In February, the International Monetary Foundation released a Staff Position Note on the size and impact of fossil-fuel subsidies, and the need for their reform, Petroleum Product Subsidies: Costly, Inequitable, and Rising.

The report notes that as fossil-fuel prices continue to increase, so will the fiscal burden on subsidizing states. It estimates that in 2010 the global value of fossil-fuel subsidies will be either US$ 250 or US$ 740 billion, depending on the method of estimation.

The IMF derive the US$ 250 billion estimate from the ‘price-gap’ approach, calculated using the difference between countries’ national prices and an international benchmark price based on the market price prevailing in the United States. They note that this is likely to be an under-estimate as producer subsidies, which affect how much oil produced by not its price, will not be captured.

The US$ 740 billion estimate takes into account subsidies granted by under-taxing fossil fuels, calculated in the same way as the price-gap approach, but using an international benchmark price that includes an ‘optimal’ tax of $US 0.30 or US$ 0.40 per liter. This taxation rate is called optimal because it is thought to be the best level to raise revenue and off-set the environmental side effects of fossil-fuel use, such as increased carbon emissions. This approach is more open to dispute than the first price-gap method, as there can be considerable controversy over what level of taxation is optimal.

A key argument of the IMF’s report is that reducing fossil-fuel subsidies could significantly contribute towards the reduction of fiscal deficits. According to their analysis, halving tax-inclusive subsidies in subsidizing countries could reduce their projected fiscal deficits by one sixth and reduce GHG emissions by around 15 per cent over the long run.

Although various obstacles can make it difficult to reform such subsidies, the IMF outline basic policy advice for how they can be overcome, including the protection of the poor with targeted welfare transfers and the creation of welfare nets, promoting transparency, and overcoming vested interests with public information campaigns.

The full IMF Staff Position Note can be read here: http://www.imf.org/external/pubs/ft/spn/2010/spn1005.pdf