Subsidy Reform Research Articles

Hybridizing low-carbon technology deployment policy and fossil fuel subsidy reform: a climate finance perspective

The environmental argument behind fossil fuel subsidy reform is strong, particularly among international finance institutions wishing to support ‘transformational’ low-carbon development. However, supporting reform in practice has often met methodological and political barriers. Instead, a large share of international climate finance has flowed to national policies and measures that incentivize the deployment of low-carbon technologies such as renewable energy technologies. In this paper, we propose that ‘hybrid’ policies that package fossil fuel subsidy reform with low-carbon technology deployment policy offer an opportunity for donors to support mitigation activities that achieve both concrete environmental impacts as well as long-term structural change. Specifically, we model the abatement cost, fossil fuel subsidy savings, and generation cost resulting from combining wind and solar photovoltaic deployment policy with fossil fuel subsidy phase-out in four country case studies. Our results not only show the extent to which fossil fuel subsidies can undermine the financial viability of low-carbon energy technologies, but also how cost uncertainties can be buffered by combining fossil fuel subsidy reform with renewable energy deployment. Furthermore, we assess the proposed hybrid policy against typical climate finance criteria and thus contribute to debates surrounding donor strategies to support low-carbon development.

Implications of energy subsidy reform in India

This paper analyses welfare impact of energy subsidy reform in India based on the data from 1970‐ 71 to 2014‐ 15. To this end, Auto Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) have been estimated to quantify the short-run and long-run price and the income elasticity of various energy products. The results show that the price elasticity of demand for all fossil fuels is low, but the respective income elasticity is higher. Therefore, an increase in the general price level caused by the subsidy reform will lead to the erosion of real income and will have related welfare implications in India. The results also reveal that energy expenditure will obviously increase and hence energy consumption will decline depending upon the extent of the withdrawal of subsidy. Therefore, policy makers in India, while undertaking further reforms, must ensure that the subsidy reaches to those who truly deserve, so that the socioeconomic casualty of reforms can be minimized along with achieving fiscal goals.

A Brief Political Economy of Energy Subsidies in the Middle East and North Africa

Energy subsidies are among the most pervasive and controversial fiscal policy tools used in the Middle East and North Africa (MENA). In a region with few functioning social welfare systems, subsidised energy prices continue to form an important social safety net, albeit a highly costly and inefficient one. In the MENA region’s oil and gas producing countries, low energy prices have also historically formed an important element of an unwritten social contract, where governments have extracted their countries’ hydrocarbon riches in return for citizens’ participation in sharing resource rents. While it is clear that energy subsidy reform will not be the only variable at play, its potential socio-economic dividends are important factors for enabling some common regional objectives—sustainable fiscal policies, fiscal space to invest in key areas, and a more efficient and equitable distribution of scarce resources—to be achieved, helping to promote a more stable political status quo in the long term. If accommodated by effective mitigation measures, reforming energy subsidies in the MENA region’s middle-income economies could be a powerful tool for governments—addressing those very profound socio-economic grievances that have contributed to the outbreak of political protest and, in some cases, to an intensification of domestic infighting over political control. In this paper, we look at some of the MENA region’s potential avenues for reform. While the past has demonstrated the political difficulty of reforming energy prices, recent experience also shows that the reform of energy subsidies can be achieved, if accompanied by a set of enabling factors.

The burden of food subsidy and mounting stocks of food grains in India: Empirical analysis

