Implicit Subsidy Research Articles

Is the clean energy transition making fixed-rate electricity tariffs regressive?

Wholesale electricity prices can rapidly change in real-time, yet households usually face fixed-price electricity tariffs. In markets with large amounts of solar electricity generation, households that predominantly import energy in the daytime when wholesale prices are low implicitly cross-subsidize households with energy use that is more weighted to the higher-priced evening. We map substation data on electricity use to demographic data, to identify the household characteristics associated with this cross-subsidization in a high-solar setting. We find that households in areas with low house prices and high levels of renters are the net funders of this implicit subsidy. These households currently have the lowest average energy cost for retailers to service, and could be the greatest immediate beneficiaries if real-time retail tariffs are made available, before accounting for price-responsiveness. Finally, we present evidence that cross-subsidy magnitudes have grown significantly in recent years, coincident with rapid solar generator penetration.

Longer school schedules, childcare and the quality of mothers’ employment

Summary Better employment quality can improve personal well-being, social cohesion, and inclusive growth and development. Yet good quality jobs – associated with greater well-being – are less accessible to women than men. While it is understood that policies balancing family and work lead to greater female labour participation, this paper investigates whether one such policy – increased childcare – improves the quality of jobs where mothers are employed. The context we analyse is a nationwide school reform in Chile that extended school schedules for primary school-aged children, providing childcare services. We combine administrative data of the phase-in of the policy with panel data of individual mothers’ employment outcomes and socio-economic characteristics. We estimate a fixed-effects model that controls for mothers’ unobserved heterogeneity and identifies the effect of the policy from plausibly exogenous temporal and spatial variations in access to schools with long schedules and exogenous exposure to the policy. We find a positive effect of childcare on several measures of employment quality and gender gaps within the couple. Our evidence suggests that the mechanism driving the impact is the implicit subsidy to the cost of childcare, affecting the opportunity cost of mothers’ time. In addition, we find heterogeneous results by mothers’ education level. Access to childcare through longer primary school schedules can increase household welfare and can play a role in reducing income and gender inequalities.

The intertemporal choice study of individual water-saving irrigation construction under three water pricing and subsidy scenarios

The world is confronted with increasing droughts exacerbated by the inefficiency of irrigation, and water-saving irrigation (WSI) holds the potential to alleviate this dilemma. Since individual farmers are important participants in WSI, it is imperative to account for their decision preferences. In addition, previous research did not consider the decision reverse in the intertemporal choice of WSI construction. Recognizing the presence of bounded rationality, particularly in terms of time preference inconsistency, a hyperbolic discounting model is constructed. The implicit subsidy, explicit subsidy, and improved explicit subsidy scenarios are simulated to analyze the decision process of individual farmers in WSI construction. The proposed methods are applied to discuss the construction of WSI within the Taocheng District, Hebei Province. The results show that: (1) The participation and stability of individual WSI construction demonstrated an increase in both the explicit subsidy and improved explicit subsidy. (2) Compared with the implicit subsidy, there was a 29.6% decrease in the number of participants who chose not to engage in WSI construction at different intertemporal choice points in the explicit subsidy scenario, and the inconsistency of choice in different intertemporal choice points decreased from 70.4% to 31.4%. (3) In the improved explicit subsidy scenario, the inconsistency of choice in different intertemporal choice points will be further reduced to 22.5%. In order to promote WSI construction for water conservation, the policy implications of the subsidy mechanism are proposed in this paper.

Asymmetric trade barriers and CO2 emissions in carbon-intensive industry

Since large carbon emissions are transferred through international trade, it is vital to explore the role country-specific trade policy has on carbon-intensive industries. The present study contributes to a deeper understanding of the connection between trade and environment in the literature, especially the impacts of trade barriers on carbon emissions. This topic has received little attention despite the importance of trade barriers to climate change and carbon emissions. Thus, we investigate the asymmetric trade barriers in carbon-intensive industries across different countries and describe the facts and motivations of these trade barriers in carbon-intensive industries. We list some political and trade explanations for the existence of trade barriers and empirically test the impacts of interest groups on trade barriers by the IV-2SLS method. Further, we have observed that certain highly developed countries, including Belgium, Switzerland, and Japan, are providing a notable implicit subsidy valued at over 200 USD per ton for carbon-intensive imported products. Our work carries essential implications for understanding how the manipulation of trade barriers could cause impacts on the environment.

