Reducing subsidies for coal, oil & co leads to greater prosperity

According to a study by the Center for European Economic Research (ZEW), reducing subsidies for fossil fuels such as coal, oil, and natural gas is worthwhile for countries. It could lead to greater prosperity and increased tax revenues – despite the burden of higher energy prices. The study was made available to the Reuters news agency in advance on Thursday.

Approximately one in three countries could achieve their climate targets without additional measures such as carbon pricing – including emerging economies such as China, India, and Indonesia. Industrialized countries such as Germany, the USA, Japan, and the United Kingdom could also achieve around a third of their climate targets in this way. This would make economic, fiscal, and climate policy goals more compatible than previously assumed.

Climate-damaging subsidies in Austria amount to up to 5.7 billion euros annually

Austria is not included in the study. According to a 2022 analysis by the Economic Research Institute Wifo, the Austrian government awarded between 4.1 and 5.7 billion euros annually in climate-damaging subsidies between 2016 and 2020. Among the highest (indirect) fossil fuel subsidies in Austria are the commuter allowance and the diesel privilege.

The abolition of subsidies on fossil fuels “would increase welfare for virtually all countries, generate considerable additional fiscal revenue and significantly reduce the economic costs of achieving climate targets,” is the conclusion of the study by Sebastian Rausch, head of the ZEW Research Department of Environmental and Climate Economics and co-author of the study.

The savings on subsidies and revenues from pricing external costs of fossil energy use – such as health costs – would provide countries with significant fiscal resources. On average, they could generate tax revenues of 4.9 percent of total consumption. Estimates range from 1.8 percent to 16.2 percent, depending on the region. Furthermore, countries would have to pay for less environmental and health damage. Furthermore, significant additional economic costs from advancing climate change could be prevented. This could offset the economic consequences of higher energy prices, the study concludes.

A third less emissions possible

"Many countries continue to contribute to ensuring that fossil fuels remain affordable for consumers," said Rausch. "For example, they cover part of the costs of energy supply through explicit subsidies, or they exclude the external health costs associated with the use of fossil fuels from the price through implicit subsidies."

To date, subsidies for fossil fuels are among the most frequently used government energy measures. The study authors cite figures from the International Monetary Fund (IMF), which estimate that global direct subsidies amount to approximately 1.3 percent of gross global product. Indirect subsidies—which arise because the external costs of fossil fuel use are not factored in—account for as much as 5.8 percent. In total, this amounts to almost six trillion US dollars worldwide, according to the ZEW.

"Eliminating explicit subsidies, such as tax exemptions on kerosene or gas price caps, would have only a limited impact on CO2 emissions," said ZEW researcher Tim Kalmey. "It is crucial that the external costs of fossil fuels, i.e., the harmful health effects of local air pollution, are also priced in." ZEW estimates that this would reduce global CO2 emissions by 32 percent.

APA/Reuters