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Energy Subsidy Reform: Implications and Policy Recommendations

This expert meeting discussed the economic value of energy subsidies in non-OECD countries, the impact of subsidies on investments and greenhouse gas emissions, and the prospects for subsidy reform. The paper emphasizes the need for comprehensive subsidy reform to enhance energy security, curb greenhouse gas emissions, and overcome political barriers.

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Energy Subsidy Reform: Implications and Policy Recommendations

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  1. IEA Work on Energy Subsidy Related Issues UNEP/UNECE Expert Meeting on Energy Subsidies Geneva, 15-16 November 2007 Trevor Morgan Senior Consultant, Economic Analysis Division International Energy Agency

  2. IEA Activities • World Energy Outlook 1999: Looking at Energy Subsidies: Getting the Price Right • IEA/UNEP Subsidy Reform Project 2000-2002: • Regional workshops • Paper on OECD subsidies • Synthesis Report to CSD-9 (New York) • Reforming Energy Subsidies summary publication (basis for 2004 UNEP report) • World Energy Outlook 2006 • Regular activities: • Country reviews (4-yearly cycle for member countries, ad hoc for non-members) • Energy prices & taxes database • Public energy R&D funding

  3. WEO-1999: Main Findings • Quantification of subsidies & impact in 8 non-OECD countries • Price-gap approach • Total value of subsidies = $95 billion • End-user prices on average 20% below full supply cost (market-based) • Removing all subsidies would • Reduce their primary demand by 13% (3.5% of world demand) • Increase their GDP by 1% per year • Lower their CO2 emissions by 16% (5% of world emissions)

  4. WEO-2006: Main Findings • Quantification of subsidies in 20 largest non-OECD countries (81% of world demand) • Price-gap approach (as for WEO-99) • Total value of subsidies = $220 billion (2005) • Biggest subsidies by fuel to oil products: c.$90 billion.. • .. and by country, to Russia: c.$40 billon • Degree of under-pricing biggest for natural gas (over half on weighted average basis)

  5. Economic Value of Subsidies in non-OECD Countries, 2005

  6. UNFCCC Paper (Morgan, 2007) • Summary of evidence from literature of • Size of subsidies • Impact on investment & emission • Prospects for reform

  7. UNFCCC Paper: Size of Subsidies ($billion, nominal terms)

  8. UNFCCC Paper: Impact on Investment & GHG Emissions • Common problems with energy subsidies • By cutting prices, can boost fossil energy use & emissions • By lowering price to producers, may cut return on investment & incentives to invest • By lowering cost of existing technology, can prevent take-up of more promising technologies • Can drain government finances • Several studies provide evidence of detrimental impact of existing fossil-energy subsidies • Subsidies to clean energy – e.g. biofuels – not necessarily cost-effective

  9. UNFCCC Paper: Subsidy Reform • Without reform, subsidies will grow in dollar terms with higher consumption (& prices?) • Reform depends on the politicians! • Principles of energy-subsidy reform • Approaches to reform: • Phasing • Compensating measures (e.g. welfare support) • Communication • Support from multi-lateral lending agencies

  10. Interpreting These Results • Biggest energy subsidies are in non-OECD countries • Most of those subsidies – mainly in form of price controls - still go to consumers of fossil fuels • Fossil-fuel subsidies have probably risen since 1999 due to higher international prices • They are dampening demand response & aggravating energy insecurity, pollution & climate change • Electricity subsidies are undermining utilities’ auto-financing capacity & ability to increase access in many cases

  11. Implications for Policy • Never subsidise consumption of fossil fuels! • May be justification for limited subsidy for • Modern energy for poor (essentially electricity) • Non-fossil energy & investment in efficient technology (to overcome market barriers) • Fuel/carbon tax is the most economically efficient to internalizing externalities • Subsidy reform must form part of broader policy reform • Big potential for subsidy reform to enhance energy security & curbing GHG emissions but enormous political barriers

  12. What More Needs to be Done? • More monitoring & analysis? • Data patchy, analyses partial & irregular • Target biggest problems (by country & sector) • Continue to alert policymakers to cost & (in)effectiveness of subsidies? • Widespread ignorance about true cost of subsidies • Policy schizophrenia – even in IEA countries! • Practical advice (but not preaching) on how to reform/remove subsidies? • Overcoming political hurdles • Success stories – reform is possible if done the right way!

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