Here’s How Fuel Subsidies Burden Both the Rich and the Poor

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I have posted frequently (most recently in a three-part series that starts here) on the topic of underpricing of energy in the United States, but we are not the only offender. Many countries around the world subsidize consumer energy prices in ways that bring them to levels even lower than what U.S. consumers pay. These policies burden the rich and the poor alike — rich countries like Saudi Arabia and poor ones like Egypt, and within each country, both rich and poor citizens.

Who subsidizes fuel prices and why?

Many countries around the world subsidize fuel prices. A recent IMF report divides the subsidies into two types. Pre-tax subsidies are those that reduce the cost of energy to consumers to a level below the world price, adjusted for transportation costs. Government budgets sometimes record such subsidies explicitly and sometimes hide them, for example as losses of state-owned enterprises, accumulation of payment arrears, or in other ways. Post-tax subsidies include all policies that hold the after-tax price of energy below the level consistent with efficient taxation.

The IMF defines efficient taxation as a system that applies uniform rates of consumer taxes like VAT across all goods, and also includes compensatory taxes to reflect externalities of energy use. Except for a note at the end, this post is concerned primarily with pre-tax subsidies. Also, although the prices often extend to electricity and industrial energy, what follows will focus on consumer prices for petroleum products.

The following table, excerpted from Appendix Table 2 in the IMF study, shows pre-tax subsidies for a representative sample of countries. Subsidizers include wealthy countries like Saudi Arabia, poor ones like Yemen, and many in between. Oil exporters are especially prominent on the list, but there are importers there as well. Some, like Indonesia and Egypt, are former exporters turned importers. At the same time, some major exporters engage in little or no subsidization, Russia and the United Arab Emirates being notable examples.

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