By contrast, “implicit” subsidies are defined as “under-charging” producers for the environmental costs they generate from their exploration and production activities and consumers for perceived environmental costs not adequately covered by various consumption taxes . So when, for instance, a country fails to impose a consumption tax high enough to cover the perceived costs to society of climate change, congestion or local pollution, the paper would classify that as a subsidy.
The working paper indicates that explicit global subsidies were US$450 billion in 2020, or six per cent of the total. Most of these are actually so-called tax expenditures: tax credits or deductions for investments in high-risk exploration and development activities, similar to those provided to firms in other sectors of the economy.
That leaves the 94 per cent of subsidies that were what the paper refers to as “externalities.” Let’s be clear. Externalities are not subsidies. They are a cost or benefit of an economic activity that affects a third party not directly related to that activity. The cost is not always evident, nor is it clear by what mechanisms such costs and benefits should be shared.
The vast majority of what the paper calls “subsidies” thus relate to charges not imposed for the harmful external effects of consuming fossil fuels, especially in oil-producing countries that choose to impose lower excise and sales taxes on gasoline and other fuels. The paper finds that East Asia and the Pacific regions account for almost half of total global energy subsidies. In effect, the report concludes that the prices of energy should be substantially raised for the world’s poor.
The paper did not explain how it calculated Canada’s 2020 subsidies to fossil fuels but, given its general analysis, one can only assume it was based on the judgment that fossil fuel costs to consumers were not high enough. But in 2018, total taxes on gasoline alone were roughly $24 billion. One has to wonder how the IMF’s math figures that this, and the more recent increases in carbon taxes, still constitute under-charging for externalities.
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