World fossil fuel subsidies and global carbon emissions

Larsen and Shah present evidence on the level of fossil fuel subsidies and their implications for carbon dioxide emissions. They conclude that substantial fossil fuel subsidies prevail in a handful of large, carbon-emitting countries. Removing such subsidies could substantially reduce national carbon emissions in some countries. Global carbon emissions could be reduced by 9 percent, assuming no change in world fossil fuel prices, and by 5 percent when accounting for estimated changes in world prices. Larsen and Shah estimate world energy subsidies to be more than US$230 billion. The welfare costs of these subsidies are more than US$20 billion, not including the cost of greenhouse gas and local pollution from fossil fuel consumption. Net fossil fuel importers in Japan, the United States, and Western Europe are estimated to experience welfare gains of about US$14 billion, while welfare effects would be negative in exporting countries in the event of a dampening effect on world fossil fuel prices associated with the removal of subsidies. Eliminating these subsidies would translate into an average 21 percent reduction in carbon emissions in the subsidizing countries, or 20 percent of OECD emissions. To achieve an equivalent reduction in tons of emissions in the OECD countries would require imposing a carbon tax of $60-$70 per ton of carbon, even when accounting for estimated changes in world fossil fuel prices.