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Overview of Subsidy Reform in the APEC Region APEC Technical Workshop on Fossil-Fuel Subsidy Reform PowerPoint Presentation
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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

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slide1

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
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
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
Project Objectives
  • assesswhere 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
Outline of this presentation

Get into the insights – background is in the reports

  • Subsidies and their impacts
  • Reform strategies and experiences – the Reform Framework
types and magnitudes of subsidies
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)
is information on fiscal and economic impacts enough for ministry of finance
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
Economic impact modeling often not public

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
Some environmental impact info. available

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
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
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
How important is household impact data?

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
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
Reform recommendations from political economy analysis (Victor, 2009)
  • Sunset clauses
    • to ensure the subsidy will be removed once it is no longer needed to meet its original policy objective
  • Pre-announced conditions for receiving the subsidy
    • enables businesses to plan their investments accordingly
  • Transparent adjustment mechanisms
    • enabling public debate on the utility of the subsidy
  • Non-selective, performance targeting
    • allow service providers and users flexibility
the reform framework

How subsidies have arisen

  • Research

Recipients

The Reform Framework

Economic impacts

Costs

Transparency

New policies (pricing/tax regime)

Timing

Communication and consultation

  • Reform options

Complementary policies

Political strategy

Strategies to respond to change

New policies (pricing/tax regime)

  • Implementation

Complementary policies

Monitoring, evaluation and adjustment

elements of a successful reform strategy
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
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
Producer Subsidies –Coal Case Study
  • 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
  • 1989: coal demand plummeted - prices still controlled
  • 1998 : New government, New Restructuring Programme
discussion furthering efforts for reform of inefficient subsidies in the apec region
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?