Energy Subsidy Reform IMPLICATIONS OF SUBSIDIES This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for Capacity Development courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of the course staff and do not necessarily represent those of the IMF or IMF policy.
Implications of Energy Subsidies: Macroeconomic Implications Environmental Social S i l
Implications of Energy Subsidies: Macroeconomic Implications Environmental Social
I. Macroeconomic Implications: Energy Subsidies affect: 1. Growth 2. Public finances 3. Macroeconomic imbalances
1. Impact on Growth: Subsidies reduce investment in the energy sector low subsidized prices low profits or losses unattractive to invest severe energy shortages negative impact on growth
1. Impact on Growth: 3000 Example: Electricity in Sub-Saharan Africa KWh per capita in 2009 Access to electricity (% of population) 2009 2500 2000 1500 1000 Electricity Production Electric power consumption 90 70 50 500 30 0 East Asia & Pacific Latin America Middle East & North Africa South Asia Sub-Saharan Africa 10 East Asia & Pacific Latin America Middle East & North Africa South Asia Sub-Saharan Africa Source: World Development Indicators and IMF staff estimates.
1. Impact on Growth: Subsidies diminish the competitiveness of the private sector Low subsidized prices Low costs in many sectors Over-use of cheap subsidized technology Over-allocation of resources to less productive activities
1. Impact on Growth: Subsidies crowd-out more worthwhile hil public spending 45 40 35 30 25 20 15 10 5 0 Uzbekistan Turkmenistan Iran, Islamic Rep. Ukraine Algeria Venezuela, RB Kuwait Libya United Arab Emirates Oman Qatar Ecuador Brunei Darussalam Russian Federation Kazakhstan Bangladesh Lebanon Syrian Arab Republic Trinidad and Tobago Vietnam Indonesia Zambia India Azerbaijan
1. Impact on Growth: Subsidies increase smuggling incentives If domestic prices are lower than in neighboring countries, illegal trade increases the budgetary cost for the subsidizing country
1. Impact on Growth: Example: Nigeriai Selected Countries: Super Gasoline Prices, December 2012 (CFAF/liter) Cameroon 569 Gabon 535 Chad 405 Central African Republic 880 Republic of Congo 595 Nigeria 224 Benin 580 Burkina Faso 732 Niger 579 Togo 595 Sources: IMF staff estimates.
2. Impact on Public Finances: Subsidies have an adverse impact on fiscal balances and public debt especially in periods of rising prices 700 600 500 400 Gasoline and diesel Crude oil 300 200 100 Coal Natural gas 0 2006 2007 2008 2009 2010 2011 2012 International prices of energy products (January 2000=100)
2. Impact on Public Finances: Adjustment t of Energy Subsidies for Taxes and Externalities, 2011
3. Impact on Macro Imbalances: Oil importing countries Incomplete pass-through of international prices worsens the balance of payments Oil exporting countries Failure to adjust prices during commodity booms reduces ability to manage demand
ENVIRONMENTAL AND SOCIAL IMPACT
Implications of Energy Subsidies: Macroeconomic Implications Environmental Social
II. Environmental Implications: Energy subsidies help contribute to: 1. Global warming and air pollution 2. Traffic congestion and accidents 3. Less incentives for investment in cleaner technology
1. Air Pollution & Global Warming: Subsidies promote global warming and air pollution Low subsidized prices Higher consumption higher CO2 emissions
2. Traffic Congestion: Subsidies create other externalities Traffic congestion, higher rates of accidents, road damage Example: Iran subsidized fuel encouraged high levels of vehicle traffic.
3. Less Incentive to Invest: Subsidies reduce incentives to invest in cleaner technology Subsidies for traditional energy sources No incentive to invest in new technologies
Potential Solutions Corrective Taxes? Corrective Motor Fuel Taxes, Selected Countries (Cents per liter, 2011 dollars) Gasoline (Cars) Diesel (trucks) United States United Kingdom Chile United States Chile Total 38 44 73 40 65 Contribution of: local pollution 3 4 18 10 16 carbon 8 7 8 9 9 congestion 15 26 19 10 16 accidents 12 8 28 3 12 noise 0 0 0 2 1 road damage 0 0 0 6 12 Sources: Institute for Fiscal Studies (2012); Parry (2011); Parry and Small (2005); Parry and Strand (2011
Implications of Energy Subsidies: Macroeconomic Implications Environmental Social
III. Social Implications: Energy subsidies: Create direct and indirect social benefits Reinforce inequality
1. Social Benefits: Direct impact Indirect impact Lower prices (and higher quantities) for subsidized products Lower prices (and higher quantities) for goods and services that use subsidized d goods as input Examples Examples
2. Concentrated Benefits: Energy subsidies reinforce inequality because they are not well-targeted
Concentrated Benefits Example: Distribution ib ti of Petroleum Products Across Income Groups Gasoline Kerosene LPG Diesel 3 6 10 21 19 4 8 13 42 7 12 61 19 20 20 54 21 16 21 23
Summary Energy subsidies 1. Negatively affect growth over the long-term 2. Are costly fiscal instruments crowding-out productive spending 3. Exacerbate macroeconomic imbalances 4. Create negative externalities and contribute to global warming and local pollution 5. Reinforce inequality