The distribution of food grains through Public Distribution System (PDS) to the consumers to the targeted sections, at affordable prices has been an important objective of food management policy in India. The current food stocks in the country are far more than the needs. The problem of plenty is not going vanish away soon and it is a main concern of the policy makers. Along with this, the quantum of food subsidy has been increasing in India and has increased more rapidly during the recent years. This is basically because of the hike in Minimum Support Prices (MSPs), increase in procurement incidentals and distribution costs and expansion in the scale of PDS. The study intends to compute the rising trend in food subsidy and its determinants. It also intends to analyze the impact of rising MSPs on procurement and off take of food grains and finally to compare the role of MSP on rising food subsidies and rise in food grain stock. The study is based on the time series data on PDS off take, MSPs, PDS stocks, Central Issue Prices of food grains, food subsidy and production of food grains compiled from RBI hand book of statistics on Indian Economy economic survey, FCI reports and from ministry of food and public distribution. As the study finds that a two way relation between MSP and food subsidy and MSP and increasing stocks of food grains the role of MSP in the procurement operations of the government have to be taken into the account. Further, the study suggests that the food subsidy reforms have to be initiated to rationalize the burden of exchequer. The plan to computerize the TPDS databases along with the introduction of the Aadhaar/UID and NPR systems is the important stride to move forward.

Policy Monitor—Principles for Designing Effective Fossil Fuel Subsidy Reforms

There is mounting evidence that fossil fuel subsidies are detrimental to economic, environmental, and social sustainability, as they tend to drain national budgets, encourage overconsumption of fos...

The Political Economy of Distribution in the Middle East: Is There Scope for a New Social Contract?

The majority of Arab political economies are characterised by a peculiar distributional system built on excess public employment and wide-ranging energy subsidies—features that exist in other developing countries but are more pronounced in the Arab world. This chapter provides an overview of this distribution regime, develops hypotheses regarding its historical origin, and analyses the political and economic distortions it creates. It builds on a wide range of literature on energy subsidies and on recent publications on (the weakness of) conventional social safety regimes. In its comparative analysis of public employment, it mostly relies on primary data.The chapter proposes that the current distribution regime not only benefits insiders and creates multiple segmentation of labour markets, it also weakens links between business and citizens. There follows a discussion of the outlines of an alternative social contract based on less distortionary welfare systems, notably direct cash grants for citizens. In this, the text again draws on a well-developed literature on energy subsidy reform and on potential strategies for compensating for energy price increases. The chapter’s main contribution to the literature lies in its analysis of public employment reform and its labour market implications and of the wider political economy implications of distributional reform. It spells out the potential impact of a more inclusive and less distortionary distribution and welfare regime on social stratification and on relations between state, business and citizens.

Energy Consumption in Onion and Potato Production within the Province of El Hajeb (Morocco): Towards Energy Use Efficiency in Commercialized Vegetable Production

<p>Energy use efficiency is a key requirement for sustainability in agricultural production, but often overlooked. The aim of this study was to quantify the amount and efficiency of energy consumed in the production of onions and potatoes in El Hajeb province of Morocco. These estimates are of significant importance in informing contemporary policy discourse related to energy subsidy reform in Morocco, and more specifically within an ongoing national strategy for ‘modernizing’ the agricultural sector under the ‘Green Morocco Plan’. Data were collected through the administration of a direct questionnaire with 60 farmers and analyzed using PLANETE. Our results indicate that total energy consumption in onion production is 107483 MJ ha<sup>-1</sup> with butane (79.5%) as the main source of direct energy. Chemical fertilizers (61.53%) and water for irrigation (30%) were main sources of indirect energy. Energy indices related to energy efficiency ratios, energy profitability and energy productivity were estimated at 0.78, -0.22 and 0.54 kg MJ<sup>-1</sup>, respectively. Total energy consumption in potato production was estimated at 74,270 MJ ha<sup>-1</sup>, with direct energy consumption of 28,521 MJ ha<sup>-1</sup> stemming from butane (70%) and diesel (19.14%) as primary sources. Indirect energy consumption was estimated at 45749 MJ ha<sup>-1</sup> and generated principally through the use of fertilizers (60%). Energy indices (efficiency, profitability and productivity) were estimated at 1.54, 0.54, and 0.45 kg MJ<sup>-1</sup>, respectively. GHG emissions were found to be 3.47 t CO<sub>2eq</sub> ha<sup>-1</sup> in the production of onions and 3.63 t CO<sub>2eq</sub> ha<sup>-1</sup> for potatoes. We find that within the study area, increases in the size of production plots are not necessarily consistent with increases in energy use efficiency.</p>

