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The High Cost of Fossil Fuels

The International Monetary Fund (IMF) has released a working paper that attempts to quantify the total cost of subsidies we pay for fossil fuels. This includes not just direct payments and tax breaks for energy companies, but also the cost of “externalities” like cleaning up after oil spills and health costs directly attributable to the use of fossil fuels (costs that are borne by us all).

The number they came up with is an astonishing annual cost of $5.6 trillion. Which is more than 7% of the Gross World Product. That is a lot of money.

Republicans like to complain about the high costs of switching away from fossil fuels, but they ignore the even higher costs of continuing to use them. And of course there are other benefits to reducing our subsidies to energy companies. According to the research:

Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global CO₂ emissions by more than 20 percent, and cut pre-mature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).

That’s right, eliminating the use of fossil fuels would save us a bunch of money, and also save 3.2 million lives every year. Indeed, it seems like the only losers would be the politicians who would stop receiving huge campaign contributions from the corporations that benefit from energy subsidies.

Republicans also claim that it doesn’t make sense for the US to take unilateral action until other countries get on board. But the paper specifically states that the local benefits from ending subsidies are high enough that they should be eliminated even in the absence of action in other countries. Again, according to the research:

An important point, therefore, is that most (over three-fourths) of the underpricing of energy is due to domestic distortions – pre-tax subsidies and domestic externalities – rather than to global distortions (climate change). The crucial implication of this is that energy pricing reform is largely in countries’ own domestic interest and therefore is beneficial even in the absence of globally coordinated action.

Ironically, the most subsidized fossil fuel is not oil, it is coal (both because of its high environmental damages and because unlike road fuels, no country imposes meaningful excise taxes on its consumption). Coal subsidies alone account for almost 4% of the Gross World Product (around $3.2 trillion annually).

So the next time conservatives say they are in favor of free markets, we should ask them when we are going to have a real free market for fossil fuels, rather than “the government picking winners and losers” through massive energy subsidies.



  1. John wrote:

    Prediction: Conservatives will simply claim that, the IMF is a liberal left-wing organization which has no clue.

    That was just way too easy. Wait for it.

    Thursday, May 28, 2015 at 2:30 pm | Permalink
  2. Iron Knee wrote:

    No, I don’t think they will. The IMF holds a few too many powerful purse strings. Remember, follow the money!

    Thursday, May 28, 2015 at 10:28 pm | Permalink

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