The International Monetary Fund (IMF) released a report this week that urges governments, including the U.S. government, to reform their energy subsidies substantially. In its report “Energy Subsidy Reform: Lessons and Implications,” [link opens PDF] the IMF says that while subsidies are meant to protect consumers, they have significantly negative consequences that ultimately hurt those same consumers.

The report says that subsidies “distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources.” The IMF highlights further negative effects, including aggravated financial inequality and depressed private investment.

The report identifies the U.S. among the top three subsidizers across the world, in absolute terms, at $502 billion. China ($279 billion) and Russia ($116 billion) round out the list. In advanced economies like that of the U.S., the report finds that “prices remain below the levels needed to fully capture the negative externalities of energy consumption on the environment, public health, and traffic congestion.”

Among its reform recommendations, the IMF urges governments to phase in energy price increases across energy products, and to implement institutional reforms that depoliticize energy pricing, such as automatic pricing mechanisms. The report is dated Jan. 28 but was released this week.

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