Underpriced and Overused

This paper provides a bi-annual assessment of efficient fossil fuel prices and subsidies for 170 countries, based on a comprehensive analysis of environmental and other externalities from fuel consumption. Globally, explicit (or fiscal) subsidies were 725 billion (0. 6 percent of GDP) in 2024. Implicit subsidies, primarily underpricing of environmental costs, were 6. 7 trillion (5. 8 percent of GDP), with three quarters from underpriced air pollution and climate change. * Relative to GDP, explicit subsidies have stablized at pre-COVID levels while implicit subidies have increased somewhat and are expected to rise gradually until 2035. Explicit subsidy removal would reduce CO2 emissions by six percent below baseline levels in 2035, avoid 70, 000 premature air pollution deaths annually, raise 0. 6 percent of GDP in government revenue, and generate net economic benefits worth 0. 5 percent of GDP. Removal of both explicit and implicit subsidies (through corrective taxes) generates substantially larger benefits, such as 1. 1 million fewer premature air pollution deaths and a 46 percent reduction in CO2 emissions, but would be politically difficult. Subsidizing fuels is an inefficient way to support low-income households: for every dollar spent on explicit fuel subsidies, the poorest 20 percent of households receive just 8 cents.