September 20, 2023

di Francesco Ramella

The world is warming up and now “boiling”, according to the new definition by UN Secretary-General António Guterres. Yet, instead of tackling the “climate crisis”, governments are subsidising fossil fuels. This claim has been put forward by the IMF in the 2023 Update of its “Fossil Fuels Subsidies Data”. According to the authors, world fossil fuel subsidies were $7 trillion in 2022 or 7.1% of world GDP.

Where does this estimate come from?
The IMF considers two items: explicit and implicit subsidies. Explicit subsidies occur when governments transfer taxpayers’ money to energy consumers and producers. Implicit subsidies occur, according to the IMF, when the retail price doesn’t include externalities (e.g. pollution). In other words, externalities are damages imposed upon the others without their consent. VAT exemptions should not be considered a subsidy, though. Similarly, a person is not subsidized if her tax rate is lower than that of someone else.

Other problematic assumptions made by the IMF regard accidents and congestion. These are indeed externalities. Yet, congestion is highly variable in time and space. Taxing fuel (the level of taxation is calculated by dividing the total cost of congestion in a country by the amount of gasoline and diesel burned) is not an effective way to deal with it: it is much too small in the (few) dense areas and too large in the rest of the territory. A congestion charge like those adopted in central London, Milan or Stockholm would be more appropriate. A similar argument can be made for safety. Drivers’ behaviour is a key factor, especially in accidents in which people are killed or seriously injured, and it varies (women, for example, are much more prudent than men). An average tax calculated by dividing the total cost of the accidents by the amount of fuel used in litres and equally applied to all is both ineffective and unfair: tailored insurances and punishment of wrongdoing would be more appropriate.

Of course, EV vehicles do not differ from traditional ones as far as road occupancy and safety are concerned.

In this light, an interesting perspective emerges from the IMF study. According to the IMF methodology, diesel is subsidized in the major European countries, while gasoline only in the UK. But if we compare the sum of supply cost and the true externalities relating to fossil fuels, the actual consumer price is almost always higher than the efficient one, especially in the case of gasoline. In brief, consumers are subsidizing the community and not the other way round.

Moreover, one should observe that

  1. air pollution externalities of the newest diesel vehicles (Euro 6 standard) are about 90% lower than that of the oldest ones (Euro 0). Thus, the average cost of this externality is going to decrease significantly with the renewal of the fleet;
  2. the IMF ignores noise, another negative externality.

The IMF states that if fossil fuels were priced efficiently, global carbon dioxide emissions in 2030 would be 43 percent below the baseline level and 34 percent below the 2019 level and consistent with the 2030 objectives.

To summarise, Europe does not need to increase the present level of fuel taxation because of climate change. Indeed, in many cases taxation is inefficiently high and should be lowered, while at the same time the price of using a car in the few areas where congestion is high should be increased and bad drivers’ behaviour should be punished more effectively. At the same time, subsidies to railways and public transport should be scrapped: they are inefficient. Polluting less is a duty, not a virtue. In theory, subsidies could be efficient as a second-best policy when externalities are not priced in the first place. As we have seen, that’s not the case today in Europe.