Case studies from the APEC region APEC Technical Workshop on Fossil-Fuel Subsidy Reform Tara Laan, Global Subsidies Initiative 18 October 2011

Outline of this presentation 1.Objectives and GSI’s approach 2.Case studies 1 to 4: key policies and lessons 3.Q&A 4.Case studies 5 to 7: key policies and lessons 5.Overarching lessons 6.Q&A

1. Objectives Experience and best practice Methods for protecting the poor and enhancing access to energy Range of subsidy and economy types Focus mainly on the needs of developing economies Clear rationale

1. GSI’s approach Range of subsidy and economy types –Producer subsidies widespread in the region –But reform in developing economies focussed on consumer subsidies for petroleum Few examples of perfect reform programs –best-practice and successful reform are policies that helped reduce subsidies even if they have been reinstated Target specific reform strategies

1 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

2. Case studies: overview Reform strategyEconomyFuel typeSubsidy type ResearchAustraliaAll Producer & consumer Communications and measures to assist the poor Indonesia Gasoline, diesel, kerosene, LPG Consumer Measures to assist the poorMexicoPetroleum productsConsumer Gradual deregulation and assisting the poor Thailand Gasoline, diesel, natural gas Consumer TransparencyChile Gasoline, diesel, natural gas Consumer Price adjustment mechanisms ChinaGasoline and dieselConsumer Gradual liberalizationRussiaNatural gasConsumer

Subsidies: none or US$12 billion in Unique approach: –Independent body within government to research and advise on reform on an ongoing basis Independence, transparency, community-wide focus Other methods can achieve similar results 2. Research: Australia’s Productivity Commission

Main lessons: gradually build a pro-reform constituency reforms once made tend to stick investment in thorough research worthwhile in the long-term

2. Building support for reform: Indonesia Consumer subsidies for gasoline, diesel, kerosene and LPG: US$ 9.6 billion in 2010 Fixed prices were successfully raised in 2005 and 2008 –Communication and consultation campaigns –Social programs

2. Building support for reform: Indonesia Communications –Consultation with opposition parties, academics and industry –Media campaigns on the benefits of reform and compensation packages –Emphasis on “fuel efficiency” not price increases

2. Building support for reform: Indonesia Social programs: 2005 reforms ProgramRecipientsCost School and Student Assistance 40.3 million students US$ 639 million Basic Health Care Package36.1 million poor individuals US$ 391 million Rural and regional infrastructure support 12,834 villagesUS$ 340 million Unconditional cash transfers15.5 million poor households US$ 474million

2. Building support for reform: Indonesia Industry and labour sector programs : 2005 reforms increase in the tax-free threshold for income tax increase in the government’s purchase price for rice exemption of value added tax on agricultural commodities reduced interest rates and longer repayment times for credit removal of certain road and transport charges

2. Building support for reform: Indonesia Social programs: 2008 reforms ProgramRecipientsCost Rice support for the poor19 million households US$ 433 million Unconditional cash transfer19.2 million households US$ 1549 million Financial support for the children of lowest ranks of civil servants, military and police officers 1.4 million childrenUS$ 46 million Loan interest subsidy for SMEs US$ 103 million

2. Building support for reform: Indonesia Main lessons Unlike failed 2003 attempt, reforms in 2005 and 2008 successfully raised prices Build on previous reform efforts and existing support programs Benefits of reforms eroded by continued price fixing

2. Assisting the poor: Mexico’s Oportunidades program Subsidies: around US$ 6 billion for gasoline, diesel, LPG and electricity in 2010 Mexican Conditional Cash Transfer (CCT) poverty alleviation program, “Oportunidades” –Provide grants to low-income households –Co-responsibilities: children attend school and families attend health clinics and information session

2. Assisting the poor: Mexico’s Oportunidades program Key features of Oportunidades Coverage5 million families BudgetUS$4.7 billion Amount per familyUS$15 to US$165 every 2 months Energy component added in 2007 Set at MXN 50 (US$ 4.12) in 2010 recipients

2. Assisting the poor: Mexico’s Oportunidades program Main lessons Proven model for CCT program Energy component could be raised to coincide with a reduction in fossil fuel subsidies Expanded to include the lower-middle class that would object to subsidy removal without compensation

2. Gradual reform and assisting the poor: Thailand Consumer subsidies to diesel, LPG and CNG: US$2 billion in 2010 Market deregulated in 1991 at a time of falling prices Oil fund and budget allocations used to subsidize certain fuels and reduce price spikes Fixing prices for petroleum products in cost US$ 2.92 billion: led to a change of approach When oil reached US$ 145/barrel in July 2008, the government still imposed taxes and levies on gasoline

2. Gradual reform and assisting the poor: Thailand Measures to assist the poor cope with high energy prices free electricity and tap water for low-consuming households free travel on non-air conditioned buses and trains price freeze on household cooking gas excise tax cuts on fuel

2. Gradual reform and assisting the poor: Thailand Main lessons Deregulation during a time of falling prices reduces the need for a comprehensive reform package But complimentary policies will be necessary as soon as prices rise Thailand has gradually introduced the public to volatile energy markets while shifting towards more targeted ways to help the poor

3. Q&A Research tools Measures to assist the poor Corrections, clarifications, other reforms

4. Transparency: Chile’s Probity and Transparency Agenda Subsidies: fuel sector deregulated but prices stabilized through two oil funds –government “top-ups”: US$ 1.2 billion in 2008 Government makes available all documents regarding price stabilization mechanisms –weekly reports on the calculation of the fuel price plus the oil fund’s financial balance –disseminated through website and federal gazette

4. Transparency: Chile’s Probity and Transparency Agenda Main lessons transparency particularly important when the government intervenes in fuel prices Improved transparency helps consumer understand price fluctuations and opens the door to informed debate Need to provide specific subsidy reporting in the budget on transfers to the oil fund and cross-subsidies by the National Oil Company

4. Price adjustment mechanism: China Consumer subsidies for gasoline and diesel: US$ 11 billion in 2010 New pricing mechanism introduced in 2008 on the back of falling international oil prices Links domestic and international prices in controlled way Price adjustments considered every month Maintains the option of not adjusting domestic prices 1 st half 2011: crude prices rose 26%, retail prices 10%

4. Price adjustment mechanism: China Main lessons Take advantage of falling world prices to introduce a market-based formula The formula must be applied automatically and independently to avoid political interference Controlling fuel prices may help fight inflation but it comes at a high cost Rumours of a move to price deregulation

4. Gradual deregulation: Russian natural gas Consumer subsidies to domestic consumers of gas: US$ 17 billion in 2010 Russian gas sales prices (per bcm) (from Pirani, 2011) (proj.) Industry, wholesale Residential, wholesale European border price

4. Gradual deregulation: Russian natural gas Gradual introduction of market pricing: Electronic trading platform trialled from 2006 to 2008: is to become permanent From 2007, Gazprom and clients can negotiate the price of gas within range around the regulated price From regulated prices to be based on the market price of alternative fuels Gradual increase in prices toward international parity

4. Gradual deregulation: Russian natural gas Main lessons Introduction of market mechanisms provides a controlled exposure to market forces before deregulation Some market forces are working for reform Need to develop methods for targeted social assistance

5. Overarching lessons Comprehensive reform strategies needed Link domestic and international prices Deregulation with ongoing compensation programs Political economy issues are significant Decouple fossil-fuel subsidies from social and economic policies: governments need better tools

6. Q&A Transparency Price adjustment mechanisms Gradual deregulation Overarching lessons

Thank you