The racial wealth gap, financial aid, and college access

AbstractWe examine how the racial wealth gap interacts with financial aid in American higher education to generate a disparate impact on college access and outcomes. Retirement savings and home equity are excluded from the formula used to estimate the amount a family can afford to pay. All else equal, omitting those assets mechanically increases the financial aid available to families that hold them. White families are more likely to own those assets and in larger amounts. We document this issue and explore its relationship with observed differences in college attendance, types of institutions attended, degrees attained, and education debt using data from the Survey of Consumer Finances (SCF), the National Postsecondary Student Aid Study (NPSAS), and the Panel Study of Income Dynamics (PSID). We show that this treatment of assets provides an implicit subsidy worth thousands of dollars annually to students from families with above‐median incomes. White students receive larger subsidies relative to Black students and Hispanic students with similar family incomes, and this gap in subsidies is associated with disadvantages in educational advancement and student loan levels. It may explain 10 percent to 15 percent of white students’ advantage in these outcomes relative to Black students and Hispanic students.

Policy Note: Why Irrigation Water Pricing is Difficult

Could irrigation water pricing be reformed so that the practice of irrigation is less harmful? Answering this question requires insights into how water pricing reform works for different irrigators/crops each with its own price elasticity of irrigation water demand and water supply, and into the political complexity of irrigation water pricing reform. In particular, the full benefits and costs associated with irrigation are an important, but often inadequately understood, element in irrigation water pricing reform. In this paper, these insights are investigated using the theoretical concepts of supply and demand. It is shown that the market cannot provide the full benefits from irrigation and ignores the full costs. It is also shown that the shape of the irrigation water supply and demand schedules, the current equilibrium position and the size of the charge required to get to a socially optimum position all work against irrigation water pricing as a tool that can be used to reduce demand. These concepts can be used to assess the implications of irrigation pricing reform comprehensively, explicitly and consistently, so that the implicit subsidies and externalities become visible.

The Economic Incidence of Wildfire Suppression in the United States

This study measures the degree to which public expenditures on wild-fire protection subsidize development in harm’s way. We use administrative data on firefighting expenditures to measure the causal effect of nearby homes on the amount spent to extinguish wildfires. We use these estimates in an actuarial calculation yielding geographically differentiated expected implicit subsidies for homes across the western United States. The expected net present value of this subsidy can exceed 20 percent of home value, increases with fire hazard, and decreases surprisingly steeply with development density. We discuss potential behavioral responses by individuals and local governments using a simple economic model. (JEL D91, Q23, Q54, R52, R58)

Fiscal Space for Investment in Agriculture— A Review of Taxes and Subsidies in Agriculture in Pakistan

Despite agriculture’s importance in terms of its relationship to poverty and welfare of the poorest households, the government finds it increasingly difficult to find the fiscal space for budgetary allocations for agriculture and agricultural RD. We hypothesise that expansion of expenditures on agriculture is possible in the short to medium run with a combination of reallocations and new taxation. We argue that existing spending aimed towards the agriculture sector includes very large outlays on implicit subsidies that are largely unproductive. These costs include: subsidisation of gas for fertiliser plants, which approach Rs 48 billion in gas subsidies to fertiliser companies; the full costs of the infrastructure and operation and maintenance of the irrigation system, which amount to Rs 166 billion per year; and losses on wheat procurement, which have been about Rs 25 billion recently. On the taxation side, while agricultural producers are not currently liable to pay tax on income, they do however pay indirect taxes on agricultural inputs. Using a Social Accounting Matrix (SAM), we estimate agricultural producer pay about Rs 61 billion, mostly from GST taxes on fertiliser. Using a Computable General Equilibrium model, we show that agriculture could contribute further with an income tax on agricultural income. With a ―low-rate-widebase‖ income tax of 15 percent on non-poor, medium and large farms, as much as Rs 130 billion could be raised, enough to cover, for example, a sizable portion of the operation and maintenance cost of the irrigation system. JEL Classifications: D58, E16, H20, H22, H23, Q10 Keywords: Agriculture, Fiscal Policy, Subsidies, Taxation, General Equilibrium, Social Accounting Matrix, Pakistan

C. H. Hanumantha Rao and Hans Linnemann (eds). Economic Reforms and Poverty Alleviation in India. New Delhi: Sage Publications, 1996. 271 pages. Hardbound, Indian Rs 350.00; paperback, Indian Rs 195.00.

