What do we mean by «energy subsidies»?

Size: px

Start display at page:

Download "What do we mean by «energy subsidies»?"

Christal Boyd
6 years ago
Views:

1 Energy Subsidies Jon Strand Work referred to: Parry et al, 2014 G Mundaca, 2017, How much can CO2 emissions be reduced if fossil fuel subsidies are removed? Energy Economics, 64, C Beers and J Strand, 2013, Political Determinants of Fossil Fuel Pricing. Policy Research Working Paper no 6470, World Bank. J Strand, 2016, Model of non-corrupt government versus corrupt government in delivery of transport services: The impact of energy subsidies. (See website.)

2 What do we mean by «energy subsidies»? The IMF uses two separate terms: Net subsidies: These are subsidies that lead to a net fiscal cost to governments. Not simply loss of revenue. Gross subsidies: With this concept, one compares the actual pricing of energy with an «ideal» price. The «ideal» price implies that a Pigou tax, which corrects optimally for all exernality costs resulting from the consumption and production of this energy, is charged to the energy price. This concept can then also contain «implicit» subsidies (relative to the correct energy price).

3 What energies are subsidized? Natural to separate between fossil and non-fossil energies. Subsidies to fossil energy is particularly damaging in particular for carbon emissions. Other energies that can be/are subsidized: Nuclear energy Hydropower Other renewables. For other renewables in particular, there may be good reasons to subsidize, to stimulate techological development for these, and to promote their use relative to more harmful energies.

4 At what stages are energies subsidized Most common to subsidize consumption directly, by lowering the consumer price of the respective energies. This can be also most damaging. This is the most common subsidy in lower-income countries. Also production (mainly renewables) and extraction (mainly fossil fuels) of energy can be subsidized. This is more common in higherincome contries.

5 Focusing on fossil fuels, what are problems with fossil energy subsidies? Excessive consumption of fossil energy, excessive carbon emissions Excessive local pollution Very often adverse distributional impacts. In many cases, the wealthy have by far the most benefits from the subsidies (as when subsidizing gasoline in poor countries) High fiscal costs, reduced public expenditure on more important goods and services Distortions to industrial structure, in the direction of too energy-intensive Worsened energy security for energy importers Reduced economic growth

6 Pre-tax (or direct fiscal) fossil energy subsidies by region and fuel, 2013 US $ Billion By region Sub Sah. Africa, 4% Middle East, North Africa, Pakistan, 47% Latin America, 14% Emerging and Developing Asia, 18% Cent., East. Eur., Common. of Ind. States, 14% Advanced, 4% By fuel type Electricity, 29% Natural gas, 21% Coal, 1% Petroleum, 49%

7 Who are subsidizing fossil fuels, and what is subsidized? Most direct fossil fuel subsidies are found in the Middle East and North Africa (MENA) region. But also in many countries in East Asia, and some countries in Latin America, and Central Asia. Petroleum is given the most direct subsidies, followed by electricity (but the latter is composed of both fossil and non-fossil sources). The highest «gross subsidies» are found in the countries with the highest externality costs associated with fossil energy consumption, China and India.

8 Post-tax (gross; including also indirect/notional) subsidies to fossil fuels by region and fuel, ,000 4,500 4,000 3,500 Emerging Europe, % SS Africa, 2% Mid East, North Africa, Pakistan, 10% Latin America, 5% Electricity, 5% Natural gas, 10% US $ Billion 3,000 2,500 2,000 1,500 1, Emerging and Developing Asia, 47% Cent., East. Eur., Common. of Ind. States, 10% Advanced, 23% Coal, 52% Petroleum, 33% 0 By region By fuel type

9 Excise tax rates on motor fuels, high-income countries Australia Austria Belgium Canada Chile Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom United States Simple average US$ per liter Gasoline Diesel

10 What is the impact on fuel consumption and emissions from fuel subsidies? Mundaca (2017) finds demand elasticities with respect to the diesel price of between -0.2 and -0.6 for different World Bank regions. Similarly for gasoline, but slighly lower, between and -0.5 for the same regions. She finds low (country-level) income elasticities for diesel and gasoline, around in both cases.

11 Energy subsidies and fuel consumption (cont.) Mundaca (2017) considers a 20 cents per liter increase in the prices of both gasoline and diesel, in countries that subsidize fuels. She shows that the long-run effect of such price increases can reduce gasoline and diesel demand and consumption dramatically in those countries that subsidize these energies most, such as Iran, Saudi Arabia and Egypt. Diesel consumption in Iran and Saudi Arabia fall by more than 2/3, and gasoline consumption by about half. Overall, an elimination of energy subsidies globally could lead to a very large reductions in global fossil fuel consumption and thus carbon emissions. Possibly, on the range 5-10% of current consumption or more. See also next slide.

