Implicit costs, explicit profits

Climate change is a classic problem of public goods: the costs of reducing emissions are incurred locally, the benefits are distributed globally. This asymmetry makes international cooperation more difficult and encourages the adherence to fossil fuels, which in many places are supported by explicit and implicit subsidies. In 2022, these subsidies amounted to around $7 trillion globally, of which 82 percent were implicit components. Its abolition is considered a key measure to combine economic, health and climate policy goals, but remains politically controversial. The discussion paper "The Welfare Effects of Explicit and Implicit Subsidies on Fossil Fuels" by ZEW - Leibniz Centre for European Economic Research uses a multi-regional, multi-sectoral general equilibrium model to examine the welfare effects of the abolition of such subsidies and the introduction of local Pigou prices, which internalise the externalities.