The book under review is an edited collection of eight papers presented at a seminar on “Structural Adjustment and Poverty in India: Policy and Research Issues”, and is Volume 17 in the Indo-Dutch studies on Development Alternatives. The book evaluates the impact of economic reforms on poverty alleviation in India. In the “Introduction”, the editors describe the main theme of the book and propose some policy measures for poverty alleviation in the light of the findings of the papers included in the book. The paper, “Structural Adjustment in India—What about Poverty Alleviation?”, by Pieter A. van Stuijvenberg, evaluates the impact of India’s Structural Adjustment Programme (SAP) on the poor and suggests some policy corrections to mitigate the adverse effects of this adjustment on the poor. He observes an improvement in the balance-of-payments position and foreign exchange reserves without a simultaneous fall in gross domestic product under the SAP. His major concerns are the large size and composition of fiscal deficits (dominated by revenue deficits). The large size of fiscal deficits, according to van Stuijvenberg, drive up real interest rates and endanger investment-led growth. He observes that social indicators of the social safety net, employment, and rural development programmes have not improved much due to expenditure cuts on rural infrastructural investments. He suggests a reduction in the size and composition of the public sector, elimination of all explicit and implicit subsidies, and discouraging rent-seeking behaviour for a successful implementation of economic reforms.

The market impact of systemic risk capital surcharges

AbstractThis paper tests the ‘Too‐Big‐to‐Fail’ hypothesis that whether being designated as a global systemically important bank (G‐SIB) has an impact on the credit default swap (CDS) price of the bank, thereby reducing its credit risk. We find surprising evidence that the CDS spreads of a bank increase (decrease) after the announcement of a higher (lower) capital surcharge. However, this effect is temporary, as the mean CDS spreads revert to preannouncement level, dropping sharply after the initial rise. These findings create a puzzle by implying that a higher capital surcharge requirement and more stringent regulation could outweigh the implicit subsidy advantages of being too‐big‐to‐fail.

Rural electrification subsidy estimation: a spatial model development and case study

A global push to achieve universal electricity access, paired with drastic reductions in the cost of decentralized electricity technologies, has led to significant research on how best to roll out access to rural communities in sub-Saharan Africa. Various geospatial electrification models have been developed to aid the decision-making process considering decentralized grid alternatives such as mini-grids and solar home systems. Despite these tools suggesting that in many cases, decentralized systems are a more cost-effective electricity access pathway, grid extension still predominates in practice. This is due, at least in part, to institutional structures in most countries that provide significant direct and indirect subsidies to grid extension projects, commonly through publicly-owned utilities. These sources of finance are generally not available to primarily privately operated off-grid energy service providers. However, the subsidy provided for grid extension projects is not well understood. In this paper, we employ utility grid extension costs and revenue data, and geospatial grid infrastructure data to estimate the size and distribution of subsidy implicitly provided to rural grid extension projects for 129 communities in Mombasa County, Kenya. We also estimate subsidies for hypothetical off-grid electricity systems in the same communities that would deliver equivalent services to the grid. We allocate the cost of shared medium voltage (MV) distribution infrastructure using a marginal and an average cost method for grid extension and compare these with subsidies for off-grid systems. We find that the average of average subsidy per customer across communities for grid extension is US$5,118 and US$5,330 for the two MV cost allocation methods respectively, while for the off-grid systems the corresponding average of average subsidies are US$3,380, using a real discount rate of 1.3% evaluated from a nominal discount rate of 8% and inflation rate of 6.7%. Our results show that in the communities in our case study, 40% and 37% of the communities would command less subsidy while served by minigrids over the grid, and the switch would save 50% and 54% of the total cost for average and marginal cost allocation methods respectively. We also show that by using a multi-model approach to electrification and by reallocation of implicit subsidies that have been exclusive to grid extension to other technology options utilities can cast the net wider, without an increase in budgets.

