Overview of Subsidy Reform in
the APEC Region
APEC Technical Workshop on Fossil-Fuel
Subsidy Reform
Peter Wooders, Global Subsidies Initiative
18 October 2011
Global Subsidies Initiative (GSI)
• Established by the International Institute for
Sustainable Development (IISD) in 2005
• Purpose: to investigate and promote reform of
subsidies that have negative economic, social or
environmental impacts.
• Phase I (2006 – 2008): Biofuel subsidies
• Phase II (2009 – 2011): Fossil-fuel subsidies
• Phase III (2012 – 2014): Energy and Water
Project Overview
• Phasing out Fossil Fuel Subsidies to Reduce Waste
and Limit CO2 Emissions while Protecting the Poor
• July-November 2011
• IISD-GSI team, with associates
• US$80,000 including expenses
• Outputs
– Draft Outline Report (July 2011 – inc. Literature Review))
– Draft Final Report (October 2011 – inc. Case Examples)
– Final Report (November 2011)
Project Objectives
• assess where various economies stand
• document best practices
• [develop a] comparative analysis [which] will
provide a more comprehensive picture of where the
subsidies lie and of their costs and perceived benefits
• include [in the final report] a set of
recommendations for cost-effective capacity
building in this area for developing APEC
economies
Outline of this presentation
Get into the insights – background is in the reports
I.
Subsidies and their impacts
II. Reform strategies and experiences – the Reform
Framework
I. Subsidies and their Impacts
Types and Magnitudes of Subsidies
• Definitions exist and are not a barrier to reform
– GSI recommend use WTO ASCM; IEA good too
Government
revenue
foregone
Tax breaks and
special taxes
Tax expenditures: Tax expenditures are foregone tax revenues, due to
special exemptions, deductions, rate reductions, rebates, credits and
deferrals that reduce the amount of tax that would otherwise be payable.
Overall tax burden by industry: Marginal tax rates are lower than other
industry.
Exemptions from excise taxes/special taxes: excise taxes on fuels;
special targeted taxes on energy industry (e.g., based on environmental
concerns or "windfall" profits)
• Country-specific sources in addition to IEA
– Indonesia State Budget 2011 – US$15.1bn
– Mexican Ministry of Finance 2010 - US$2.07bn (price-gap)
Producer Subsidy data is limited
APEC economy
Australia
Main subsidy types included
Consumer and producer subsidies to energy – coal,
oil, gas and non-fossil – and transport
Mostly tax benefits for exploration, aviation and
other fuels, and company cars
Canada – Alberta, Subsidies for the exploration and production of oil
Saskatchewan,
and
Newfoundland
and Labrador
Indonesia
Subsidies for the exploration and production of oil
and gas
Malaysia
Subsidized gas for non-power sectors
Mexico
Tax and royalty subsidies for the Chicontepec oil
field
United States
Federal tax provisions for the exploration and
production of oil, gas and coal
Federal subsidies for fossil fuels
Subsidy Estimate
AU$ 10 billion
AU$ 8 billion
CA$ 2.84 billion
US$ 1.8 billion
US$ 5.36 billion
US$ 122-183 million
US$ 3.88 billion
US$ 49 billion
Breaking news! OECD Study, October 2011
Economy / Category
Australia
Support to coal
Support to petroleum
Diesel and Alternative Fuels Grants Scheme
Fuel Sales Grants Scheme
Queensland Fuel Subsidy Scheme
Western Australian Diesel Subsidy
Petroleum Products Freight Subsidy Scheme
Fuel Tax Credits
Reduced Excise Rate on Aviation Fuel
Exemption from Excise for 'Alternative Fuels'
Reduced Excise Rate on Heating Oil et al.
Jurisdiction
2009
2010p
AUD million, nominal
n.a.
n.a.
Federal
Federal
QLD
WA
Federal
Federal
Federal
Federal
Federal
n.a.
n.a.
28
9.44
n.a.
