Fuel Subsidies Are a Preferential Tax Treatment

June 10, 2010 International Tax Cooperation

Warmth for Helsinki, Warmth for the planetAccording to the OECD, fuel subsidies are a form of preferential tax treatment and need to be addressed by Governments worldwide. The phasing out of worldwide fuel subsidies would be a cost-effective measure to meet environmental protection targets set out during the UN climate conference in Copenhagen.

On June 9th the Organization for Economic Cooperation and Development (OECD) released a statement regarding an analysis of new fuel use and fuel subsidy data released by the International Energy Agency (IEA). According to the OECD, a new international initiative to phase out global fuel subsidies would reduce greenhouse gas emissions by 10 percent by 2050.

The OECD stated that fuel subsides currently take the form of preferential tax treatment of oil, gas and fuel production sectors. Numerous governments worldwide have also instituted tax exemptions on sector-specific fuel use, like diesel fuel use in mining, agriculture and fisheries. It was estimated that OECD-member nations currently provide USD 8 billion in fuel tax exemptions for farmers, and an additional USD 1.1 billion for the fishing industry.

The OECD criticized the tax treatment of fuel and oil production, saying that the measures were inefficient on several counts. Angel Gurría, OECD Secretary-General, claimed that Governments worldwide are encouraging the production of greenhouse gases through preferential tax treatments while at the same time using national finances to promote the use of “green energy”. The dual standard is a grossly inefficient use of tax revenues. Additionally, tax-based fuel consumption and production subsidies in poor countries are inefficient at achieving a betterment of the economy and the population. The OECD claimed that consumption subsidies are more likely to benefit the rich, as low-wage workers in developing economies often cannot afford cars.

The OECD admitted that fuel subsidy reforms are a politically challenging task. Key elements to a successful round of reforms for any nation would include a gradual phase-out out of subsidies, advance announcement of the plans, and adequate public awareness campaigns.

Photo by melancholic optimist

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