By Sanjeev Gupta and Michael Keen/iMF Blog

In their blog [link to blog], Ben Clements and Vitor Gaspar make the points that global energy subsidies are still very substantial, that there is a strong need for reform in many countries, and that now is a great time to do it. This log sets out what we mean by “energy subsidies,” provides details on their estimation, and explains how they continue to be high despite the recent drop in international energy prices.

Our latest update of global energy subsidies shows that “pre-tax” subsidies—which occur when people and businesses pay less than it costs to supply the energy—are smaller than a few years back. But “post-tax” subsidies—which add to pre-tax subsidies an amount that reflects the environmental, health and other damage that energy use causes and the benefit from favorable VAT or sales tax treatment—remain extremely high, and indeed are now well above our previous estimates.
While pre-tax subsidies have fallen, the efficiency costs of failing to charge for environmental and other damage and secure a contribution to revenues are even larger than we previously thought. So the urgent need for energy price reform—in a wide range of both advanced and developing countries—remains. Low international oil prices have not made the problem go away. But they provide a great opportunity to move towards more efficient pricing of energy.