4 996.23
980
517.02
n.a.
n.a.
n.a.
n.a.
9.72
n.a.
4 996.23
1 000.00
536.53
n.a.
Is information on fiscal and economic
impacts enough for Ministry of Finance?
• Fiscal liability: Mexico x4 2007 to 2008 (to US$25bn)
• Economic inefficiencies: Oil price volatility issues
• Inflation: Bank of Thailand (2011) says +0.5-1% if
gasoline price stabilization removed
• Fuel shortages: e.g. Chinese refining scale back in 2008
• Investment: Pertamina (Indonesia) amongst companies
short of capital
• Fuel adulteration and corruption: 40% of kerosene to
black market in India? (Shenoy, 2010)
Economic impact modeling often not public
Federal/National
Alberta
Saskatchewan
GDP
GDP Oil Producers
Government Budget
0.0%
–4.8%
0.9%
–0.16%
–6.0%
4.8%
–0.14%
–1.2%
3.8%
Newfoundland
and Labrador
–0.10%
–0.3%
–0.2%
Net Oil Exports
(trade surplus)
Employment
–13.6%
–9.9%
–1.6%
1.0%
0.0%
0.4%
0.3%
0.0%
Sawyer, D., & Stiebert, S. (2010, November). Fossil Fuels – At What Cost?
Government support for upstream oil activities in three Canadian provinces:
Alberta, Saskatchewan, and Newfoundland and Labrador. Retrieved from
http://www.globalsubsidies.org/files/assets/ffs_awc_3canprovinces.pdf
Some environmental impact info. available
Region
Australia & New Zealand
Canada
China
Japan
Russia
United States
CO2 emissions from fuel combustion
All greenhouse gas emissions
2020
2050
2020
2050
2.1
8.3
1.2
3.4
1.7
5.5
1.3
3.7
-4.0
-15.7
-3.1
-11.8
1.6
10.8
1.4
8.7
-19.9
-41.3
-16.6
-34.6
1.2
7.5
1.0
6.1
Burniaux, J. M., Chateau, J., Dellink, R., Duval, R., & Jamet, S. (2009a). The
economics of climate change mitigation: how to build the necessary global
action in a cost-effective manner. OECD Economics Department Working
Papers. Retrieved from
http://www.oecd.org/officialdocuments/displaydocumentpdf/?cote=ECO/WKP(2
009)42&doclanguage=en
Consensus that subsidies highly inefficient
at reaching the poorest
• Lowest 40% get 15-20% (World Bank, 2009)
• Lowest 20% get 10%, highest 20% get 40% (IMF, 2007)
• Gasoline are the most regressive (Coady, 2010)
– Top 40% get 80% (Coady, 2010)
– LPG: top 40% get 70%
– Diesel: top 40% get 65%
• But – the poorer countries are, the better fuels like
kerosene are targeted towards them
– But – kerosene gets diverted (e.g. India)
Experience of same schemes can vary
• Promotion of LPG
– Indonesia scheme since 2007 considered a success
• Reduced consumption of subsidised kerosene from 9.9 to 2 million
kilolitres
• By providing 23 million conversion packages (cookstove, 3kg cylinder)
– Andra Pradesh (India) subsidised costs of connection ($22)
• Review (2001) showed that traditional fuels still predominated…
• …because fuel itself was not subsidised
• New scheme (not yet evaluated) provides a smaller, more affordable
cyclinder
How important is household impact data?
Country
Bolivia
Ghana
Jordan
Mali
Sri Lanka
Aggregate (direct & indirect effect) real income impact from a fuel
subsidy removal (range from bottom to top income quintiles)
5.0 percent (5.8-4.7)
8.5 percent (9.1-8.2)
4.4 percent (5.4-4.1)
1.7 percent (regressive, U)
(1.9 if electricity incl.)
2.4 percent (2.9-2.2)
Coady, D., El-Said, M., Gillingham, R., Kpodar, K., Medas, P., & Newhouse, D.
