Consumers aren't paying nearly enough for their energy, and that's a massive problem for the planet.
Big Middle Eastern oil exporters hold the price of gasoline within their countries well below what it should be. Ukraine does the same with natural gas. In sub-Saharan Africa, electricity prices are artificially lowered. The United States isn't the worst actor -- but it, too, is far from clean. In the most thorough accounting yet of what people pay for their electricity, petroleum, natural gas and coal, the International Monetary Fund (IMF) just found that virtually every country in the world engages in this kind of corrupt economic distortion, at a staggering cost of $2 trillion in 2011.
How is that possible? Partly because the IMF didn't look just at explicit supports listed in government budgets. Its economists also factored in what policymakers are refusing to do. Burning fossil fuels produces a range of negative side effects, such as pollution. The only economically rational response is to build those costs into the price of energy through an efficient tax. Governments that refuse to levy such a tax -- the U.S.'s and many others -- are in effect asking many to suffer in order to prop up the over-consumption of some. Economically, the effect is identical to more familiar forms of subsidy.
Despite the popularity of many energy-subsidy schemes, the net result is a big drag on world prosperity. Government policies that make prices artificially low encourage people to use too much energy, resulting in pollution that dirties local environments, congested streets and global warming. At the same time, subsidies distort investment; instead of allowing capital to flow to where it would do the most good, they push it toward fossil-fuel production -- and away from enterprises that would more usefully employ some of the money, such as clean energy. Supports also hurt government budgets by diverting resources away from worthier state spending. And they disproportionately benefit the wealthy.
Every country in the world would benefit from the honest pricing of energy. The Group of Eight recognized this in its summit at Camp David last year, when its member countries recommitted to eliminating fossil-fuel supports. Yet the Obama administration has resisted pressing for a carbon tax, and Congress is even worse. Developed economies, meanwhile, can't be the only ones to move. Developing nations in the Middle East, Asia and Latin America spend more than advanced countries do, the IMF reckons. Broadly applied reform would neutralize concerns that manufacturers will unduly suffer in countries trying to do the right thing. It would also result in some serious environmental benefits, reducing global carbon dioxide emissions by 13 per cent.
Active U.S. leadership will be necessary. The United States must show that it is willing to put a charge on carbon dioxide emissions so that the price of energy in the United States better reflects its true cost. As it does so, it will be in a stronger position to press others to make the obvious reforms.