A few days back the IMF (International Monetary Fund) released a document called "How Large Are Global Energy Subsidies?" which is a nice title for a political piece destined to demonize fossil fuel subsidies throughout the world.

LET'S CLARIFY

Yes, the IMF is recommending cancelling large subsidies. As you can imagine, the concept of an international organization proposing such cancellations, the goal of such organization being to lend money to ensure socialist governments keep going (i.e. all governments throughout the world), is bizarre to say the least. As a matter of fact, what they are saying is the following:

Energy subsidies damage the environment, causing more premature deaths through local air pollution, exacerbating congestion and other adverse side effects of vehicle use, and increasing atmospheric greenhouse gas concentrations.

Energy subsidies impose large fiscal costs, which need to be financed by some combination of higher public debt, higher tax burdens, and crowding out of potentially productive public spending (for example, on health, education, and infrastructure), all of which can be a drag on economic growth.

Energy subsidies discourage needed investments in energy efficiency, renewables, and energy infrastructure, and increase the vulnerability of countries to volatile international energy prices.

Energy subsidies are a highly inefficient way to provide support to low-income households since most of the benefits from energy subsidies are typically captured by rich households.

Which is shocking because they are actually very much correct. All of it! Has the IMF gone mad?

THERE IS METHOD IN THEIR MADNESS

No. Not really. They have not "gone postal" so to speak. Keep reading.

The data

The IMF distinguishes two types of subsidies: pre and post tax. They are defined as:

• Pre-Tax: subsidies are applied before the consumer buys the product; hence the final price is below the cost of supplying energy.
• Post-Tax: subsidies are applied during the consumption cycle, thus the final price is below the cost of supplying energy plus the environmental cost plus the burden of regular taxes.

Of course, the concept of pre or post tax subsidies is an artificial artifact in a free market (i.e. a "thing" that does not actually exist) which was created out of thin air simply because governments exist and thus they provide subsidies and impose taxes. But let's put this truth on the side and continue. The IMF says that the costs are:

• Pre-tax: about $5.3 trillion USD for 2015
• Post-tax: about $10.6 to $14.7 trillion USD for 2015

Which is a lot of money.

The solution

What the IMF proposes is to eliminate all post-tax subsidies. According to them, these would be the benefits:

• Government revenue raised by $2.9 trillion
• CO2 emissions cut by 20%
• Pre-mature air pollution deaths reduced by half
• Higher energy costs for consumers but a raise in the world GDP by $1.8 trillion USD.

The summary

From this perspective and taking IMF numbers at face value (a ridiculous concept, we know) everything would seem to be oh-so-reasonable. The government spends less, the government gets more "revenue" and there is an increase in health and wellbeing throughout the world. The only thing missing from this fairy tale is that we will all live happily ever after.

The goal

What is the goal of this sudden push? Simple. The goal is for the government of the USA to collect even more money. That's it. We must never forget that the IMF is a creature of the USA and as such it fully responds to its "natural hierarchical structures".

A DOSE OF REALITY

The IMF paper is quite full of numbers…they want to you see, but it is quite full of gaps… reflecting things they don't want you to see nor consider. Let's take a look at some of them.

Pre-Tax Subsidies

To begin with, the IMF is not recommending ending pre-tax subsidies… which is strange considering that they are in the order of 5.3 trillion USD. What this means is that despite all this negative propaganda, the money that corporations actually receive from the government will not change!!! At all!!!

Post-Tax Subsidies

The IMF recommends eliminating only post-tax subsidies. Why? To answer this question we need to understand what a post-tax subsidy actually means. Luckily enough, the IMF provides a very clear answer:

"Efficient energy prices are central to the definition of energy subsidies. The efficient consumer price for an energy product (for example, gasoline or coal) consists of three components: the cost of supplying the product to the consumer (or opportunity cost), a “Pigouvian” (or “corrective”) tax reflecting the environmental costs (or externalities) associated with energy consumption, and (less important) a consumption tax reflecting the need to tax all consumption to raise revenue. The efficient producer price for an energy supplier is simply the supply cost since efficient taxation requires that only final consumption by households is taxed."

What this means is that according to the IMF only consumption should be taxed, not production. Under the current system of subsidies, consumption (i.e. post-tax) as well as and production (i.e. pre-tax) are both subsidized.

But if governments would to approve the IMF initiative, the only subsidy that would disappear would be the consumption one! What this essentially means is that the government would continue to impose a "Pigouvian" tax plus a consumer tax on you, but this time without any discount, all the while continuing to provide actual money to producers!

