Essays in Honor of Roy Bahl
Studies in Fiscal Federalism and State–local Finance series
Edited by Richard M. Bird and Jorge Martinez-Vazquez
Chapter 8: Reforming subsidies for fossil fuel consumption: Killing several birds with one stone
Many developing countries subsidize uneconomic activities. Besides distorting the allocation of resources, subsidies squander scarce public funds, aggravating the problem of revenue mobilization. Governments of developing countries could pick low-hanging revenue fruit by eliminating uneconomic subsidies.Subsidies for the consumption of fossil fuel are especially wasteful. In addition to the negative impacts on resource allocation and public finances mentioned above, they fritter away foreign exchange, complicate demand management, aggravate energy insecurity, and encourage traffic congestion and air pollution. In addition to these undesirable effects, which, with the exception of some forms of air pollution, affect primarily the country subsidizing fuel consumption, these subsidies encourage the emission of CO2, the most plentiful greenhouse gas (GHG) thought to be responsible for climate change. Because climate change is a global problem, Annex 1 signatories of the Kyoto Protocol (essentially advanced countries and some countries in transition from socialism) pledged: Progressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention and application of market instruments. In September 2009, leaders of the Group of Twenty (G-20) largest industrialized and developing economies, in a bid to advance their energy security and climate change agendas, made a non-binding commitment “to rationalize and phase out over the medium term inefficient fossil-fuel subsidies that encourage wasteful consumption.”
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