IMF calls on countries to cut back on tax breaks, subsidies given to oil companies

Sep 20, 2023 ExxonMobil, News, Oil & Gas

* as fossil fuel concessions surged to record US$7 trillion

* says scaling back would prevent 1.6 million premature deaths annually, raise government revenues by US$4.4 trillion

Kaieteur News – Fossil-fuel subsidies surged to a record US$7 trillion last year and the International Monetary Fund (IMF) is urging countries to cut back on these concessions. In a new report released late last month titled” IMF Fossil Fuel Subsidies Data: 2023 Update” the bank said as the world struggles to restrict global warming to 1.5 degrees Celsius and parts of Asia, Europe and the United States swelter in extreme heat, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent), the IMF said in the article written by its staff Simon Black, Ian Parry, and Nate Vernon.

The report comes amid a local fight for the Guyana Government to get US oil giant, ExxonMobil to pay its fair share of taxes. Guyana foregoes billions in taxes to the oil major annually due to a lopsided contract it signed with the company back in 2016. In the article, the IMF said its findings come as the World Meteorological Organization says July was the hottest month on record, underscoring the urgent need to curb human-induced climate change. According to the IMF, fuel subsidies rose by US$2 trillion over the past two years as explicit subsidies (undercharging for supply costs) more than doubled to US$1.3 trillion. “That’s according to our newspaper, which provides updated estimates across 170 countries of explicit and implicit subsidies (undercharging for environmental costs and forgone consumption taxes).

TAX BREAKS

While Guyana received a meagre US$94.5 million in 2022 as royalty for its sweet light crude in the Stabroek Block, the country gave away US$290 million in taxes to multinational oil corporation, ExxonMobil. When the country signed the lopsided Production Sharing Agreement (PSA) with the oil company in 2016, it agreed to pay the taxes on behalf of the Stabroek Block partners. This means that not only did Guyana pay taxes for Exxon, but it also paid taxes on behalf of Hess Corporation and CNOOC. Publisher of Kaieteur News, Glenn Lall had challenged this concession, but High Court Judge, Nareshwar Harnanan earlier this year threw out the case affirming the legality of the government’s decision to hand extensive tax waivers to ExxonMobil and its affiliates.

In his application, Mr. Lall had contended among other things, that many of the provisions listed under Article 15.1 of the Petroleum Agreement, dated June 27, 2016 between the GOG and the oil companies, grant exemptions to persons other than licensees, which violate the Petroleum Exploration and Production Act (PEPA), and the Financial Administration (and Audit) Act. Lall had specifically flagged paragraph 2 of Article 15.10 of the Agreement which states: “Notwithstanding any provision to the contrary in this Article, Affiliated Companies or Non-Resident Sub-Contractors shall not be subject to the provisions of the Income Tax Act (Cap 81:01) and Corporation Tax Act of Guyana (Cap 81:03) during the expiration period on income earned in Guyana for any given tax year if the affiliated company or non-resident Sub-Contractors has conducted business for one hundred eighty-three (183) days or less on a cumulative basis in the tax year of assessment.”

As such, the newspaper publisher had requested declarations from the Court that the provisions are unlawful, null and void, and of no legal effect. However, Justice Harnanan said the minister is vested with the power under Section 51 of the PEPA and the Petroleum (Exploration and Production) (Tax laws) to grant EEPGL, CNOOC Nexen Petroleum Guyana Limited, and Hess Guyana Exploration Limited, all companies that are parties to the case, concessions of extensive tax exemptions.

ENORMOUS ENVIRONMENTAL COSTS

Meanwhile, the IMF said consuming fossil fuels imposes enormous environmental costs—mostly from local air pollution and damage from global warming. It said the vast majority of subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel.

“Our analysis shows that consumers did not pay for over US$5 trillion of environmental costs last year. This number would be almost doubled if damage to the climate was valued at levels found in a recent study published in the scientific journal Nature instead of our baseline assumption that global warming costs are equal to the emissions price needed to meet Paris Agreement temperature goals,” the IMF article stated.

The IMF said these implicit subsidies are projected to grow as developing countries—which tend to have higher-polluting power plants, factories, and vehicles, along with dense populations living and working close to these pollution sources—increase their consumption of fossil fuels toward the levels of advanced economies. “If governments removed explicit subsidies and imposed corrective taxes, fuel prices would increase. This would lead firms and households to consider environmental costs when making consumption and investment decisions. The result would be cutting global carbon-dioxide emissions significantly, cleaner air, less lung and heart disease, and more fiscal space for governments,” the IMF article concluded. “We estimate that scrapping explicit and implicit fossil-fuel subsidies would prevent 1.6 million premature deaths annually, raise government revenues by US$4.4 trillion, and put emissions on track toward reaching global warming targets. It would also redistribute income as fuel subsidies benefit rich households more than poor ones.”

However, the IMF said removing fuel subsidies can be tricky, noting that governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package that underscore the benefits. It said a portion of the increased revenues should be used to compensate vulnerable households for higher energy prices. The remainder could be used to cut taxes on work and investment and fund public goods such as education, healthcare, and clean energy. With global energy prices receding and emissions rising, it’s the right time to phase out explicit and implicit fossil-fuel subsidies, for a healthier and more sustainable planet.