Iran The Chronicles of the Subsidy Reform: Successes, Controversies, and Shortcomings of the 2010-2014 Reforms and Lessons for Future Reformers

We review the experience of Iran’s Targeted Subsidies Reform, from the early successes that followed its implementation in December 2010 to the challenges encountered in 2012-13. We discuss briefly the key elements of the second phase of the reform launched in March-April 2014. The short interval between the start of the reform in December 2010 and the intensification of international sanctions against Iran in late 2011, in particular the country’s crude oil exports and access to the international financial system, made the reform particularly difficult. The sanctions severely impeded Iran’s access to international technologies, expertise, and investment needed to facilitate more rapid and orderly reduction of the economy’s energy intensity and its re-orientation towards non-oil exports.We address several popular criticisms of the key elements of the reform design, implementation record, and broader economic and social impact. We identify and elaborate on the most critical design and implementation shortcomings. We propose options for the next steps in subsidy reforms, and put them into the context of broader reforms to modernize the economic architecture in Iran and other oil and gas exporting countries.

Electricity subsidy reform in China

China’s rapid economic growth significantly drives the country’s electricity demand. Electricity tariff in China is regulated by the government and is generally priced at a low level, leading to substantial electricity subsidy. With increasing coal price in recent years, the Chinese government’s low electricity tariff policy has led to huge financial losses for power companies, which directly results in electricity shortage. Therefore, the reform of electricity subsidy is the most important aspect of energy price reform in China. The reform is very difficult, as it is closely associated with people’s daily consumption and production activities. This article adopts a price-gap approach to estimate the scale of electricity subsidy with or without external costs in China. The results indicate that the current subsidy is substantial. In 2010, electricity subsidy with external costs in China amounted to 520.249 billion CNY, accounting for 1.3% of the year’s GDP. Despite the substantial electricity subsidy, low-income households did not benefit much. Therefore, there is need to design a sound electricity tariff subsidy and initiate subsidy-reducing strategies to improve efficiency and equality.

Applicability of economic instruments for protecting ecosystem services from cultural agrarian landscapes in Doñana, SW Spain

Abandonment and conversion of cultural agrarian landscapes are major drivers behind the loss of ecosystem services in Europe. One incentive for land-use conversion is the higher (private) economic return from industrial mono-functional crops relative to traditional multi-functional ones. However, conversion of cultural agrarian landscapes can involve high direct and indirect costs to society through the loss of ecosystem services. Using as a case study the traditional vineyards surrounding the Doñana National Park, South-West Spain, this research has three objectives: i) to measure soil erosion impacts from the conversion of traditional vineyards in biophysical and economic terms, (ii) to identify drivers of change behind the loss of traditional vineyards, and iii) to assess the applicability of economic instruments to protect traditional vineyards. Our results suggest that uprooting of traditional vineyards is an important driver behind the siltation of the marsh in the Doñana National Park, which in turns involve socio-environmental costs in terms of loss of ecosystem services and cultural values. Subsidy reform to reward management practices that sustain ecosystem services and eco-labelling of vine-derived products are pointed at as promising economic instruments to slow down or reverse abandonment or conversion of traditional vineyards.

Welfare implication of reforming energy consumption subsidies

Reforming energy consumption subsidies, in particular for fossil fuels, has been frequently referred to as a quick-win policy to enhance environmental mitigation. In addition, the removal of such subsidies may release a sizeable portion of a country's national budget for use on more productive targets. One of the most recognized challenges of such reform is “selling” the new energy prices to citizens, particularly those with a more fragile purchasing power. Several empirical and technical studies have prescribed that the reform might be supported by a direct compensation mechanism in order to ensure feasibility.This is what was done during the recent energy subsidy reform in Iran. However, the compensation mechanism implemented in Iran's reform was successful at the beginning, but did not proceed as expected. This has raised questions about the feasibility and sustainability of the direct compensation mechanism, and even of the reform policy itself.In this paper, we consider a stylized model where direct compensation is the instrument proposed to restore consumers’ utility against increased energy prices. We find that, when prices of Other Goods are affected by the announced reform policy, the feasibility of a subsidy reform critically depends on the value of certain parameters: the initial subsidization rate, the share of energy in the consumers’ bundle, and the energy portion of price of Other Goods.

