Petroleum Product Subsidies: Costly, Inequitable, and Rising
Posted by Justin Tyson
Petroleum product subsidies around the world have again started to rise with the rebound in international commodity prices. A recent Staff Position Note reviews the latest developments in subsidy levels and argues that it is necessary to reform the policy framework for setting petroleum product prices in order to reduce the fiscal burden of these subsidies and to address climate change.
In 2003, global consumer subsidies for petroleum products, measured as the difference between domestic retail prices and international prices adjusted for transport and distribution costs, totaled nearly $60 billion. They are projected to reach almost $250 billion in 2010. Including tax subsidies (the difference between “optimal” taxes to raise revenue and corrected for externalities and actual taxes), such subsidies are substantially higher. Taking an optimal tax in the range $0.30-$0.40 per liter, projected subsidies are estimated at between $740-$970 billion (or 1.0–1.3 percent of global GDP). Including producer subsidies for other fuels, such as subsidized coal for power plants, would drive these estimates even higher. G-20 countries account for over 70 percent of projected tax-inclusive subsidies, with emerging G-20 countries accounting for a sizable part of that. Halving tax-inclusive subsidies could reduce projected fiscal deficits by one sixth in subsidizing countries and could reduce greenhouse emissions by around 15 percent over the long run.
The note highlights the importance of transparent accounting and reporting of subsidies in order to help raise awareness of the fiscal burden caused by subsidies and also overcome vested interests in the subsidy reform process. The note states that petroleum product subsidies should be recorded transparently in government accounts. Where these have fiscal consequences, they should be incorporated into the budget on a gross basis and explicitly identified. Off-budget subsidies should be identified and recorded in separate accounts.