Fossil fuel subsidy reform:
insights from the OECD input
to the G20 initiative
Anthony Cox
Environment and Economy Integration Division
Environment Directorate
1
Joint report by OECD, IEA,
World Bank, OPEC
I.
Introduction
II.
Identifying and quantifying subsidies
a.
b.
c.
Taxonomy of energy subsidies
Summary of measurement approaches and challenges
Review of subsidy estimates
III. Reforming and phasing-out energy subsidies
a.
b.
Impact of subsidies and reform on sustainable development
Modelling the reform of energy subsidies
IV. Suggestions for implementation
a.
b.
c.
d.
Political economy of energy subsidies reform
Policy tools to address distributional issues
Operational initiatives to reach the poor
Lessons learned from country experiences
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Statutory or Formal Incidence (to whom and what a transfer is first given)
Direct consumption
Unit cost of Household or
consumption
enterprise
income
Transfer Mechanism (how a transfer is created)
Direct
transfer of
funds
Transfer of
risk to
government
Unit subsidy
Output
returns
GovernmentPer-tonne
subsidized life- subsidy for
line electricity metallurgical
rate
coal
Government
Means-tested
Price-triggered
expenditure
cold-weather
subsidy
on coal buffer
grant
stock
Enterprise
income
Cost of
intermediate
inputs
Capital grant
Operating
Input subsidy
linked to
grant to coalfor electricity acquisition of
mining
used in mining mining-related
company
capital
Government
limit on
producer
liability for
mining
accidents
Credit
guarantee
Security
linked to
guarantee for
acquisition of
coal trains
mining-related
capital
Tax deduction
related to
Reduction in
Production
Reduced rate
Excise-tax
energy
excise tax on
Tax revenue
tax credit for of income tax
concession on
purchases
fuel used by
foregone
making liquid on coal-mining
fuel
that exceed
mining
fuels from coal companies
given share of
machines
income
Under-pricing
Under-pricing
Reduced
of a good,
Other
of access to a
royalty
government
government
natural
payments on
service or
revenue
resource
access to
access to a
foregone
harvested by
coal deposits
natural
final consumer
resource
Induced
transfers
Regulated
price; cross
subsidy
1. Labour, land, capital, knowledge.
Mandated lifeline electricity
rate
Costs of
Production
Factors1
Tax credit for
investment in
mining
equipment
Under-pricing
of access to
government
land used for
storage of
coal
Import tariff or
Export
Monopoly
Wage
export
restriction on
concession to
controls on
subsidy on
domestically
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coal company
mining labour
coal
produced coal
Subsidisation rates for
fossil fuel consumption, 2008
Of the countries surveyed, fossil fuels were subsidized at an average rate of 29%, meaning
consumers paid roughly 71% of competitive market reference prices
Source: IEA
Philippines
90
Korea
Brunei
Peru
Sri Lanka
Colombia
Angola
Azerbaijan
Kazakhstan
Nigeria
Vietnam
Qatar
Libya
Bangladesh
Ecuador
Turkmenistan
Chinese Taipei
Thailand
South Africa
Algeria
Kuwait
Malaysia
Ukraine
Pakistan
UAE
Uzbekistan
Iraq
Argentina
Indonesia
Mexico
Venezuela
Egypt
China
India
Saudi Arabia
Russia
Iran
Subsidy (billion US$)
Fossil fuel consumption
subsidies – by economy, 2008
120
coal
Coal
gas
Gas
Oil
oil
60
30
0
Global subsidized consumption of fossil fuels amounted to US$ 557 billion in 2008
Source: IEA
Impact on greenhouse gases of fossil fuel subsidies removal
% change in GHG emissions w.r.t. BAU: Gradual (to 2020) phasing-out of ff subsidies in 37
countries combined with caps on emissions in developed countries & Brazil
5%
2050
0%
% deviation from baseline
-5%
-10%
-15%
-20%
-25%
-30%
-35%
Source: OECD ENV-Linkages, based on IEA subsidies data.
World
Japan
EU27 plus EFTA
Brazil
United States
Canada
Australia and
New Zealand
Rest of the World
China
India
Non-EU East Europe (1)
Russia
Oil-exporting
countries (2)
-40%
6
% deviation relative to the baseline
Unilateral removals of energy subsidies bring real
income gains
Impact on real income of unilateral fossil fuel subsidy removal, relative to the baseline in 2050
4.5%
2050
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Oil-exporting
countries (2)
India
China
Russia
Rest of the
World
Non-EU
Eastern
European
countries (1)
With multilateral
reform
there may
be reduced
income
gains for
some
regions, but
small
compared
with projected GDP
growth
1.This region includes Croatia and the Rest of Soviet Union (integrated by the following countries: Armenia, Azerbaijan,
Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan) according to the
data aggregation in the GTAP database.
2. The region includes the Middle East, Algeria-Lybia-Egypt, Indonesia, and Venezuela.
Source: OECD ENV-Linkages model based on IEA data.
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…with multilateral reform (central scenario) there may be
losses, but small compared with projected GDP growth
(% deviation relative to 2005 levels)
1500%
1400%
2050
2.6%
Projected GDP growth
1300%
Baseline
1200%
1100%
Multilateral subsidy removal
and cap and trade in OECD
1000%
900%
0.6%
800%
700%
-1.8%
0.2%
600%
-4.7%
0.2%
500%
400%
300%
200%
0.8%
100%
0.0%
0.2%
-4.4%
-0.7%
0.7%
Non-EU Eastern
European countries
(1)
Russia
Oil-exporting
countries (2)
Canada
Australia and
New Zealand
Brazil
Rest of the World
United States
China
Japan
EU27 plus EFTA
India
0%
1.This region includes Croatia and the Rest of Soviet Union (integrated by the following countries: Armenia, Azerbaijan, Belarus, Georgia,
Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan) according to the data aggregation in the GTAP database.
2. The region includes the Middle East, Algeria-Lybia-Egypt, Indonesia, and Venezuela.
Source: OECD ENV-Linkages model based on IEA data.
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Potential unintended effects of
fossil-fuel consumption subsidies
Source: IEA
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Examples of OECD tax
expenditures: consumption
•
•
Low tax rates or exemptions on diesel for agriculture & fisheries:

