Ian Parry

How Large are Global Energy Subsidies

This paper provides a comprehensive, updated picture of energy subsidies at the global and regional levels. It focuses on the broad notion of post-tax energy subsidies, which arise when consumer prices are below supply costs plus a tax to reflect environmental damage and an additional tax applied to all consumption goods to raise government revenues. Post-tax energy subsidies are dramatically higher than previously estimated, and are projected to remain high. These subsidies primarily reflect under-pricing from a domestic (rather than global) perspective, so even unilateral price reform is in countries’ own interests. The potential fiscal, environmental and welfare impacts of energy subsidy reform are substantial.

Getting energy prices right : from principle to practice

IMF economists work closely with member countries on a variety of issues. Their unique perspective on country experiences and best practices on global macroeconomic issues are often shared in the form of books on diverse topics such as cross-country comparisons, capacity building, macroeconomic policy, financial integration, and globalization.

Are Energy Efficiency Standards Justified

This paper develops an analytical framework for comparing the welfare effects of energy efficiency standards and pricing policies for reducing gasoline, electricity, and nationwide carbon emissions. The model is parameterized with US data and includes key externalities in the energy/transportation sectors and possible underinvestment in energy efficiency due to “misperceptions” over energy savings. Even with large misperceptions, the extra welfare gains from complementing efficient pricing policies with energy efficiency standards are zero for reducing gasoline and 5 percent for reducing electricity. And when viewed as substitutes, these standards forgo 60 percent or more of the potential welfare gains from corresponding pricing policies. A combination of energy efficiency and emissions standards is more than three times as costly as carbon pricing when there is no misperception over energy savings, and even with large misperceptions, combining carbon pricing with gasoline/electricity taxes is better than combining it with energy efficiency standards.

How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits

This paper calculates, for the top 20 emitting countries, how much pricing of carbon dioxide (CO2) emissions would be in their own national interests due to domestic co-benefits (leaving aside the global climate benefits). On average, second-best domestic prices are substantial,

A Second-Best Analysis of Environmental Subsidies

57.5 per ton of CO2 (for year 2010), reflecting primarily health co-benefits from reduced air pollution at coal plants and, in some cases, reductions in automobile externalities net of fuel taxes/subsidies. Pricing co-benefits reduces CO2 emissions from the top 20 emitters by 13.5%. However, co-benefits vary dramatically across countries (e.g., with population exposure to pollution) and differentiated pricing of CO2 emissions therefore yields higher net benefits (by 23%) than uniform pricing. Importantly, the efficiency case for pricing carbon’s co-benefits hinges critically on weak prospects (for the foreseeable future) for comprehensive internalization of other externalities through other (more efficient) pricing instruments.

International fuel tax assessment: an application to Chile

This paper examines the complications posed by pre-existing tax distortions in the economy, for the evaluation of a variety of subsidy policies that affect the environment. These complications include not only the efficiency cost of financing the subsidy by distortionary taxation, but also the interaction effects between the subsidized market and markets with pre-existing taxes. Studies that ignore both of these effects, or only incorporate the first type of effect, can be highly misleading.

On the implications of technological innovation for environmental policy

Gasoline and diesel fuel are heavily taxed in many developed and some emerging and developing countries. Outside the United States and Europe, however, there has been little attempt to quantify the external costs of vehicle use, so policy makers lack guidance on whether prevailing tax rates are economically efficient. This paper develops a general approach for estimating motor vehicle externalities, and hence corrective taxes on gasoline and diesel, based on pooling local data with extrapolations from US evidence. The analysis is illustrated for the case of Chile, although it could be applied to other countries.

Fiscal policy to mitigate climate change : a guide for policymakers

This paper draws on a number of recent studies to shed light on several policy issues raised by the impact of environmental policies on technological innovation. First, to what extent does induced innovation raise the overall net benefits to society from environmental policies? Second, how does induced innovation affect the appropriate choice among alternative environmental policy instruments? Third, how does it affect the optimal stringency of environmental regulations? Fourth, should environmental policies be supplemented with additional policies to promote innovation, such as research contracts or prizes for new technologies?

Tax Deductions and the Marginal Welfare Cost of Taxation

Efforts to control atmospheric accumulations of greenhouse gases that threaten to heat up the planet are in their infancy. Although the IMF is not an environmental organisation, environmental issues matter for the organisations mission when they have major implications for macroeconomic performance and fiscal policy. Climate change clearly passes both these tests. This volume provides practical guidelines for the design of fiscal policies (carbon taxes and emissions trading systems with allowance auctions) to reduce greenhouse gases. Not only are these instruments potentially the most effective at exploiting emission reduction opportunities in the near and longer term, but they can also generate for many countries a valuable new source of government revenue. The chapters, written by leading experts, explain the case for fiscal policies over other approaches; how these policies can be implemented; reasonable levels for emissions prices; policies for the forest sector; appropriate policy for developing countries; the most promising fiscal instruments for climate finance; and lessons to be drawn from prior policy experience. This is essential reading for policymakers in finance and environment ministries in developed and developing countries alike, and others grappling with balancing environmental and development concerns.

Environmental Tax Reform : Principles from Theory and Practice to Date

Recent work emphasizes the efficiency costs of tax deductions that distort the pattern of household spending. Using evidence on the sensitivity of taxable income to tax rates, this work suggests that the marginal welfare cost (MWC) of income taxes in the United States could be dramatically higher because of tax deductions, and might exceed unity. This paper develops an alternative approach for assessing the MWC using evidence on underlying parameters (e.g., labor supply elasticities, the demand elasticity for tax-favored goods). A MWC of around 0.3 to 0.5 seems more consistent with these parameter values, though this estimate is still significantly higher because of tax deductions.