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Overview of Subsidy Reform in
the APEC Region
APEC Technical Workshop on Fossil-Fuel Subsidy ReformPeter Wooders, Global Subsidies
Initiative18 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
• Country-specific sources in addition to IEA– Indonesia State Budget 2011 – US$15.1bn– Mexican Ministry of Finance 2010 - US$2.07bn
(price-gap)
Government revenue foregone
Tax breaks and special taxes
Tax expenditures: Tax expenditures are foregone tax revenues, due to special exemptions, deductions, rate reductions, rebates, credits and deferrals that reduce the amount of tax that would otherwise be payable. Overall tax burden by industry: Marginal tax rates are lower than other industry. Exemptions from excise taxes/special taxes: excise taxes on fuels; special targeted taxes on energy industry (e.g., based on environmental concerns or "windfall" profits)
Producer Subsidy data is limitedAPEC economy Main subsidy types included Subsidy Estimate Australia Consumer and producer subsidies to energy – coal,
oil, gas and non-fossil – and transport AU$ 10 billion
Mostly tax benefits for exploration, aviation and other fuels, and company cars
AU$ 8 billion
Canada – Alberta, Saskatchewan, and Newfoundland and Labrador
Subsidies for the exploration and production of oil CA$ 2.84 billion
Indonesia Subsidies for the exploration and production of oil and gas
US$ 1.8 billion
Malaysia Subsidized gas for non-power sectors US$ 5.36 billion Mexico Tax and royalty subsidies for the Chicontepec oil
field US$ 122-183 million
United States Federal tax provisions for the exploration and production of oil, gas and coal
US$ 3.88 billion
Federal subsidies for fossil fuels US$ 49 billion
Breaking news! OECD Study, October 2011Economy / Category Jurisdiction 2009 2010p Australia AUD million, nominal
Support to coal
n.a. n.a.
Support to petroleum
Diesel and Alternative Fuels Grants Scheme Federal n.a. n.a.
Fuel Sales Grants Scheme Federal n.a. n.a.
Queensland Fuel Subsidy Scheme QLD 28 n.a.
Western Australian Diesel Subsidy WA 9.44 9.72
Petroleum Products Freight Subsidy Scheme Federal n.a. n.a.
Fuel Tax Credits Federal 4 996.23 4 996.23
Reduced Excise Rate on Aviation Fuel Federal 980 1 000.00
Exemption from Excise for 'Alternative Fuels' Federal 517.02 536.53
Reduced Excise Rate on Heating Oil et al. Federal n.a. 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 Newfoundland and Labrador
GDP 0.0% –0.16% –0.14% –0.10% GDP Oil Producers –4.8% –6.0% –1.2% –0.3% Government Budget 0.9%
4.8% 3.8% –0.2%
Net Oil Exports (trade surplus)
–13.6%
–9.9% –1.6% 1.0%
Employment 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 CO2 emissions from fuel combustion All greenhouse gas emissions 2020 2050 2020 2050 Australia & New Zealand 2.1 8.3 1.2 3.4 Canada 1.7 5.5 1.3 3.7 China -4.0 -15.7 -3.1 -11.8 Japan 1.6 10.8 1.4 8.7 Russia -19.9 -41.3 -16.6 -34.6 United States 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(2009)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 Aggregate (direct & indirect effect) real income impact from a fuel subsidy removal (range from bottom to top income quintiles)
Bolivia 5.0 percent (5.8-4.7) Ghana 8.5 percent (9.1-8.2) Jordan 4.4 percent (5.4-4.1) Mali 1.7 percent (regressive, U)
(1.9 if electricity incl.) Sri Lanka 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
The Reform Framework
Research
Reform options
Implementation
Costs
Recipients
Economic impacts
How subsidies have arisen
Com
mun
icati
on a
nd c
onsu
ltatio
n
Tran
spar
ency
New policies (pricing/tax regime)
Timing
Political strategyComplementary policies
Complementary policies
New policies (pricing/tax regime)
Strategies to respond to change
Monitoring, evaluation and adjustment
Complementary Policies
Industry/business- Support to restructure sectors
e.g. retraining programmes- Measures to improve energy
efficiency- Investments in infrastructure
Social- Cash transfers: (un)conditional
- Social safety nets, pensions, health insurance
- Increase (minimum) wages- Pro-poor expenditure
Energy - Investment in renewable or
alternative energies, rural electrification, etc.
- Energy conservation, energy security, energy efficiency
policies
Macro-economic- Policies to help manage
inflation- Strengthen market forces and
encourage competition
Banking- Can help roll out cash transfers
- Credit facilities, e.g. for SMEs and micro-credit
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
Discussion: Furthering Efforts for Reform of Inefficient Subsidies in the APEC RegionPolitical 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?
