IMF Estimates Trillions in Hidden Fossil-Fuel Costs
Use of coal in China and India surpasses savings as governments slash traditional energy subsidies
By Ian Talley
Updated May 18, 2015 10:20 a.m. ET
WASHINGTON—Consumers should be paying a whopping $5 trillion more a year for energy to cover the hidden health and environmental costs of using fossil fuels, the International Monetary Fund said Monday.
Vitor Gaspar, head of the IMF’s fiscal affairs department, which produced the report, called the estimates shocking and “one of the largest negative externalities ever estimated,” referring to costs that aren’t factored into prices.
The fund said policy makers must start capturing those costs—valued at roughly 6% of global gross domestic product—in fuel prices now to curb the damaging effects, encourage greater energy efficiency and prevent a mounting toll on human health.
The report said the costs—largely fueled by the ballooning use of coal in China and India—far surpassed the savings gleaned in the past year as governments cut traditional energy subsidies.
Falling oil prices have given governments including India and Angola an opportunity to raise energy prices closer to their market values.
Cutting subsidies relieves a burden on state budgets and allows a government to channel revenue elsewhere, such as social services, health care or growth-spurring investments.
But the IMF said the uncounted costs of pollution from coal, oil and natural gas also should be considered subsidies because economies are burdened with mounting costs resulting from their use.
Based in part on new World Health Organization data, the fund estimates those “post-tax subsidies” will hit $5.3 trillion this year alone.
Around a quarter of that covers the theoretical cost of mitigating greenhouse-gas emissions.
The rest is from the health effects of local pollution as well as from traffic congestion, accidents and road damage.
“It is important to put in perspective just how many health problems are linked to energy consumption and air quality,” said Benedict Clements, a division chief in the IMF’s fiscal affairs department.
For example, the WHO estimates more than one million premature deaths a year occur because of outdoor air pollution caused largely by burning coal, he said.
IMF economists acknowledge the figures are disputable, but say they provide some indication of hidden costs that should provoke debate.
They also accept that eliminating subsides by raising energy taxes would be costly for consumers, and so it recommends a gradual increase.
“Moving to efficient energy pricing in one step would require very large increases in consumer energy prices, in particular for coal, with a global average price increase of more than 200 percent,” the IMF warned.
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