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Petroleum Product Subsidies: Costly, Inequitable , and Rising

David Coady, Robert Gillingham, Rolando Ossowski, John Piotrowski, Shamsuddin Tareq, and Justin Tyson

INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

Product Subsidies: Costly, Inequitable, and Rising1

Prepared by David Coady, Robert Gillingham, Rolando Ossowski, John Piotrowski, Shamsuddin Tareq, and Justin Tyson

Authorized for distribution by Carlo Cottarelli

February 25, 2010

DISCLAIMER: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.

Executive summary

Petroleum product subsidies have again started to rise with the rebound in international prices. This note reviews recent developments in subsidy levels and argues that it is necessary to reform the policy framework for setting petroleum product prices in order to reduce the fiscal burden of these subsidies and to address climate change. In 2003, global consumer subsidies for petroleum products totaled nearly $60 billion. They are projected to reach almost $250 billion in 2010. Tax-inclusive subsidies, reflecting suboptimal taxation, are estimated to be much larger—$740 billion in 2010, or 1 percent of global GDP. G-20 countries account for over 70 percent of tax-inclusive subsidies, with emerging G-20 countries accounting for a sizable share. Halving tax-inclusive subsidies could reduce projected fiscal deficits by one-sixth in subsidizing countries and could reduce greenhouse emissions by around 15 percent over the long run. Subsidy reform strategies should contain measures to mitigate the impact of higher prices on the poorest groups.

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