The Incidence of Pension Contributions: A Panel Based Analysis of the Impact of Pension Contributions on Labor Cost, Wages and Labor Supply

One of the key elements in the planned pension reform in the Netherlands is to abolish the implicit subsidy from younger to older workers inherent in pension schemes with age independent contribution and accrual rates. This paper investigates the impact of changes in contribution rates on wages, labor costs and labor supply using a rich administrative data set covering individual employees in the Netherlands for the period 2006–2012. With a panel-based approach and data on both marginal and average contribution rates we aim to provide insight into the mechanisms underlying the incidence and labor supply (in hours) effects of pension contributions. For a two-year change in pension contributions we find that 70% of this change is passed on to the labor costs of employers, while 30% is passed on to the net wage of the employee. No significant effects are found for labor supply. At least in the short and medium run, our results seem at variance with the standard demand-and-supply model for the labor market, but are consistent with a bargaining model.

IP Box Regimes and Multinational Enterprises: Does Nexus Pay Off?

Over the last decades, the OECD and the European Union (EU) aimed at regulations that prevent aggressive intellectual property (IP) tax planning of multinational enterprises (MNEs). These regulations should stop the international race to the bottom of effective tax burdens. Contemporaneously, EU Member States enacted favourable tax systems for corporate research and development (R&D) activities in order to increase their location attractiveness. Especially, the output-oriented R&D tax incentives, namely IP box regimes, gained attention from a tax fraud perspective as well as popularity by national governments to generate public revenues. In this article, we qualitatively and quantitatively examine the European IP boxes. Thereby, we analyse their impact on IP tax planning and location attractiveness in light of the changes introduced by the OECD’s modified nexus approach. Our results demonstrate that even after introducing the nexus, a considerable reduction in effective average tax burdens is possible. Nonetheless, in line with the policy intention, the nexus effectively prevents excessive reductions of MNEs’ tax burden. Moreover, we account for changes in IP tax planning and observe implicit subsidies for the combination of output- and input-oriented tax incentives. Thus, these combinations reduce MNEs’ tax liabilities and finally, increase the location attractiveness in the post-nexus era.

The United States' power‐based bargaining and the WTO: Has anything really been gained?

AbstractIn this article, adoption of “power‐based” bargaining by the United States in trade negotiations is evaluated. A simple game‐theoretic structure highlights use of “bargaining” tariffs by the United States elicited credible retaliation by China through a trigger strategy, bilateral tariffs returning to a Nash equilibrium. This has come at some cost to US consumers, taxpayers, and farmers, although the latter group has regained market share following implementation of the US–China Phase One Trade Agreement. Unfortunately, the Agreement fails to deal with a key reason for the trade war, the Chinese economic model, and China's use of implicit subsidies.

Priority infrastructure for minibus-taxis: An analytical model of potential benefits and impacts

Many governments in the global south are grappling with challenges of improving the quality of informal transport, and an inability to pay for service improvements. This paper asks the question whether efficiency benefits might be gained through strategic implementation of once-off infrastructure interventions providing priority to informal vehicles at intersections. We note that informal drivers already indicate this demand through (illegal) driving behaviour in traffic. We use a drone to observe indicative behaviours among minibus-taxi drivers in South Africa. We identify interventions that would formalise this behaviour: a single lane pre-signal strategy, queue-jumping lane, and dedicated public transport lane. The objective of the paper is to quantify the potential economic impacts of such treatments on minibus-taxi operators, passengers and other road users. The findings indicate that substantial savings could be realised in terms of travel time, user cost, and operating cost to taxi passengers and drivers without additional costs being incurred by other road users. The single-lane pre-signal strategy, the queue-jumping lane and the dedicated taxi lane saw a decrease in total hourly cost of 12%, 14% and 30% respectively, including construction cost, user cost, and agency cost, indicating a net social benefit. If part of these savings were passed on to passengers, priority infrastructure could serve as an implicit subsidy to public transport users.