Testing Supply-Side Climate Policies for the Global Steam Coal Market - Can They Curb Coal Consumption?

The achieved international consensus on the 1.5‐2°C target entails that most of current fossil fuel reserves must remain unburned. Currently, a majority of climate policies aiming at this goal are directed towards the demand side. In the absence of a global carbon regime these polices are prone to carbon leakage and other adverse effects. Supply‐side climate policies present an alternative and more direct approach to reduce the consumption of fossil fuels by addressing their production. Here, coal as both, the most abundant and the most emission-intensive fuel, plays a pivotal role. In this paper, I employ a numerical model of the international steam coal market (COALMOD‐World) to examine two alternative supply‐side policies: 1) a production subsidy reform introduced in major coal producing countries, in line with the G20 initiative to reduce global fossil fuel subsidies; 2) a globally implemented moratorium on new coal mines. The model is designed to replicate global patterns of coal supply, demand and international trade. It features endogenous investments in production and transportation capacities in a multi‐period framework and allows for substitution between imports and domestic production of steam coal. Hence, short‐run adjustments (e.g. import substitution effects) and long‐run reactions (e.g. capacity expansions) of exporting and importing countries are endogenously determined. Results show that a subsidy removal, while associated with a small positive total welfare effect, only leads to an insignificant reduction of global emissions. By contrast, a mine moratorium induces a much more pronounced reduction in global coal consumption by effectively limiting coal availability and strongly increasing prices. Depending on the specification of reserves, the moratorium can achieve a coal consumption path consistent with the 1.5‐2°C target.

Egypt Strives To Bolster Economy With Foreign Investment, Imports

Middle East Special Section An international bidding round for oil and gas announced on 1 August is Egypt’s most recent move to bolster its lackluster economy. The country is facing a severe dollar shortage as a drop in tourism, capital, and exports have caused international reserves to sink by more than half to USD 16.4 billion since the political instability in 2011. Economic activity and vital imports also have been limited by the country’s arrears owed to foreign oil companies. In July, Petroleum Minister Tarek El- Molla said the arrears were reduced to USD 3.4 billion in 2015–2016 from USD 3.5 billion a year earlier. He said the crude oil and natural gas received from the foreign partners’ share during 2015– 2016 was worth USD 5.4 billion, and Egypt paid the partners USD 5.5 billion. Egypt was once an oil exporter, but declining production and increasing subsidized consumption have turned it into a net importer. It is dependent on imported gas largely from Iraq and Jordan to keep pace with the country’s demand. The high cost of energy subsidies in Egypt has contributed to the country’s budget deficit and the inability of the Egyptian General Petroleum Corporation (EGPC), the country’s national oil company, to pay off its debt to foreign operators. In the fiscal year (FY) 2013– 2014, Egypt spent USD 18.2 billion on oil product subsidies and USD 1.8 billion on electricity subsidies. In FY 2014–2015, the Egyptian government projected the cost of oil product subsidies to fall to USD 9.2 billion as a result of its implemented subsidy reforms and the drop in global crude oil prices since mid-2014. However, Egypt’s spending on electricity subsidies has increased and is budgeted to cost USD 3.6 billion in FY 2014–2015. To avoid significant backlash from the public at the prospect of dwindling subsidies, which now account for approximately one-fifth of the government’s total budget, the country is looking to increase production by appealing to foreign investment in its oil and gas sector. From 2012 to 2013, Egypt’s dry natural gas production declined by 5%. Substantial natural gas discoveries in the Mediterranean Sea and in other areas have been undeveloped because the price that the government was willing to pay foreign operators for the gas was too low, making some projects commercially unviable. However, in recent years Egypt has signed deals to pay foreign operators a higher price for the natural gas they produce.

