The IISD Global Subsidies Initiative The Global Subsidies Initiative of the International Institute for Sustainable Development

Transcription

1 The Global Subsidies Initiative of the International Institute for Sustainable Development Fossil-fuel subsidies, the path to reform and the impact on renewable energy

2 The Global Subsidies Initiative (GSI) 1. Established in 2005 by IISD, the GSI is dedicated to analyzing subsidies and how they impact efforts to achieve sustainable development. 2. The GSI s goal is to encourage individual governments to undertake unilateral reforms on subsidy policy where these would deliver clear economic, environmental and social benefits and to generate a consensus on the need to take international action. 3. The GSI has received project funding from numerous governments, United Nations agencies, and foundations.

3 The Global Challenge 1. In the World Energy Outlook 2013 the IEA estimated that fossil fuel subsidies reached US $544 billion in This estimate was made by comparing energy prices to international benchmarks. The estimates cover subsidies to fossil fuels consumed by end-users and subsidies to fossil-fuel inputs to electric power generation, but do not cover subsidies to petrochemical feedstocks. 2. Countries fall into two broad categories. Those that import fossil fuels at international prices and sell domestically below market prices and those that export energy and sell domestically below international reference prices. 3. Despite much debate around the cost of subsidies to renewable energy the IEA estimates that renewable energy subsidies amounted to US$ 101 billion in Less than one fifth of the subsidy to fossil fuels.

4 There is widespread agreement that fossil-fuel subsidies need to be reformed. But how?

5 Fossil-fuel subsidy reform approach There is no one size fits all approach for FFS reform but there are a series of planning stages and common issues. One piece of advice that stands out above all is to be prepared. Some key factors which we will explore in more detail: 1. Internal cooperation 2. Pacing: a gradual approach or a big bang 3. Getting the prices right 4. Managing impacts 5. Building support for reform

6 Internal Coordination 1. Internal stakeholders are the ministries and agencies within the government structure; 2. It is essential to establish strong coordination across government; 3. There are some challenges in finding a balance between a big tent approach to internal coordination and a top down approach directed from finance ministries.

7 Administrative bodies for intra-governmental coordination Mechanism Key Features Strengths Weaknesses Cabinet sub-committee Involved all key ministers Ensures political level Needs to be supported by May be led by head of participation consultation and advisory government Decisions unlikely to need higher level of approval support at the bureaucratic level Parliamentary committee Key ministers mobilise coalitions or champions within Can involve non-government members of parliament Usually only relevant once reform proposal near-final parliaments Identify and address concerns of parliament members that could block passage of necessary legislation Taskforce Seconds officers from relevant departments and agencies Dedicated resources from all relevant agencies Time consuming and resource intensive Limited lifespan to develop and implement reform Provides central point for relations with internal and Conflict can arise between taskforce and home May be hosted by a central external stakeholders departments agency Inter-departmental committee All relevant agencies represented Involves all relevant agencies without removing resources May achieve little beyond awareness raising among Meet regularly or ad-hoc from home agencies officials Must feed into decision making process Expert group Experts could be within or outside government but must have backing of lead ministers Creates some distance between political leaders and reform plans Leaders may not take advice if it comes from non-government experts

8 Malaysia: Subsidy Rationalisation Lab 1. To help develop a roadmap for subsidy reform the Malaysian Government s Performance Management & Delivery Unit (PEMANDU) held a six week subsidy rationalisation lab in experts worked in consultation with cabinet ministers to develop a detailed reform plan 3. During the process a number of innovative actions, including nationwide SMS polling and an open day, were used to gauge public reaction to the proposals. They found that a majority of respondents supported a phase out of subsidies over 3-5 years 4. The final recommendations were presented to the prime minister

9 Pacing: A gradual approach or a big bang A gradual approach to reform allows time to monitor impacts and adapt strategies accordingly. However, in some cases the scale of the challenge or an opportunity such as falling international prices or political good will following an election can drive reformers towards rapid reforms..

10 Pacing: A gradual approach or a big bang

11 Getting the prices right

12 Getting the prices right Subsidies do not reduce the cost of energy but they do shift the cost from consumers to taxpayers. The only reliable way to remove subsidies in the long term is to use market based pricing mechanisms. Ad-hoc price rises can eliminate subsidies in the short term but as international prices rise subsidies can return. Making the switch from ad-hoc to market based pricing is a key challenge but a number of countries successfully made this transition.

13 Getting the prices right The Philippines overcame subsidies which built up as the result of an oil price stabilisation fund through the Downstream Oil Deregulation Act in The act was part of a broader programme of modernisation and coincided with reducing global energy prices during the Asian financial crisis..

