SUPPLEMENTARY INFORMATION

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1 SUPPLEMENTARY INFORMATION DOI: /NCLIMATE2679 COMMENTARY: Development incentives for fossil fuel subsidy reform Michael Jakob,ø, *, Claudine Chen, Sabine Fuss, Annika Marxen,, Ottmar Edenhofer,ø Mercator Research Institute on Global Commons and Climate Change, Torgauer Straße 12 15, Berlin, Germany Technical University Berlin, Straße des 17. Juni 152, Berlin, Germany ø Potsdam Institute for Climate Change Impact Research, Telegrafenberg 31, Potsdam, Germany *Corresponding author This supplementary document outlines the data and calculations carried out to determine the extent to which access gaps can be closed by cost savings resulting from fossil fuel subsidy reform. All access and cost data are contained in a spreadsheet that can be accessed online 1. I. Access Gaps Access to water refers to the share of the population using an improved drinking water source, such as piped water, public taps or standpipes, tube wells or boreholes (World Bank 2014). Improved sanitation facilities include piped sewer systems, septic tanks, pit latrines, and composting toilet (World Bank 2014). Electricity access measures the percent of households with an electricity connection (Pachauri et al. 2013). For telecommunication, having a mobile phone plus 10 minutes of airtime per day were 1 NATURE CLIMATE CHANGE 1

2 taken as a target (ITU 2014). Finally, for transportation, we examine the costs of paving all currently unpaved roads (World Bank 2014). We first determine the current share of people with access to the infrastructures under consideration, as well as the share of unpaved road in the total network. Population shares without access to water, sanitation and electricity as well as the percentage of unpaved roads come from the World Development Indicators (World Bank 2014). For the share of population with access to telecommunication we take (as a conservative estimate) the maximum of the population with access to fixed lines and mobiles from the ITU (2014). These shares are then assumed to remain constant until 2030, and are multiplied by the UN medium fertility population forecast (UN 2013) for 2030 in order to obtain the total amount of people who have to be connected until the target year, i.e. people who currently do not have access and the people additionally born into this nonaccess situation until Figure S1 displays the access maps for the different infrastructure types. Even though access levels can be expected to increase even without policy intervention in the future (especially for infrastructures with rapid technological development, such as ICT), our results nevertheless are useful as upperbound estimates and to give a sense of the orders of magnitude involved. In particular, for country/infrastructure combinations for which our analysis indicates that current fossil subsidies would be sufficient to achieve universal access, the same result would obtain under the more realistic condition of increased access in the business-as-usual case. 2

3 Figure S1: Share of population without access to infrastructure. (a) Water, (b) Sanitation, (c) Electricity, (d) Telecommunication, and (e) share of unpaved roads in total roads Grey areas indicate lack of available data. 3

4 II. Costs In the following, we will describe how the costs for providing access to water, sanitation, electricity, telecommunication as well as paving currently unpaved roads have been deducted from the raw data. A detailed description of assumptions and calculations is provided in Fuss et al. (2015), and all cost estimates are contained in the online data (see footnote 1). For the cost estimate of enabling universal access to clean water and sanitation, we rely on the World Health Organization (WHO) study by Hutton (2012). For electricity access, the vast variation of cost estimates across studies (Rothman et al. 2014)) led us to use cost projections from an energy systems model (Pachauri et al. 2013) as the basis for our calculation. Concerning the costs of paving unpaved roads, we use the International Energy Agency s (2013) Global land transport infrastructure requirements report (their Table 6). For the cost of telecommunications we assume that all new connections are mobile phones, as this is the much more common form currently proliferating in the emerging countries rather than fixed lines. Cost for providing access to mobile connections is assumed to be 150 US$ fixed costs per connection, which is line with the range of different studies reported in Rothman et al. (2014). For the cost of usage, we assume 2 US cents per minute. 4