Energy resource allocation in Iran regarding targeted subsidies reform

ABSTRACTIran has enormous energy resources and owns the second largest oil and gas reservoirs in the world. Cheap domestic energy prices and energy subsidies had led to a rapid increase in domestic energy consumption in the country. In 2010, increasing domestic energy prices and targeted subsidies reform were implemented. The objective of this article is to allocate optimally to each end-user a certain amount of energy to be supplied by a given resource in Iran regarding targeted subsidies reform. For this purpose, energy demands of end-users are forecasted and the outcomes are used in a fuzzy linear programing model, which determines the best allocation of energy resources of Iran from 2012 to 2020. The results would provide a scientific basis for the optimal allocation of energy resources in meeting the future energy demand in Iran.

Fossil Fuel Subsidy Reform: A New Zealand Perspective on the International Law Framework

This article examines and critiques New Zealand’s role in international efforts towards the coordinated reform of fossil fuel subsidy practices, including through its leadership of the Friends of Fossil Fuel Subsidy Reform (FFFSR), a coalition of nine non-G20 countries who have formed an alliance in advancing international fossil fuel subsidy reform efforts. A particular aspect of New Zealand and FFFSR attention and strategy to date – a focus on fossil fuel consumption subsidies in developing countries – is assessed against principles of equity, “common but differentiated responsibilities and respective capabilities” and the duty of developed nations to “take the lead” on climate change mitigation. The article also explores arguments concerning the importance of supply-side climate mitigation measures and the need to take into account risks of stranded fossil fuel production assets in domestic climate change policies.

Impacts of residential electricity subsidy reform in China

China’s rapid economic growth causes a sharp increase in the demand for electricity. Electricity price in China is generally controlled at a low level by the government, leading to a substantial electricity subsidy. Electricity subsidy is the focus of energy price reform. It is also most closely linked with residential life and is a very sensitive issue to residents. This paper adopts the price-gap approach to estimate the scale of electricity subsidy and finds that in 2010, residential electricity subsidy in China amounted to 467.17 billion CNY (Chinese yuan), accounting for 1.17 % of GDP in that year. Subsequently, the paper estimates the impacts of residential electricity subsidy reform on the welfare of residents using the compensating variation (CV) measurement. The results show that if residential electricity price rises by 50, 100, 150, and 191 %, the CV should be 288.5, 394.2, 451.1, and 467.2 billion CNY, respectively. The residential electricity subsidy reform also has a moderating role in the rebound effect of electricity consumption. The direct rebound effect in China’s residential electricity consumption is 20 %. Electricity subsidy reform will raise terminal electricity price and restrain residential electricity consumption. Therefore, electricity subsidy reform should be an effective measure to mitigate the rebound effect.

Benefit Incidence of Fuel Subsidies in Madagascar and Recommendations for Child-Friendly Reallocation

Fuel subsidies lead to environmental damage through inefficiencies in energy use, they are a burden for public budget and moreover they are regressive, benefiting the already better off households. Despite, these negative qualities, energy subsidies are still implemented throughout the World. Post-tax energy subsidies in the World are estimated to be 5.3 trillion USD while fuel subsidies alone, are estimated to be 1.5 trillion USD, making up 1.8 percent of the global GDP in 2015. Although fuel subsidies are regressive, fuel subsidy reforms impact the poor the hardest. Previous experience with fuel subsidy reforms around the World show that, poverty increases as a result of fuel subsidy removal if it is not mitigated with redistribution efforts like cash transfers.In Madagascar, the government decided to eliminate fuel subsidies gradually in June 2014. Yet, price control mechanism has not been dropped yet. Given the sharp fall in international oil prices in the last year, a window of opportunity has opened for Madagascar and countries alike to adopt a liberalized pricing system and abolish fuel subsidies.Using ENSOMD 2012 data set, we show that in Madagascar, fuel subsidies are highly regressive. Gasoline and diesel consumption is very rare in the households in the bottom 60 percent while kerosene is commonly consumed by households from all income groups. We find that poor households are affected the least if kerosene price remain unchanged. Nevertheless, different price increase scenarios including a change in the price of kerosene do not increase poverty by more than 1 percentage points. Instead reallocating the gains from the fuel subsidy reform to children aged 0-4 or 0-14 uniformly is found to decrease poverty rates between 2.4 to 4.6 percentage points.

