider environmental costs when making consumption and investment decisions. The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments,” it said.
The IMF estimates that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets.
“It would also redistribute income as fuel subsidies benefit rich households more than poor ones.
“Yet removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy,” the international financial institution added.
Governments continuously support for fossil fuels
Despite pledges by many countries to lower carbon emissions, overall governments support for fossil fuels – coal, natural gas and oil, almost doubled in 2021, according to August 2022 analysis from the Organisation for Economic Cooperation and Development (OECD) and IEA.
Globally, overall governments support for fossil fuels in 51 countries almost doubled to $697.2 billion in 2021, from $362.4 billion in 2020, as energy prices rose with the rebound of the global economy, OECD and IEA data showed. In addition, consumption subsidies were expected to rise even further in 2022 occasioned by higher fuel prices and energy use, slowing progress toward international climate goals.
With efforts to protect households from surging energy prices, major economies increased support for the production and consumption of coal, oil and natural gas, with many countries struggling to balance well-established pledges to phase out inefficient fossil fuel subsidies.
“Russia’s war of aggression against Ukraine has caused sharp increases in energy prices and undermined energy security. Significant increases in fossil fuel subsidies encourage wasteful consumption though, while not necessarily reaching low-income households,” OECD Secretary-General Mathias Cormann said.
“We need to adopt measures which protect consumers from the extreme impacts of shifting market and geopolitical forces in a way that helps keep us on track to carbon neutrality as well as energy security and affordability.”
Also commenting on the analysis, IEA Executive Director Fatih Birol said: “Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuel prices. A surge in investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis and the best way to reduce the exposure of consumers to high fuel costs.”
Carbon emissions
The global carbon emissions are projected to rise to about 39 gigatonnes per year (Gtpa) in 2025 before maintaining annual decline as industries clean up their carbon footprint, according to Rystad Energy research and analysis.
Rystad said that many countries as a measure to ensure energy security, adopted more carbon-intensive fuels in 2022, because of the ongoing Russia-Ukraine war, which it noted, led to record high in carbon emissions.
“The inflection point for fossil fuel carbon dioxide (CO2) emissions is nigh, with emissions on track to peak by 2025, according to Rystad Energy research and analysis. On the current global pathway of announced policies, projects, industry trends and expected technological advancements, global CO2 emissions are poised to hit about 39 gigatonnes per year (Gtpa) in 2025 before settling into a steady annual decline as industries clean up their carbon footprint.
“Emissions hit a record high in 2022 as countries scrambled to secure reliable, affordable fuel for power generation on the back of Russia’s invasion of Ukraine. As a result, many turned to more carbon-intensive fuels as a short-term solution to their energy security crises, reviving mothballed coal plants and prioritizing gas over cleaner alternatives. While these fuels will still have a role to play in the global economy for decades to come, the broader push towards a cleaner future is showing no signs of slowing down.
“As a sign of things to come, direct CO2 emissions – carbon dioxide originating from fossil fuel combustion at the plants worldwide – from power and heat generation will peak this year. The decline will be minimal initially before gathering momentum in the coming years, becoming a significant factor behind the decrease in total CO2 emissions from all sectors by 2025,” Rystad said in a statement.
“Fossil CO2 emissions reached an all-time high of about 38.3 Gtpa last year, raising eyebrows and questions about the world’s ability to deliver on ambitious climate goals to limit warming to between 1.5 and 2.0 degrees Celsius. However, our comprehensive emissions modeling points to an imminent emissions inflection point. Our data shows a peak of 39 Gtpa in 2025, but that timeline could move up to as early as next year if the short-term macroeconomic outlook accelerates the energy transition,” it added.
Steming carbon emission is a priority for world leaders, but even more worrisome is energy poverty bedeviling some parts of the globe. Finding a balance between achieving net-zero target and maintaining energy security, appears to be the headache for these leaders.
