• Friday, June 14, 2024
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China, Russia, India, USA led $7trn fuel subsidy spend in 2022

Subsidy Removal: A move with potential rewards

Fossil-fuel subsidies soared to a record $7 trillion last year as governments including China, Russia, India, USA among others supported consumers and businesses during the global spike in energy prices caused by Russia’s invasion of Ukraine and the economic recovery from the pandemic, says the IMF.

As the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe, and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product.

That’s more than governments spend annually on education (4.3 percent of global income) and about two-thirds of what they spend on healthcare (10.9 percent) according to analysts at the IMF

Read also: Petrol prices soar 152% since subsidy removal – NBS

This comes as the World Meteorological Organization said July was the hottest month on record, underscoring the urgent need to curb human-induced climate change.

Fossil-fuel subsidies rose by $2 trillion over the past two years as explicit subsidies (undercharging for supply costs) more than doubled to $1.3 trillion, says the IMF report titled “IMF Fossil Fuel Subsidies Data: 2023 Update,” an updated estimates across 170 countries of explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes).

Read also: Nigeria’s petrol import from Europe drops 48% since subsidy removal

The report said consuming Consuming fossil fuels imposes enormous environmental costs—mostly from local air pollution and damage from global warming. The vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel.

The implicit subsidies are projected to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies.

Read also: The complexities of fuel subsidy removal and forging ahead as a nation

If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. This would lead firms and households to consider environmental costs when making consumption and investment decisions. The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments, the analysts said.

“We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by $4.4 trillion, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones,” they said.

Yet removing fuel subsidies can be tricky. Governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscores the benefits.

Read also: Petrol subsidy removal set to transform petroleum downstream sector – PwC Nigeria

They recommend that a portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy.

Nigeria has removed subsidies since the end of May, leading to soaring fuel prices at the pump, but a lack of concrete plans to cushion the impact of the subsidy removal has complicated matters. Labour unions have called for a strike and current efforts to share food supplies as palliatives is generating concern.

According to NNPC data, Nigeria spent over N4trillion on petrol subsidies in 2022