Irrigation subsidies and their externalities

Subsidising irrigation is a legitimate approach that governments have used to achieve a set of social objectives. Yet it may simultaneously impose negative externalities, especially in the form of environment degradation. Could subsidies be reformed to be less harmful? To answer this question requires an insight into how various kinds of subsidies work, the interplay between subsidies and externalities, and the political complexity of subsidy reform. In this paper these insights are investigated using supply-demand graphs. It is argued in this paper that a broad definition of subsidies should be used, one that includes the implicit subsidies that result from partial cost recovery. It is also shown that even without subsidies, externalities due to irrigation would still exist and that any reform of existing subsidies will counter the positive impact irrigation may have, which may not be a desirable outcome.

The effect of introducing fuel tax to the Norwegian fishery industry

Fossils fuel use is the main source of climate emissions in many fisheries and also one of the input factors with the highest cost share. This has led Norway to eliminate an implicit subsidy in the form of the fuel tax-exemption for the fishing fleet. It is suggested to gradually reduce the fuel tax-exemption over the years 2022–25 and simultaneously gradually introduce the CO2 tax. For a climate motivated tax policy to be successful from an environmental perspective, the tax must give vessels an incentive to utilize less fuel. However, it is unclear to what degree this is possible and therefore what effect a fuel tax will have. In this article, we investigate the economic impact of increasing fuel prices for the Norwegian fishing fleet. The most important result is a relatively inelastic fuel price elasticity for all vessel groups. This means that increases in fuel prices will result in only moderate changes in fishing practices and a small reduction in fuel consumption. Introducing a fuel tax will accordingly have a limited effect on climate gas emissions. Furthermore, we find that there are few possibilities for input factor substitution, which means that an increase in fuel price will lead to a direct cost effect for all vessel groups.

Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies

This paper provides a comprehensive global, regional, and country-level update of: (i) efficient fossil fuel prices to reflect their full private and social costs; and (ii) subsidies implied by mispricing fuels. The methodology improves over previous IMF analyses through more sophisticated estimation of costs and impacts of reform. Globally, fossil fuel subsidies were $5.9 trillion in 2020 or about 6.8 percent of GDP, and are expected to rise to 7.4 percent of GDP in 2025. Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies). Efficient fuel pricing in 2025 would reduce global carbon dioxide emissions 36 percent below baseline levels, which is in line with keeping global warming to 1.5 degrees, while raising revenues worth 3.8 percent of global GDP and preventing 0.9 million local air pollution deaths. Accompanying spreadsheets provide detailed results for 191 countries.

Implementation Problems and Improvement Strategies of Free Ride Policy for the Elderly

<p>Shanghai has abolished the policy of free travel for the elderly and changed it into a comprehensive allowance for the elderly. This paper analyzes the problems existing in the free ride policy for the elderly from the perspective of citizens, enterprises and the government, and then puts forward three feasible improvement strategies: one is free for limited time, the other is free for limited times, and the third is to change the unlimited implicit subsidy to the quota explicit subsidy, which has reference significance for improving the free ride system for the elderly.</p>

Identifying consumption profiles and implicit cross-subsidies under fixed-rate electricity tariffs

Wholesale electricity prices can rapidly change in real-time, yet households usually face fixed-price electricity tariffs. Therefore, households that predominantly use energy when wholesale prices are low implicitly cross-subsidize households whose energy use is more weighted to high-price periods. We develop a decomposition method that maps substation data on electricity use to demographic data, identifying the household characteristics associated with this cross-subsidization in Victoria, Australia. We find that households in areas with low house prices and high levels of renters and elderly residents are the net funders of this implicit subsidy. These households currently have the lowest average energy cost for retailers to service, and may be the greatest immediate beneficiaries if real-time retail tariffs are made available to them. Finally, we present evidence that cross-subsidy magnitudes have been growing in recent years, coincident with rapid solar generator penetration.