Front Matter Page
Petroleum Product Subsidies: Costly, Inequitable , and Rising
David Coady, Robert Gillingham, Rolando Ossowski, John Piotrowski, Shamsuddin Tareq, and Justin Tyson
INTERNATIONAL MONETARY FUND
Fiscal Affairs Department
Product Subsidies: Costly, Inequitable, and Rising1
Prepared by David Coady, Robert Gillingham, Rolando Ossowski, John Piotrowski, Shamsuddin Tareq, and Justin Tyson
Authorized for distribution by Carlo Cottarelli
February 25, 2010
DISCLAIMER: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.
CONTENTS
Executive Summary
I. Introduction
II. Defining and Measuring Price Subsidies
III. Subsidies Have Increased in Recent Years
A. Responses to Recent International Price Volatility
B. Projected Petroleum Subsidies to End-2010
IV. Subsidy Reform Options
A. Targeting Mitigating Measures
B. Promoting Transparency
C. Overcoming Vested Interests
D. Addressing Cross-Border Spillover Effects
E. Reforming Price-Setting Mechanisms
Tables
1. Oil Net Exporters and Importers, 2007
2. Median Pass-through, End-2003 to Mid-2008
3. Median Tax Levels, End-2003 to Mid-2009
4. Total World Fuel Subsidies
Figure
1. International Petroleum Product Spot Prices, 2003-2010
2a. Share of Pre-Tax Subsidies in G-20 Countries
2b. Share of Tax-Inclusive ($0.40) Subsidies in G-20 Countries
3. Distribution of Petroleum Product Subsidies by Income Group
Boxes
1. Optimal Taxation of Petroleum Products
2. Measurement of Petroleum Product Subsidies
3. Mitigating Measures: Country Experience
References
Executive summary
Petroleum product subsidies have again started to rise with the rebound in international prices. This note reviews recent 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 totaled nearly $60 billion. They are projected to reach almost $250 billion in 2010. Tax-inclusive subsidies, reflecting suboptimal taxation, are estimated to be much larger—$740 billion in 2010, or 1 percent of global GDP. G-20 countries account for over 70 percent of tax-inclusive subsidies, with emerging G-20 countries accounting for a sizable share. 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. Subsidy reform strategies should contain measures to mitigate the impact of higher prices on the poorest groups.
This note benefited substantially from discussion with and comments by Ben Clements, Carlo Cottarelli, and Sanjeev Gupta and from comments received from other IMF staff.