5 To provide an overview, Table S2 shows the total cost of giving access to the respective populations without access in the main world regions. These are the aggregated numbers of the inputs at country level. 2 Electricity Water Sanitation ICT Roads Total East Asia & Pacific 22,590 95,748 88, ,210 2,352,731 3,124,149 Europe & Central Asia 0 5,655 12, , , ,986 Latin America & Caribbean 13,952 29,869 41, ,926 2,215,966 2,431,972 Middle East & North Africa 5,170 19,392 13,971 54, , ,532 North America , ,419 South Asia 35,861 5, ,213 1,062,650 2,488,990 3,697,759 Sub-Saharan Africa 355,554 37, , , ,733 1,482,099 total 433, , ,492 2,601,945 7,809,031 11,450,916 Table S2: Total costs of closing access gaps in millions of 2010 US$. Sources for cost estimates: Hutton (2012) for water and sanitation, Pachauri et al. (2013) for electricity, IEA (2013) for roads and ITU (2014) for mobile connections. 2 For the paper, we rely on country-level figures for those countries for which data on fossil fuel subsidies were available. 5

6 III. Fossil Fuel Subsidies Data for fossil fuel subsidies are available for 181 countries for the year 2011 from the IMF (2013). They are given as a percentage of national GDP. We used GDP figures from the World Development Indicators to arrive at absolute values. As subsidies are calculated as the difference between the world market price and costs for domestic users 3, they provide a measure of the revenue that is forgone by selling fossil fuels at a lower price than the one that could be obtained on the global market. While it can be argued that this approach under- as well as overestimates subsidies, it is the most commonly used measure (Koplow 2009) and to our knowledge the only one for which comprehensive cross-country data is available. It also has the advantage that no benchmark for extraction costs is needed and that it implicitly includes all taxes and royalties, such that one can abstract from them without requiring country-level estimates. For our benchmark scenario, we assume that the absolute annual level of subsidies will remain unchanged over the period Given growing energy demand in most countries, this approach likely underestimates future subsidies (see next section for a sensitivity analysis that takes into account the effect of higher subsidies). Consequently, the potential of meeting infrastructure investment needs by means of subsidy reform may be even higher than the results reported in the paper. 3 These subsidies are frequently labeled pre-tax, as opposed to post-tax subsidies, which also take into account the lack of a price on externalities (such as local air pollution). 6

7 IV. Sensitivity Analysis In the wake of low oil prices in the last year, it seems likely that some subsidies (such as direct price controls) are now below the values given in our dataset. This would of course reduce the amount of finance available for investment to some extent. In addition, the cost of infrastructure build-up is to a certain extent uncertain and could change in the future due to changed costs of inputs (e.g. capital costs) or technological advances (e.g. less expensive mobile phones). For this reason, we carry out sensitivity analysis that repeats our calculations for energy subsidies that are 50% higher and lower as well as infrastructure costs that are 50% higher and lower than those used in the paper. By spanning such a large spectrum of outcomes between very extreme scenarios, we are confident to reliably test the robustness of our conclusions. The results, shown in Figure S2 and Table S3, confirm that for water, investment needs could fully be covered by fossil fuel subsidies for all regions for all scenarios. For electricity and sanitation, however, in the case that assumes low subsidies and high infrastructure costs ( worst ), they would be insufficient for Sub-Saharan Africa (even though they would even then amount to less than half for sanitation, and less than one sixth for electricity for all other regions). For telecommunications, infrastructure investment needs could exceed fossil fuel subsidies in East Asia and Pacific, South Asia and Sub-Saharan Africa several times for the low subsidies/high costs scenario. Finally, investment needs to pave all unpaved roads could then be several times higher than fossil fuel subsidies for the above three regions as well as Latin America. However, for the assumption of high subsidies and low 7

8 infrastructure costs, fossil fuel subsidies would be sufficient to meet investment requirements for ICT in all regions, and for roads in all except Latin America and South Asia. Figure S2: Result of sensitivity analysis for each infrastructure under consideration by region (share of fossil fuel subsides required to achieve universal access to respective infrastructure over the period ). Shares larger than one indicate that subsidies would not be sufficient to meet infrastructure investment needs. 8

