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Remove Fossil Fuel Subsidies to Fight Climate Change
By Tyler Collins

A new report by the International Monetary Fund concludes that the best way to fight climate change is to get rid of $1.9 trillion in global fossil fuel subsidies. “Energy Subsidy Reform: Lessons and Implications” states that subsidies amount to 8% of government revenues, or the equivalent of about 2.5% of global GDP.

In addition to $480 billion in direct subsidies for consumption, there’s another $1.4 trillion in subsidies in the form of “mispricing” fossil fuels—a failure to take into account the air pollution and climate damage they cause (a form of a negative externality, as discussed in the earlier blog “Pricing Externalities: Redefining Profit to Reflect Reality”).

Although subsidies are intended to protect consumers by keeping prices artificially low, they can also crowd out public spending that could otherwise boost economic growth. Subsidizing energy tends to reduce dollars available for infrastructure, education, and health care, and can also lead to overconsumption of fossil fuels, contributing to environmental degradation, pollution, and climate change.

According to the World Energy Outlook 2011 from the International Energy Agency, state spending on fossil fuel subsidies ($409 billion) is six times greater than subsidies on renewable energy ($66 billion). This disparity forces the market to favor fossil fuels. Indeed, without any fossil fuel energy subsidies, renewable energy would be significantly more competitive and consumers would not be nearly so reliant on fossil fuels.

The Organization for Economic Cooperation and Development (OECD) has calculated that simply removing fossil fuel subsidies could reduce carbon emissions by more than 10% by 2050.

At a 2009 summit, the G20 nations called for an end to such destructive subsidies, stating that "Inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources, and undermine efforts to deal with the threat of climate change." But it hasn’t happened—yet.

Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: June 6, 2013