US$ 8 billion for agriculture sector in OECD countries

US$ 1.1 billion for fisheries sector in OECD countries
Reduced VAT rates and VAT exemptions, eg for heating fuels:

•
Automatic tax cuts and subsidies when fuel prices rise:

•
e.g. Italy, Korea, UK
in Mexico – with low oil prices, leads to net revenues, but with high oil
prices in 2008 led to subsidies amounting to 1.8% of GDP.
Tax exemptions to fuel used by public sector:

e.g. France had excise duty exemptions for natural gas used for heating
by public agencies and fuel used by military, but recently been stopped.
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Energy subsidy reforms have not
been extensive
• There is a limited pool of successful energy subsidy reforms
from which to draw insights for future reform efforts:
– Primarily focused on hard coal mining sector
• Case studies have examined lessons from the reform of:
– Poland’s reduced VAT for energy products
– Direct subsidies for petroleum products and for electricity prices in Indonesia
– Caps on prices for electricity and petroleum products in Malaysia
– Consumer price subsidy for natural gas in the US
– Partial exemptions from ecotaxes in Germany
– Subsidies to coal mining in Germany, Poland, UK, Spain and France
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Some key insights from subsidy
reform experience
• Need good quality information on subsidies, their economic
and environmental impacts, and distributional outcomes:
– Transparency is essential to build support for reform
• Build the arguments for reform, and challenge those against it:
– Competitiveness, employment, social equity, energy security impacts
• Build the case for reform:
– Strong leadership is needed, broad support across government (finance,
industry, energy, environment), engage the opposition
• Well-targeted, time-limited compensation is a key ingredient:
– To help address distributional concerns
– “Buy” support for reform and reduce opposition
• Package subsidy reform within broader structural reforms:
– Flanking policies can address underlying distortions in competition, pricing,
property rights, externalities, etc.
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Thank you
www.oecd.org/g20/fossilfuelsubsidies
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