There is now unprecedented worldwide interest in the reform of fossil fuel pricing, reflecting several underlying factors. 1 First, reducing carbon dioxide (CO 2 ) emissions from fossil fuels is central to greenhouse gas (GHG) mitigation commitments submitted by 190 countries for the 2015 Paris Agreement. Second, many countries are concerned about dangerously high local air pollution concentrations that frequently exceed (often dramatically so) World Health Organization (WHO) guidelines, and much of this pollution comes from fossil fuel combustion. Third, in the aftermath of the financial crisis, many countries face growing fiscal pressures from rising debt levels, which are likely to be reinforced over the medium to longer term by spending pressures from ageing populations (especially in advanced economies) and financing needs for the Sustainable Development Goals (especially in developing economies). Increasing fossil fuel prices is administratively straightforward and could play the central role in addressing all three concerns.
Information on the gap between existing and efficient levels of fossil fuel prices is a key ingredient of an informed debate on the need for, and benefits of, fuel pricing reform. It provides a basis for understanding the environmental, fiscal, and economic welfare impacts of moving to more efficient pricing, the likely social and political challenges, and a benchmark against which alternative policies (e.g., less ambitious fuel pricing or the use of non-pricing instruments) can be evaluated. This helps policymakers understand trade-offs, prioritize reforms, understand differences across countries, and communicate the case for reform. Download IMF PDF