Coal accounts for the largest subsidy, due to its high environmental damage.

Fossil fuels are being subsidised by an estimated US$5.3 trillion (AU$6.63 trillion) a year globally, according to a new report from the International Monetary Fund.

The IMF working paper, How Large Are Global Energy Subsidies?, found that the majority of subsidy was due to “failure to adequately charge of the cost of domestic environmental damage”.

Climate change only comprised one quarter of the environmental costs, the IMF report found, “so unilateral reform of energy subsidies is mostly in countries’ own interests, although global coordination could strengthen such efforts.”

Vitor Gaspar, IMF head of fiscal affairs, said the estimates were “shocking”.

“Energy prices remain woefully below levels that reflect their true costs,” he said.

Lead report author David Coady said the numbers had to be rechecked when they were first arrived at.

However, he said it was indeed “the true cost associated with fossil fuel subsidies”.

Coal accounted for the largest subsidy, due to its high environmental damage and because “no country imposes meaningful excises on its consumption”.

The report found that eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global carbon emissions by over 20 per cent, and cut premature air pollution deaths by more than half.

Money raised from the correct pricing of energy could be directed to “productive public spending like health, education and infrastructure.

“After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP),” the report said.

“[U]sing the fiscal dividend from energy subsidy reform to lower distortionary taxes or increase productive public spending could generate further substantial improvements in welfare and economic growth.”

“This very important analysis shatters the myth that fossil fuels are cheap by showing just how huge their real costs are,” London School of Economics Professor Nicholas Stern told The Guardian.

“There is no justification for these enormous subsidies for fossil fuels, which distort markets and damages economies, particularly in poorer countries.”