(2006). The Magnitude and Distribution of Fuel Subsidies: Evidence from
Bolivia, Ghana, Jordan, Mali, and Sri Lanka. International Monetary Fund
(IMF) Fiscal Affairs Department, (Working Paper WP/06/247).
Private sector has important (but mixed)
interests
• Producer subsidies
– Big debates on “subsidies or incentives?” in US, Canada, etc.
– Many countries favour NOCs…
– …but PEMEX is heavily taxed and subsidised at same time
• Supporting consumer subsidies can place a large burden
on energy utilities
– Reliance, Essar Oil, Shell India have pulled out of downstream
• Transport (freight), fishing and farmers are key groups
of diesel consumers
Reform recommendations from political
economy analysis (Victor, 2009)
1. Sunset clauses
–
to ensure the subsidy will be removed once it is no longer
needed to meet its original policy objective
2. Pre-announced conditions for receiving the subsidy
–
enables businesses to plan their investments accordingly
3. Transparent adjustment mechanisms
–
enabling public debate on the utility of the subsidy
4. Non-selective, performance targeting
–
allow service providers and users flexibility
II. Reform Strategies and Experiences – the
Reform Framework
How subsidies
have arisen
Costs
New policies
(pricing/tax regime)
Complementary
policies
New policies
(pricing/tax regime)
Complementary
policies
Research
Recipients
Economic impacts
Reform options
Implementation
Timing
Political strategy
Strategies to
respond to change
Monitoring,
evaluation and
adjustment
Transparency
Communication and consultation
The Reform Framework
Complementary Policies
Industry/business
Social
Energy
- Support to restructure sectors
e.g. retraining programmes
- Cash transfers: (un)conditional
- Investment in renewable or
alternative energies, rural
electrification, etc.
- Measures to improve energy
efficiency
- Social safety nets, pensions,
health insurance
- Increase (minimum) wages
- Investments in infrastructure
- Pro-poor expenditure
- Energy conservation, energy
security, energy efficiency
policies
Macro-economic
Banking
- Policies to help manage
- Can help roll out cash transfers
inflation
- Credit facilities, e.g. for SMEs
and micro-credit
- Strengthen market forces and
encourage competition
Elements of a successful reform strategy
• Price-setting mechanisms: independent,
transparent & adjustable.
Price rises: gradual or sharp?
• E.g. Bolivia tried to raise fuel prices by
between 53% and 87% in December
2010 but failed
• GIZ recommends raising prices 10% at
a time, however
• E.g. Iran reformed fuel subsidies in one
price rise, by providing compensation
for entire population (~50% of the
revenues)
Current GSI projects in Indonesia, India
• Funded by UK FCO
• 12-18 months’ duration
– To feed into 1 annual budget cycle
• Look at the reform process and work on the gaps
– Is anyone listening to those affected?
• Broker a deal
• Citizens’ Guide
– Filling the gaps
• India: Inflation; detail cash transfer schemes
• Indonesia: CSO movement (provide a focus); quota-based system
Producer Subsidies –Coal Case Study
• 1989: coal demand plummeted - prices still controlled
• 1998 : New government, New Restructuring Programme
• Legal instrument was
Parliamentary Bill: social focus
– soft loans for business
establishment
– social benefit of 65 per cent of
“vacation monthly wage” payment
for 24 months/new job
– One-time payments >1 year wages
Thank you
email: pwooders@iisd.org
www.globalsubsidies.org/en
Discussion: Furthering Efforts for Reform
of Inefficient Subsidies in the APEC Region
Political barriers constrain; note experience & best practice
• Plans: In place or need to develop?
• Political barriers: Understood? Complementary policies?
• Comms and Consultation: Strategies are adequate?
• Timescale: What is best?
Next steps
• National: Specific capacity building needs – provided by?
• EWG: Research? Workshops (for policymakers)? Other?