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MODELLING OF DISTRIBUTIONAL IMPACTS OF ENERGY SUBSIDY REFORMS:
AN ILLUSTRATION WITH INDONESIA
Olivier Durand-Lasserve, Economist/Policy Analyst,OECD Environment Directorate – IEA Directorate of Global
Energy Economics
Expert seminar organised by the OECD and Indonesia’s Ministry of Finance4-5 November 2015
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Adding distributional aspects to the economic and environmental analysis
Modelling assessment of impacts of FFS reforms in Indonesia
• Macroeconomic & environmental: IEA (1999), Magné et al (2014)
• Macroeconomic & distributional: Clements et al (2007), Yusuf and Resosudarmo (2008), Widod et al. (2012)
• Distributional: World Bank (2006, 2011), Dartanto (2013)
Construction of a dedicated framework to deal simultaneously with all 3 dimensions energy subsidy reforms
• Environmental • Macroeconomic• Distributional
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Macro model Microsimulation models
The analytical framework
Economy -wide effects
• Market prices• Wages and rents• Taxes and transfers
Household-level effects
• Income• Expenditures• Demand adjustment
Fossil fuel consumption subsidy phase out
Economic Efficiency
Environmental
effectivenessDistribution
al effect
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The energy consumption subsidy phase out scenarios
Phase out of energy consumption subsidies in Indonesia from 2012 to 2020
• Electricity, gasoline, diesel, kerosene, LPG • For firms and households
3 different redistribution schemes:1. Cash transfer: all the households receive identical
payment2. Food subsidies: food & agricultural products are
subsidized3. Labour support: households receive payments
proportional to their labour income
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Strong emissions reduction: ~8% for GHG for all scenarios
Results: GHG impacts
Note: The emission reductions exclude emissions from deforestation, which are large in Indonesia, but highly uncertain and for which the model cannot make reliable projections
-9-8-7-6-5-4-3-2-10
2012 2013 2014 2015 2016 2017 2018 2019 2020
GHG emissions (% of baseline)
Cash transfersLabour supportFood subsidies
Source: ENV-Linkages
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Results: macroeconomic impacts
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0.1
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0.3
0.4
0.5
0.6
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0.8
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Real GDP (% of baseline)
Cash transfersLabour supportFood subsidies
Source: ENV-Linkages
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Results: distributional impacts
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0
2
4
6
8
10
12
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1 11 21 31 41 51 61 71 81 91Income centile groups
Real income variation in 2020 (% baseline)
Cash transfersLabour taxFood subsidies
Source: ENV-Linkages
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Results: cash transfers are efficient and equitable,... But the scheme represented is very stylized
Questions• How to target beneficiary?• Development of infrastructure, education,
…• Improved access to energy• Renewable energy and energy efficiency
What we learnt,….
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APPENDIX
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Cash transfer requirements to compensate households
Only a fraction of gov. expenditures avoided by the subsidy reform is redistributed with cash transfers and the recipients are targeted
What fraction needs to be redistributed to keep constant the real income of households until to a given decile?
Notes: (1) the cash transfer payments are adjusted for each decile group, (2) here the feedback effects on growth are ignored
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Transfers: the revenues generated by the phase out can be redistributed to the households based on eligibility criteria.
Households may be impacted differently by an energy consumption subsidy reform
Expenditures: consumer prices change and the impacts on household groups depend their consumption structure and on how they behave
Income: the policy can affect wage rates as well as non-wage factor income and the impact on households’ income depend on their sources of income
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Microsimulation models, based on household budget surveys, are often needed for quantifying the differences in impacts between household groups
Combining micro and macro approaches
But for a energy subsidy phase out has economy-wide effects, and a microsimulation model has to be linked with a macroeconomic model• The effects on the phase on final prices and households’
income depend on the whole structure of the economy• Redistribution schemes cannot be featured without
representing how governments’ budget adjusts to the policy
• Distributional, environmental, economic effects interplay
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The decomposition algorithm at iteration k and period t
CGE model with 1 representative
household
Microsimulation model:1-Household-level revenues computation2-Household-level optimal consumptionand savings
Final good prices
Total households’ consumptions and savings
Production factors’ prices
Recalibration of the
representative household’s
utility function
calibrated representative
household’s utility function
iteration k+1
iteration k
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• Low budget shares of energy• Increasing share of food consumption• The share of formal labour in revenue decrease with income
Elements on households heterogeneity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 10deciles
Labour (formal) Labour (informal)Capital LandNatural resource Transfers
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 10deciles
Electricity Gasoline and DieselKerosene and LPG Transportation servicesAgricultural products Food productsManufactured goods Services
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Based on the IFLS4 household budget survey data, >10000 Indonesian household groups are explicitly represented in the multi-period, multi-region CGE model
For the models’ base year, household-specific parameter are calibrated on the HS data• Parameters of the extended linear demand system• Endowments in production factors
The baseline projection is generated assuming that the households’ preferences and endowment parameters are static: no structural change
Resolution of the integrated model using a decomposition algorithm (Rutherford et al. 2006)
Representative households groups for Indonesia in ENV-Linkages
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Remarks on the imputation process• Gasoline and diesel expenditures are not explicitly represented in
the HS. They are proxied based on information about expenditures for transportation and vehicle ownership
• Profits from own business assigned to labour and capital revenue categories using values shares from the corresponding sector in the CGE.
The process for reconciling the HS and the CGE data ensures:• Micro-macro accounting consistency: for each expenditure and
income category, the total over households adds-up to the CGE base-year value
• Balance budget for individual households: for each household, the total disposable income is equal to the sum of expenditures and savings
• “Steady state savings”: for all the households, the ratio between savings and capital revenues is the same. This requirement is used because of the multi-period setting in order to avoid a massive reallocation of capital income between the households in the baseline scenario
Imputation and reconciliation of survey data with the CGE
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Driving mechanisms of distributional impacts in the cash transfer scenario
The redistribution scheme makes the reform progressive• The direct effect through final price changes is slightly
regressive• The cash transfers effect is very progressive and
dominates the regressive effects of final price changes
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111315
1 11 21 31 41 51 61 71 81 91income centile groups
Total effect
Final price effect
Transfer effect
Source: ENV-Linkages
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Driving mechanisms of distributional impacts in the labour support scenario
The effect through labour income is regressive as labour income from formal activities represents a lower proportion of total income for higher-income than for lower-income households
-5-4-3-2-1012345
1 11 21 31 41 51 61 71 81 91income centile groups
Total effect Final price effect Labour income effect
Source: ENV-Linkages
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Conclusions (1/2)
The energy consumption subsidy phase out contributes to emissions reduction: ~8% for GHG and ~12% for CO2, if excluding emission from tropical forest fires
Positive impacts on GDP (+0.4 to +.7% in 2020 w.r.t. baseline)
Direct price effect of subsidy removal is regressive but the compensation schemes can make the reform progressiveCash transfers are the best policies in terms of GDP growth, and inequality reduction
Impacts of the redistribution schemes • Cash transfers: very progressive• Food subsidies: slightly progressive• Labour support: regressive
