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The IMF’s “shocking” estimate of fossil fuel costs: There’s more to the story

Sajai Jose

Credit: CGP Grey/Flickr, CC-BY 2.0
Credit: CGP Grey/FlickrCC-BY 2.0

Recently, when an International Monetary Fund research paper revealed that the actual cost of fossil fuel usage for 2015 was a staggering US$ 5.3 trillion (approx. 340 lakh crore rupees), it made headlines worldwide, though it went largely unreported in India.

What accounts for the bulk of this figure are the hidden costs of fossil fuel use – referred to as ‘externalities’ in economics – calculated in monetary value. Most of it consists of damages inflicted by fossil fuel use on public health (for eg. deaths from air pollution) and the environment (global warming).

Referring to the findings as “shocking”, the IMF calculates that the amount equals 6.5% of world GDP, and “likely greater” than the health budget of governments worldwide for the year. The IMF labels the entire amount as ‘energy subsidies’, though actual government subsidies for fossil fuels form only a fraction of it, at US$333 billion. Source: International Monetary Fund

Source: IMF

According to the IMF paper, China outweighs other nations with a $2.3tn contribution to fossil fuel costs. At $277bn, India is ranked fourth, after the United States ($700bn) and Russia ($335bn), and is followed by Japan ($157bn) and the European Union ($330bn).

The paper highlights some important trends. For example, health costs associated with local pollution still accounts for the biggest share, even more than global warming. A related trend shows that coal – by far the most polluting of fossil fuels – gets the least in terms of government subsidies, but accounts for the largest share of hidden costs.

Source: International Monetary FundSource: International Monetary FundUnderlining the significance of these findings, Dr. Bhamy V. Shenoy, oil industry veteran and former senior advisor to the Center for Energy Economics, University of Texas, says, “These numbers show us that if actual costs are counted, fossil fuels will be far more expensive than renewables – and that is the biggest argument against their continued use.”

The IMF paper calls for governments to remove fossil fuel subsidies altogether, and also raise prices to cover some of the hidden costs.

A closer look at the IMF’s numbers
However, a closer look reveal several problems with the paper’s methodology. For example, calculating fossil fuel costs nation-wise in a global economy doesn’t make much sense. So, while we learn that China accounts for most hidden costs, the fact that it also produces half the world’s steel and cement, apart from consumer goods, is not mentioned.

In response to a query, IMF staffer and co-author of the paper Baoping Shang justified this, saying they have provided national figures because energy prices are set by individual governments. He also points out that the bulk of the costs – for eg. Air pollution is the biggest – are local. But invariably, such technicalities tend to get ignored in the media frenzy to apportion blame.

Likewise, the same costs calculated per capita would give a more accurate picture; still more so if calculated separately for different income groups. Shang admits that “it would be useful to present some results in per capita terms,” but justifies the analysis saying that the intention was to present “the magnitude of the energy subsidies.”

Also, the larger question of historical costs, whether in terms of official subsidies or hidden costs, is not mentioned at all. The fact is that accounting for these factors would make for a much more accurate (and very different picture) of who is responsible for fossil fuel costs.

What the experts say
Experts this reporter spoke to called attention to other aspects of the issue. For Sagar Dhara of Hyderabad-based energy and environment think-tank Cerana Foundation, the main issue was the timing. “For at least two decades, environmentalists have been urging agencies like the IMF to factor in the true costs of economic decisions to cover environmental and social impacts. If the IMF has woken up only now, there’s a reason to it,” he says.

Dhara elaborates, “We are about to witness a breakthrough for renewables, with wind power almost matching fossil fuels in price, and solar PV fast catching up. Many governments, including India, are actively promoting renewable energy. The IMF, which has funded coal power for many decades, has sensed which way the wind is blowing, and my guess is that they are signaling a shift in their funding pattern with this report.”

Mihir Mathur, an Associate Fellow at TERI’s Earth Science and Climate Change Division, is skeptical about a key claim in the paper – that removing subsidies lead to large fiscal gains for governments. “This tells only half the story: under/un-employment due to slowing down of the economy could create other economic losses which can easily offset this,” he says.

Mathur also points to a larger problem with the IMF’s analysis, “It doesn’t acknowledge non linear feedback loops between environment, resources and economic and social systems, which can often produce counterintuitive results.” This, he says, underlines the difficulty involved in modeling complex systems like the global economy and environment, adding, “At best we can have a qualitative sense of the dynamics and hope like hell that we are right.”

Dr. Shenoy, who has consistently advocated against fuel subsidies in India, finds the IMF’s use of the term ‘subsidy’ to denote both ‘true costs’ and consumer subsidies for fossil fuels misleading. “It makes people think that these huge sums are going to the fossil fuel industry as profits, when that’s far from the case,” he says, adding, “They have also downplayed the fact that ultimately it is citizens who must pay, including for remedial measures for climate change and pollution-related health.”

The IMF and subsidies: a checkered past
According to IMF’s Shang, they used the term ‘subsidy’ since  true costs of fossil fuel consumption are “not borne by consumers of energy but instead by the society”, and therefore society is “subsidizing” it. But this unusual usage of the term ‘subsidy’ is not merely a matter of terminology.

The IMF-World Bank-WTO triad have always advocated for removing subsidies in even essentials like food and fuel in developing nations. Be it in Asia, Africa, or the Middle East, it has a history of using pressure tactics and questionable statistics to persuade governments to implement this agenda. In 2014, the IMF put pressure on Pakistan to change from subsidized but relatively clean gas in favour of polluting, imported coal for its power generation.

The IMF, which virtually arm-twisted India into opening up its markets in 1991, has consistently argued against fuel subsidies here too, and successfully so. In 2013, the UPA 2 deregulated petrol prices and introduced the cash transfer scheme for LPG users in place of subsidized gas. In October 2014, the new Modi government, buoyed by the slump in crude oil prices, deregulated diesel.

Not surprisingly, the IMF paper singles India out for praise, its direct cash transfer scheme to replace subsidized LPG – one of the largest in the world – earning a special mention. This, despite the fact that the scheme remains controversial; with some critics even accusing it of being a stealth tactic to reduce subsidy values by leaving them at the mercy of inflation.

Viewing the IMF’s skewed analysis of fossil fuel costs against its history of aggressive advocacy against consumer energy subsidies, it is not unreasonable think of its latest findings as a new, if tangential attempt to further an old agenda.

A dogma in search of data?
In a recent article, Richard Heinberg of US-based energy think tank Post Carbon Institute identifies the key problem with the IMF’s estimate of fossil fuel costs. “Eliminating the local pollution and global climate impacts of our current energy regime will require policy makers to do the very thing they least want to do: curtail and reverse economic growth,” he writes.

Heinberg is pointing to the core dilemma faced by the IMF as an institution, as well as others who share its policy agenda: How to keep promoting a highly resource and energy-intensive economic model that thrives on perpetual growth, in the face of growing evidence of its pervasive negative effects?

The latest findings by the IMF indicate a planetary environmental and health crisis that calls for urgent collective action. But the agency neglects to mention that the startling evidence it has collected implicates above all the very economic agenda it has championed for decades. Instead, it has chosen to use the shock value of that evidence to advance that agenda.

Though dire, the IMF’s diagnosis is hardly new, and its prescription suspect. Given the track record of this particular physician, it’s best to take a second opinion.

(This article was first published by The Wire)

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About Sajai Jose,

Sajai Jose is a freelance writer and editor based in Bangalore. You can reach him at: sajaijose.poi@gmail.com