12 Impact of fossil-fuel consumption subsidy phase-out on global energy demand and CO2 emissions, (Impacts by 2020 from eliminating energy subsidies)

13 Estimates of subsidies to different energy types, OECD, 2009 Energy type Energy produced (2009) OECD Share of production (2009) Subsidies per energy unit US cents/kwh (2009) Nuclear energy 2,600 TWh electricity 83% Renewable energy (excluding hydropower) 500 TWh electricity 83% Fossil Fuels to electricity 12,900 TWh electricity Biofuels to transport 51 Mtoe 66% 3.3 Oil products to transport 2,205,570 Ktoe 0.5

Energy subsidies by country group, 2004-2010 (A/B: poor/middle-inc energy importers; C/D: poor/middle-inc energy exporters) Group A Armenia, Ghana, India, Jordan, Moldova,

14 Energy subsidies by country group, (A/B: poor/middle-inc energy importers; C/D: poor/middle-inc energy exporters) Group A Armenia, Ghana, India, Jordan, Moldova, Morocco, Pakistan; in Group B Chile, Dominican Republic, Peru, Turkey; in Group C Azerbaijan, Egypt, Indonesia, Iran, Nigeria, Yemen; and in Group D Argentina, Malaysia, and Mexico.

Gasoline prices by country group, 2004-2010 Note that Group C are the heaviest enery subsidizers, followed by Group D.

15 Gasoline prices by country group, Note that Group C are the heaviest enery subsidizers, followed by Group D. Group B are taxing energy, in some cases heavily (as for gasoline in Turkey) Group A Armenia, Ghana, India, Jordan, Moldova, Morocco, Pakistan; in Group B Chile, Dominican Republic, Peru, Turkey; in Group C Azerbaijan, Egypt, Indonesia, Iran, Nigeria, Yemen; and in Group D Argentina, Malaysia, and Mexico.

16 What do empirical results say about relationships between politics and energy subidies? Beers and Strand (2013) study the following issues in this context: Degree of corruption, or lack of corruption control Whether the political system is democratic, or autocratic Stability of the political (democratic or autocratic) system Potential power distribution within the political system Actual political power distribution.

17 Results (Beers and Strand) A more corrupt and dictatorial society and government tends to set lower motor fuel prices, and higher fuel subsidies. This is not surprising. In more corrupt societies, visible favors (such as low fuel prices) to key groups will tend to play a larger role. Since gasoline is in most countries the primary fuel for private transport, one should expect the highest subsidy level for that fuel. Dictators have often smaller groups (a «selectorate») that are crucial for them to back up. Such support can often be done effectively by subsidizing energy that this group uses to a higher degree than others. More energy subsidies in countries with poor governance. Energy subsidy is an inefficient but administratively easy way to favor or pay off friends and supporters. Energy subsidies are often the only government favor or good that politicians can credibly promise to provide to voters and other supporters.

18 Results (cont.) When the political system changes from democratic to non-democratic, or vice versa, motor fuel prices in both cases immediately drop. For a country switching from non-democracy to democracy, the tendency is for fuel prices first to shift down and then gradually to drift upwards as the democracy matures. Among democracies, a presidential system in which swing votes often are particularly important leads to more subsidies than a parliamentary system. A political system with a directly elected president and/or a plurality voting system reduce both gasoline and diesel prices significantly. In political systems where swing votes are important to get (re-)elected (or in autocracies, where support from often small, key, population groups is important to stay in power), a more targeted redistribution of public resources through clearly visible fossil fuel subsidies takes place.

19 Results (cont.) More concentrated power in the hands of government parties in parliament leads to more motor fuel subsidies or lower fuel prices. This effect is particularly strong for middle-income countries, and is stronger for diesel than for gasoline.

20 More on political economy of energy subsidies Generally, fossil energy exporters subsidize fossil energy, and often by more the larger the export (Norway is an exception). Few fossil importers have large consumption subsidizes to fossil energy. But some countries that have no oil still subsidize oil products. (An example is Egypt.) When a country has established an energy subsidy policy, it is often politically difficult to get rid of it.

21 Model of political economy of energy subsidies (Strand 2016, MIT Press, available on website) Consider following objective function where ( T, s, N) EW0 H( B0) Z. 1 ( T, s, N) Z G U( T, s ) ev ( T, N, s ) qc( N, s ) H( B ) t t 0 t 0 t t t t t

22 Optimal infrastructure investment with non-corrupt government The first-order condition wrt infrastructure (period 0) can be written Z ElT ( ) ElN ( ) H '( B) U T evt ( evn qcn ) NT ( NT ) r 1 T N LHS: Marginal cost for the politician of making infrastructure investment RHS: Marginal returns to infrastructure invest. δφ/r = discount factor U(T) = marginal utility of infrastructure for politician 2nd main term = emissions and externality impacts (negative) 3rd main term = impacts on reelection probability from better infrastructure (positive)

23 Optimal energy subsidy rate First-order condition of sitting government with respect to fuel subsidy can be written as follows: ds dz S Z2 Els ( ) ElN ( ) H '( B) ( Ns ) ds ds 1 s N LHS: Marginal fiscal cost of increased fuel subsidy RHS: 1st term expresses benefits to politician from subsidies. Tend to be < 0 (> 0) for responsible (irresponsible) politicians 2nd main term expresses impact on reelection probability due to fuel subsidy. This is often positive.

