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Subsidies are rampant in today's world economy, and they generally do more harm than good. Governments usually fail when they try to pick industrial winners, while subsidies to support industrial losers are hard to phase out. International disciplines contained in the World Trade Organization are weak and seldom enforced.
For all these reasons, it's good public policy to shine a spotlight on subsidies and challenge governments to pare back on wasteful excess. That said, it's unfortunate that the International Monetary Fund (IMF) issued a study that exaggerated the magnitude of fossil fuel subsidies and spawned misleading media reports.
The IMF authors projected an annual fossil fuel subsidy of $5.3 trillion in 2015, about 6.5 percent of global GDP. Subsequent media reports mischaracterized the handouts as payoffs to Big Oil. The mischaracterization has pointed policy remedies in the wrong direction.
Fossil fuel users receive two hardcore subsidies. In several oil-producing countries, like Russia, Venezuela, Iran, and Saudi Arabia, fossil fuels are sold, by government fiat, at prices far below world levels, spurring wasteful consumption. These subsidies amount to about $0.3 trillion annually, and none reaches the coffers of Big Oil. If anything, government-mandated giveaway prices subtract from the bottom line of oil-producing firms.
The second hardcore subsidy arises from the fact that only a few countries impose proper carbon taxes on coal, gasoline, and natural gas consumption to compensate for the damage resulting from climate change and local pollution (particularly from coal). The absence of carbon taxes (often called Pigouvian taxes) to compensate for negative externalities is the whopper, a subsidy of about $4 trillion a year. Again, the fact that proper carbon taxes are not collected does nothing to enrich Big Oil, but it surely impoverishes governments and societies around the world—especially China, India, and the United States.
The remaining $1 trillion in the IMF's 2015 calculation represents a doubtful assortment of invented charges for congestion costs, highway accidents, road damage, and uneven value added taxes (VAT). None of these charges would be considered subsidies in other social contexts. They should not clutter the IMF's proper focus on giveaway fuel prices and woefully inadequate carbon taxes.