The Hood-Robin effect

What this means is that in effect the IMF is proposing to steal from the poor and give to the rich! Of course, the paper does not present this fact in this fashion, because we must never forget that apparatchiks (all of them) never bite the hand that feeds them. Consequently, they provide us with fireworks graphs showing that if the proposal is to be accepted, there would be a "large redistribution of welfare" in terms of "losses in consumer surplus" versus "environmental benefits". In other words, yes, you would have a better environment (marginally) but your energy costs would skyrocket. And why would this be a "redistribution of welfare"? Because these high energy costs which provide slightly better environmental conditions would be paid by you and not by the producers! The fact that the energy lobby is one of the most powerful lobbies anywhere in the world (including Washington) and that their political contributions are one of the highest has absolutely nothing to do with it. No sir! Darn gossips and lies!

Eventually the paper writers reach an illuminating moment "This suggests that subsidy reform could potentially lead to a large redistribution of welfare, which may be why it has proven to be so difficult in practice." As they would say in my neighbourhood, no shit Sherlock!

The twisted logic

Allow us to summarize their logic. According to them, because energy is so artificially cheap (due to government subsidies), people are overusing it. This overuse creates addiction that governments need to keep fueling. Furthermore, this overuse creates large negative ecological impacts that people need to keep paying for (through taxes). Thus, by removing subsidies the prices of energetics will go up, people will use less, there will be less environmental damage leading to less taxation to correct it. However, as the price would skyrocket and subsidies would be removed, the government would collect more in taxes. That's about it.

This is a very nice fairy tale, but it does not wash. First at all and as we mentioned before, the only subsidies that would be removed would be the ones for consumers, not producers. Which means that people will continue to pay through taxes in order to have "cheaper" energetics (albeit more expensive than before). This will create a raise in prices, no doubt. However, energetics consumption is what economists call "inelastic". What this means is that to a large degree people simply cannot use less of them. It is not a matter of choice. Think about it. Whether gasoline is expensive or cheap, you still need to go to work, you still need to heat or cool your house, you still need to cook and so on. The same is valid for manufacturers. We don't even have to imagine what would happen since it did happen in the past in 1973 and 1979 during the Oil Embargo. In general terms, the price of gasoline quadrupled and consumption dropped by 20%... with a dramatic increase in the use of other energetics. In other words, people did pay 4 times more for a litre of gasoline and shifted to natural gas, coal, nuclear and conservation.

Yet, the IMF recommendation implies all energetics. If nations would to do so, there would be no alternative sources of energy which we could use to compensate. And yes, we are not ignoring the fact that solar and wind sources are becoming more and more economically viable, but, there are still many difficult problems. The most salient are:

• Many countries in the world do not have good conditions for solar nor wind generation.
• Solar or wind generation is extremely variable and often counter-trend. You can generate the most when you need it the least…as EU and UK discovered.
• In order to fix this problem we need high energy storage devices that are economical enough to store vast amounts of energy while plentiful and discharge it during peak utilization. Only problem is, we are not there yet. The technology necessary to be mass produced and deployed to achieve this is not yet available.

Furthermore, the economy world-wide dropped by anywhere between 2 to 3% GDP during said Oil Embargo years. Can you spell stagflation? We are just coming out from the 2008 debacle and into an incoming storm of massive proportions due to all QE "initiatives". Whether the economy is recovering or already heading into massive troubles is a matter of debate, but there are many troubling signs already present. Do you think that it is a good idea to push measures that will surely throw the world-wide economy into the deepest hole in history?

During the Oil Embargo prices quadrupled and so did tax revenues from energetics! Remember, consumer taxes were not decreased during the Oil Embargo nor does the IMF so recommend. Screw the people? That's right! This is reflected in the estimate increase of tax revenues of about $2.9 trillion USD.

And what about environmental benefits? Yes, there would be some but they would be limited. A cut in CO2 by 20% is meaningless in terms of global warming, even if you subscribe to the theory that CO2 is causing it. This is so because our atmosphere is oversaturated with CO2. In order to affect global warming we would need to get down to ZERO CO2 emissions for a number of decades just to begin to see some positive change. A measly 20% won't make much of a difference.

And what about particulate pollution? This would be "smog". This type of pollution causes premature death, there is no doubt about this. However, consider the following. According to the IMF there would be 50% less deaths due to this reduction in smog. Impressive, right? Yet, what is the price of all this decrease? Every time the availability of energetics decreases (or its price rises) many goods and services become unavailable due to either supply shortage or price raise. Many said goods and services are actually critical for the survival of people, such as food, medications and hospital services. Most countries in the world are already operating on the edge of what they can afford in terms of food production, medicines and medical care! How many deaths do you think such a raise in price will cause? A lot? Absolutely! However, we won't know because the IMF did not bother calculating it or estimating it. What a coincidence…

So the IMF logic comes down to this: cut salaries to consumers and let them deal with the consequences because whatever happens, tax revenues will be increased. Does this sound something you would like? Of course not!

Note: please see the Glossary if you are unfamiliar with certain words.