Spyros, this is an excellent article, very clear analysis – and yes, you did present my views fairly and accurately. I think we agree on the most important issues: fossil fuel prices are too low (externalities), we should raise them with a carbon tax, and since this will imply an economic cost, we should have a more transparent discussion on the trade-offs so we can design a transition that is both economically sustainable and politically feasible.
You are right in noting that only about one third of the IMF’s subsidy estimates relate to climate change. Pollution is a clear and present cost. (As a picky aside, I still don’t understand why the IMF attributes the costs of congestion to fuels rather than vehicles – if the whole existing fleet turned electric overnight, wouldn’t congestion be the same? But that has no material impact on the main points.)
I still disagree on who benefits from subsidies. Yes, producers get more revenues and profits. But the biggest beneficiaries are consumers who need fuel, gas and electricity in their daily lives. Let me put it like this: if we hike the price of fuel, gas and electricity, who’s going to tell consumers that they should not worry because it’s really the producers who are getting hurt?
But thanks for this excellent piece, let’s keep the conversation going.
Thank you Marco for the comments and the great discussion.
On congestion, and it’s a great point, I think that - following the logic of their framework - they must be thinking of something like “excess congestion” implicitly. I.e. if you have, say, 100mn “car-hours” at current prices of fossil fuels and you would have had 50mn with the tax, then the 50mn contribute towards a congestion externality. But I’m just guessing, I don’t remember seeing any details in the paper.
Thanks Spyros. Another thought -- again not one that would change the main conclusions, but still relevant I think: you rightly noted that a significant share of implicit subsidies reflects pollution. That tends to be more prevalent in emerging markets, which as i mentioned account for two-thirds of subsidies. So I think we're seeing another trade-off: pollution has meaningful health costs, but at lower income levels so does slower growth.
True. Although lowering the subsidy saves the government money, which - at least in principle - could be rebated to poorer households and stave off adverse health effects. More generally, I would argue that fossil fuel subsidies is an inefficient poverty alleviation measure, at best second-best (excuse the pun).
Spyros, this is an excellent article, very clear analysis – and yes, you did present my views fairly and accurately. I think we agree on the most important issues: fossil fuel prices are too low (externalities), we should raise them with a carbon tax, and since this will imply an economic cost, we should have a more transparent discussion on the trade-offs so we can design a transition that is both economically sustainable and politically feasible.
You are right in noting that only about one third of the IMF’s subsidy estimates relate to climate change. Pollution is a clear and present cost. (As a picky aside, I still don’t understand why the IMF attributes the costs of congestion to fuels rather than vehicles – if the whole existing fleet turned electric overnight, wouldn’t congestion be the same? But that has no material impact on the main points.)
I still disagree on who benefits from subsidies. Yes, producers get more revenues and profits. But the biggest beneficiaries are consumers who need fuel, gas and electricity in their daily lives. Let me put it like this: if we hike the price of fuel, gas and electricity, who’s going to tell consumers that they should not worry because it’s really the producers who are getting hurt?
But thanks for this excellent piece, let’s keep the conversation going.
Thank you Marco for the comments and the great discussion.
On congestion, and it’s a great point, I think that - following the logic of their framework - they must be thinking of something like “excess congestion” implicitly. I.e. if you have, say, 100mn “car-hours” at current prices of fossil fuels and you would have had 50mn with the tax, then the 50mn contribute towards a congestion externality. But I’m just guessing, I don’t remember seeing any details in the paper.
Thanks Spyros. Another thought -- again not one that would change the main conclusions, but still relevant I think: you rightly noted that a significant share of implicit subsidies reflects pollution. That tends to be more prevalent in emerging markets, which as i mentioned account for two-thirds of subsidies. So I think we're seeing another trade-off: pollution has meaningful health costs, but at lower income levels so does slower growth.
True. Although lowering the subsidy saves the government money, which - at least in principle - could be rebated to poorer households and stave off adverse health effects. More generally, I would argue that fossil fuel subsidies is an inefficient poverty alleviation measure, at best second-best (excuse the pun).