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: [email protected] 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?