Household welfare implications of fossil fuel subsidy reforms in developing countries

With over 200 countries reaching an agreement with the stated aim of restricting global warming to “well below 2°C above pre-industrial levels” – the most comprehensive climate change agreement was recently signed. Though most of the hard work lies ahead, it marks an important first step for the collective global community to address climate change. Fossil fuels continue to remain one of the largest contributors to greenhouse gas emissions and for many developing countries high levels fossil fuels continues to enable an overconsumption of fossil fuels. Given the sensitivity of governments to subsidy reforms, this study examines the household welfare implications of the removal of fossil fuel subsidies. It finds that while welfare implications are unambiguously positive for government the results are mixed for private households, although in an overwhelming majority of cases, the results are positive. However, even in the cases where the welfare implications are negative for private households we find that it is possible for governments to carry out the reforms in such a way as to be welfare improving to households incomes by compensating them with some of the fiscal savings gained from the subsidy reform.

The Socio Economic Impacts of Fossil Fuel Subsidy Reform in Developing Countries: The Case of Bangladesh

Subsidies have become a crucial topic nowadays for many developing countries due to the fluctuations in international fuel prices. Many developing nations (both importers and exporters of fossil fuels) are trying to phase out subsidies due to the burden it exerts on the fiscal budget. Many attempts have been taken by these countries towards reform and successful results have been obtained by some as well. Bangladesh is a country that is heavily dependent on fossil fuel imports. Since it is a developing country, government highly subsidizes fossil fuels to ensure affordability as energy is vital for the development of any country. However, due to fluctuations in international oil prices it has become important for Bangladesh to think of subsidy reform as it is not logical to maintain the previous policies of fuel subsidies. Subsidies crowd out investments which could be used in other sectors like healthcare, education, purchase of machineries etc. Many developing countries like India, Indonesia, and Sudan have undergone subsidies reform over the past few years. Although some of them were not successful, some countries could effectively implement policies to ensure subsidy reform. Time plays an important factor along with the public understanding for any reform to be successful. Also, political consensus is vital for any such reform. Therefore, government has to plan out every step before implementing any policy and time should be allowed after informing the public about the change so that they can prepare for it. Transparency is also very important to build public support. Although subsidy removal has become important, reform is not easy. Subsidy removal often leads to high prices resulting in inflation. Therefore, countries like Bangladesh need to mitigate its effects on poor to avoid any economic or social unrest. Hence, it is a crucial time for Bangladesh to go for a reform and proper planning is required to do so. The lessons learned from other developing countries can help the policy makers of Bangladesh to make crucial decisions as they already know some of the negative effects (high inflation rate, currency depletion, public opposition, etc.) that may arise due to the reform thus they can take measure accordingly to mitigate that effect. Moreover, the lessons can be a guideline for Bangladesh that can be analyzed before the policy is implemented.

Impact of fossil fuel subsidy reform in China: estimations of household welfare effects based on 2007–2012 data

Changing the energy subsidy mechanism is a priority of China’s ongoing market-based energy reform. Using the 2007–2012 empirical data, this paper applies an input–output model to evaluate the welfare effects, that is, the expenditure increments of five income groups in 28 provinces, associated with the possible policy scenario of removing the subsidies for fossil fuels. The key findings of this study include, first, that the total indirect welfare effects (i.e. the additional money spent on non-energy commodities) are two-to-three times as large as the direct ones (i.e. the additional money spent on energy). Second, removing the oil subsidy leads to an additional expenditure of 19.74 CNY annually for each resident, which is much larger than the effect of removing the natural gas and coal subsidies. Third, the composition of the indirect effect varies significantly among income groups, because food expenditure contributes to approximately two-thirds of the total indirect effect on average. Finally, the welfare effect is very sensitive to the income level. To promote the smooth reform of the fossil fuel subsidies, we suggest that the government should deal with the coal industry initially, pay special attention to the indirect expense increase, and compensate low-income households for the welfare losses.