14 Managing impacts Improved economic, social and environmental prosperity is the rationale for fossil-fuel subsidy reform. But within the large scale picture of overall gains there will be unwanted negative consequences including: Disproportionally affected social groups Energy intensive sectors of the economy Costs increases of goods or services which use energy as an input To evaluate the impacts of reform and design mitigation strategies the following process can be followed:

15 Steps 1. Project the impacts of subsidy reform 2. Identify impacts that need mitigation 3. Identify potential mitigation measures and reassess impacts 4. Prepare chosen mitigation strategy Managing impacts Activities Map out expected impacts of reform. Estimate effects quantitatively and supplement with qualitative analysis. Conduct stakeholder analysis. Identify impacts on the economy, business or households to make reform politically feasible. Distinguish between temporary transitional measures and those which require ongoing measures. Identify measures that could be employed to address unwanted impacts taking into account: i) measures that reduce the impact of reform such as timing and staggering reform for different fuel types and ii) alternative economic and social assistance iii) policies that counteract price increases for selected groups. The impact of reforms should then be reassessed assuming the presence of the proposed mitigation measure Develop the capacity to deliver the mitigation strategy. Depending on the context and the complexity of the policies, this may be a considerable task that takes several years. A two-track strategy may be needed to respond to short term crises, and realise long term reform Subsidy reduction or change in pricing takes place 5. Monitor and adjust Monitor impacts after reform and the performance of mitigation measures r following their introduction. Adjust as necessary.

16 Managing impacts The impacts of reform can follow simple analyses based on economic databases or use more advance economic models such as CGE or energy sector models. A simple process described by Coady (2006) and World Bank (2003) which is estimated to take two person weeks to complete and aims to quantify the impact of energy price increases on the costs of goods and services which use fuel as an intermediate output. This process was employed in Ghana in 2005 and is routinely used by the IMF.

17 Managing impacts: PSIA in Ghana The impact analysis showed that that the lowest income quintile would see consumption costs rise by 9.1 percent as a result of the proposed reforms The modelling showed that the largest indirect impact would come from cost increases in agriculture The results were used to test mitigation options: The modelling showed that excluding kerosene from the reforms would reduce the impact to 7 percent Increasing education grants would reduce the impact to 7.1 percent A cash transfer system would reduce the impact to 4 percent. The cost of operating the cash transfer system was estimated to cost just 5.4 percent of the total savings of the reforms

18 Building support for reform Fossil fuel subsidy reform can have far reaching impacts and requires a whole-of-government approach. Internal coordination is a vital first step. Effective reform plans are founded on a deep understanding of stakeholder perceptions of reform. Consultation that engages with stakeholders through public enquiries, roadshows, discussion groups and works shops is considered to be good practice. Stakeholder views may also be gauged through systematic literature reviews and survey data. To target subsequent communication and mitigation measures importance/influence matrices can be used.

19 Example of an importance/ influence matrix

20 Household surveys in Egypt The survey consisted of 20 multiple choice questions designed by IISD- GSI, Sections on: household characteristics knowledge of energy subsidies attitude toward reform impacts information consumption Sample size of about 1,200 households

21 Communication Communication is an essential part of the reform process. Good communication focusses on clear simple messages tailored to each stakeholder group. Communications may contain both positive and negative messages but overly negative messages may cause the audience to disengage with the issue. Innovative campaigns can raise awareness.

22 Communications in Indonesia In Indonesia the Ministry for Energy placed banners at most retail fuel outlets that read Regular gasoline is a subsidised fuel- only for the disadvantaged of society- thank you for using unsubsidised gasoline. The message is unlikely to dissuade wealthier motorists from purchasing fuel, but it does raise awareness that subsidised fuel is not an entitlement for all consumers.

23 India: GSI graphic novel on fossil-fuel Subsidies In January 2014 GSI released Understanding Fossil-Fuel Subsidies in India: Questions and Answers: A guide to fossil-fuel subsidies and how they affect you The aim was to explore to communicate the issues around fossil fuel subsidies in an engaging way to audiences who might not otherwise engage with the debate

24 The impact of fossil-fuel subsidies on renewable energy 1. Fossil fuel subsidies are particularly distorting on the electricity sector. 2. In the Middle East and North Africa (MENA) region, subsidies are among the highest in the world reach up to 5% of GDP in several countries. Favourable climatic conditions, and reliance on expensive fossil fuel generators operating on diesel and HFO mean that renewable energy is already at cost parity with fossil fuel power generation 3. This advantage which implies that renewable energy would not need the same financial support as in other regions is obscured by fossil fuel subsidies.

25 Thank you! Download all our publications at: