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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. Objectives and GSI’s approach Case studies 1 to 4: key policies and lessons Q&A
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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 • Objectives and GSI’s approach • Case studies 1 to 4: key policies and lessons • Q&A • Case studies 5 to 7: key policies and lessons • Overarching lessons • 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
The Reform Framework How subsidies have arisen • Research Recipients 1 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
2. Research: Australia’s Productivity Commission • Subsidies: none or US$12 billion in 2011-12 • Unique approach: • Independent body within government to research and advise on reform on an ongoing basis • Independence, transparency, community-wide focus • Other methods can achieve similar results
2. Research: Australia’s Productivity Commission Main lessons: • gradually build a pro-reform constituency • reforms once made tend to stick • investment in thorough research worthwhile in the long-term
2. Building support for reform: Indonesia • Consumer subsidies for gasoline, diesel, kerosene and LPG: US$ 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
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
2. Building support for reform: Indonesia • Build on previous reform efforts and existing support programs • Benefits of reforms eroded by continued price fixing Main lessons • Unlike failed 2003 attempt, reforms in 2005 and 2008 successfully raised prices
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 • 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$2 billion in 2010 • Market deregulated in 1991 at a time of falling prices • Oil fund and budget allocations used to subsidize certain fuels and reduce price spikes • Fixing prices for petroleum products in 2004-05 cost US$ 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 • 1st 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)
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 2011-12 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