9 V. Putting access gaps and fossil fuel subsidies into perspective As mentioned in the paper, the countries with the highest fossil fuel subsidies in place are in general not those with the largest access gaps. In order to identify countries with large access gaps and high levels of fossil fuel subsidies, Table S1 presents a list of access gaps for all countries with per-capita energy subsidies of more than US$ 30. These data suggest that there are indeed various countries that correspond to the above criteria. For instance, Brunei Darussalam and Turkmenistan both have fossil fuel subsidies of more than US$ per year, and the former country displays a substantial access gap for electricity access, and the latter for access to water. Countries that display comparatively low rates of access to all infrastructures and at the same time feature intermediate level of subsidies (US$ per person per year) include Congo, Zimbabwe, Indonesia, Yemen, Zambia, Cabo Verde, Angola and Nigeria. Fossil fuel subsidies are generally lower in South Asia. Nevertheless, India, Pakistan, Sri Lanka and Bangladesh have fossil fuel subsidies exceeding US$ 30 per person per year. At the same time, these countries feature substantial access gaps in practically all types of infrastructure considered. 9

10 Country FF subsidies per capita Improved water Improved sanitation Electricity access ICT access Roads, paved Kuwait N/A Qatar N/A United Arab Emirates N/A Saudi Arabia N/A Bahrain Oman Libya N/A N/A N/A Brunei Darussalam N/A N/A 72.6 N/A 80.4 Turkmenistan N/A Venezuela, RB N/A N/A N/A Iran, Islamic Rep Iraq N/A Algeria Trinidad and Tobago N/A N/A Lebanon N/A N/A Uzbekistan N/A N/A Ecuador N/A Egypt, Arab Rep Jordan Russian Federation N/A Argentina N/A Kazakhstan Malaysia Azerbaijan Ukraine Tunisia Congo, Rep N/A Zimbabwe N/A Thailand N/A Indonesia Yemen, Rep N/A N/A Kyrgyz Republic N/A Zambia N/A Cabo Verde N/A Angola N/A Antigua and Barbuda N/A Nigeria N/A Bolivia Ghana N/A Cameroon Pakistan N/A 72.5 South Africa N/A Bangladesh N/A Sri Lanka N/A 14.9 Cote d'ivoire N/A Table S1: Fossil fuel subsidies per capita and access rates to water, sanitation, electricity and ICT, as well as share of paved roads. Sorted by fossil fuel subsidies per capita, only countries with subsidies > US$ 30 are shown. 10

11 References Fuss, Sabine, Claudine Chen, Michael Jakob, Annika Marxen, Narasimha D. Rao, and Ottmar Edenhofer Could Resource Rents Finance Universal Access to Infrastructure? A First Exploration of Needs and Rents. Mimeo. Hutton, Guy Global Costs and Benefits of Drinking-Water Supply and Sanitation Interventions to Reach the MDG Target and Universal Coverage. WHO/HSE/WSH/ IEA Global Land Transport Infrastructure Requirements: Estimating Road and Railway Infrastructure Capacity and Costs to ctureinsights_final_web.pdf. IMF Energy Subsidy Reform: Lessons and Implications. ITU World Telecommunication/ICT Indicators Database, 18th Edition. Koplow, D Measuring Energy Subsidies Using the Price-Gap Approach: What Does It Leave Out? Pachauri, Shonali, Bas J van Ruijven, Yu Nagai, Keywan Riahi, Detlef P van Vuuren, Abeeku Brew-Hammond, and Nebojsa Nakicenovic Pathways to Achieve Universal Household Access to Modern Energy by Environmental Research Letters 8 (2): doi: / /8/2/ Rothman, Dale S., Mohammod T. Irfan, Barry B. Hughes, Eli Margolese-Malin, and Jonathan D. Moyer Building Global Infrastructure (Patterns of Potential Human Progress). Paradigm Publishers. UN World Population Prospects: The 2012 Revision. World Bank World Development Indicators. x?source=world-development-indicators. 11