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

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 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)

4. 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

5. Outline of this presentation Get into the insights – background is in the reports • Subsidies and their impacts • 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 http://www.globalsubsidies.org/files/assets/ffs_awc_3canprovinces.pdf

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 http://www.oecd.org/officialdocuments/displaydocumentpdf/?cote=ECO/WKP(2009)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) • 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

18. II. Reform Strategies and Experiences – the Reform Framework

19. 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

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 • 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

24. Thank youemail: pwooders@iisd.org www.globalsubsidies.org/en

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?