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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.

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Presentation on theme: "Overview of Subsidy Reform in the APEC Region APEC Technical Workshop on Fossil-Fuel Subsidy Reform Peter Wooders, Global Subsidies Initiative 18 October."— Presentation transcript:

1 Overview of Subsidy Reform in the APEC Region APEC Technical Workshop on Fossil-Fuel Subsidy Reform Peter Wooders, Global Subsidies Initiative 18 October 2011

2 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

3 Project Overview Phasing out Fossil Fuel Subsidies to Reduce Waste and Limit CO 2 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)

4 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

5 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

6 I. Subsidies and their Impacts

7 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)

8 Producer Subsidy data is limited

9 Breaking news! OECD Study, October 2011

10 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)

11 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

12 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 009)42&doclanguage=en

13 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)

14 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

15 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).

16 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

17 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

18 II. Reform Strategies and Experiences – the Reform Framework

19 The Reform Framework Research Reform options Implementation Costs Recipients Economic impacts How subsidies have arisen Communication and consultation Transparency New policies (pricing/tax regime) Timing Political strategy Complementary policies New policies (pricing/tax regime) Strategies to respond to change Monitoring, evaluation and adjustment

20 Complementary Policies

21 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)

22 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

23 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

24 Thank you email:

25 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?

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