24 Summary of factors likely to give a high level of fuel subsidies (in case of no corruption) dz -S /ds high at moderate s levels: High utility to sitting government from paying subsidies (small impact of moderating factors) dφ/ds high at moderate s levels: Large political gain from subsidizing fuels, in terms of higher reelection probabilities. U (H) is small at moderate s levels: The politician has little concern for negative budget balance; fuel subsidy not fiscally very harmful. N low: Has ambiguous effect. Low N implies little fiscal cost related to a fuel subsidy. But low N could also mean that there is little political impact from subsidizing fuels, since few voters benefit from the fuel subsidies (few have cars). Most likely positive effect in autocracies, when it affects a narrow and politically important selectorate.

25 Impacts of corruption Consider a modified periodic objective function Z G Y ( N, s ) U( T, s ) ev ( T, N, s ) qc( N, s ) H( B ( s )) where now Y are bribes paid to the politicians when subsidizing fuels, and λ is the preference of the politician for bribetaking. The objective function of a politician which takes bribes is now (2) EW Z (1 ) Z 1 (2) Here, σ is the probability that the politician is thrown out of office when being corrupt. This reduces the future value of all policies for corrupt politicians.

26 Impacts of corruption (cont.) New first-order condition with respect to energy subsidy: dew1 d( Z1 Y1 ) 1 1 Ys ( s N Ns ) YYs Z2 0 ds ds Two new terms: The term λy(s) represents the impact of the bribe (leads to higher s) The last term containing σ: Expresses the (negative) impact of bribe taking on future government rule, which leads to lower s. This effect is likely to be small (large) with poor (good) governance.

27 Brief summary of factors likely to give more corruption High λ: High propensity of politicians to like bribes, and take them. This increases bribe paying and corruption, and increases energy subsidies. Y(s) high: This means that an increase in s gives much more bribes. Expresses the propensity of the public to pay bribes. This gives more bribing in equilibrium. High N: More people have cars, thus more people have incentives to pay bribes. This can increase bribe paying, corruption, and perhaps also the fuel subsidy (although fiscal burden effects go in other direction) When there is more widespread bribing (Y(N) high), this is likely to reduce σ (rate of sacking politicians) when corruption is discovered. Society is likely to become more tolerant to corruption as corruption increases, and politicians are punished by less. This may increase corruption, and the fuel subsidy rate. It may also lead to multiple equilibria, with and without bribing.

28 Overview of some important results from the model of Strand (2016) Key variable or model variant Effect in fuel subsidies Effect in infrastructure investment Effect on budget balance Many have cars Politicians gain personally from subsidies Subsidies positive for politicians reelection Politicians have small budget concern Negative in autocracy Positive in democracy Negative Ambiguous Higher Neutral Negative Higher Lower Negative Higher Higher Negative Politicians are myopic Higher Lower Negative Growth effect added to basic model Corruption added to basic model Reduced Higher Negative early, but positive later Mostly higher Mostly lower Negative

29 Basic messages: A politician who takes a short-run perspective will tend to downprioritize infrastructure investments, and put more emphasis on short-run measures such as energy subsidies. A greater (known) growth effect of energy subsidy phase-out, and of infrastructure investment and other public goods, will tend to give infrastructure/public goods more emphasis, and energy subsidies less emphasis. But this effect may vanish when the politician is shortsighted (expected tenure is short).

30 Basic messages (cont.): Infrastructure investment in roads (not public transport) can favor fuel subsidies as the constituency (number of cars) increases and the public puts more weight on fuels. Many households with cars can make politicians favor road investments over public transport investments, thus further biasing investments in that direction. This may lead to multiple equilibria as more energy subsidies lead to more cars which in turn lead to more support for energy subsidies (and perhaps more bribes to politicians to support low fuel prices). This can then also give more support to investment in road infrastructure. (We could have opposite effects when there are high fuel prices).

31 Basic messages (cont): The prevalence of corruption reduces politicians future tenure. This could to lead to even more short-sighted behavior (more emphasis on subsidies and less on infrastructure). But it can also limit politicians bribe taking when politicians tenure is (strongly) affected by the possibility of being caught in corrupt acts. These impacts are somewhat ambiguous. When more politicians are corrupt already, a given politician will more easily accept bribes in return for low energy prices, as corruption tends to punished lighter. Thus, corruption breeds corruption.

Global Energy Production & Use 101

Global Energy Production & Use 101 Jean-Sébastien Rioux The School of Public Policy SPP-HEI Summer School on the Geopolitics of Energy & Natural Resources Calgary, AB May 15-20, 2017 Presentation highlights