IEA analysis of fossil-fuel subsidies for APEC Marco Baroni Office of the Chief Economist International Energy Agency Kaohsiung, Chinese Taipei, 18 October 2011
Mtoe Policies could dramatically alter the long-term energy outlook World primary energy demand by scenario 20 000 18 000 16 000 14 000 Current Policies Scenario New Policies Scenario 450 Scenario 12 000 10 000 8 000 6 000 1980 1990 2000 2010 2020 2030 2035 Compared with the New Policies Scenario, energy demand in 2035 is 8% higher in the Current Policies Scenario and 11% lower in the 450 Scenario
Mtoe Primary energy demand in APEC economies in the Current Policies Scenario 12 000 10 000 8 000 6 000 4 000 Other renewables Hydro Nuclear Gas Oil Coal 2 000 0 1990 2000 2010 2020 2030 2035 APEC energy demand expands by 44% between now and 2035 an average rate of increase of 1.4% per year with fossil fuels remaining dominant in the energy mix
Spending on oil & gas imports as a share of GDP in APEC economies in the Current Policies Scenario 7% 6% 5% 4% 3% 2% 1% Indonesia China Japan Mexico United States ASEAN* Australia/ New Zealand 0% 1990 2000 2010 2020 2030 2035 The combination of higher prices and expanded imports translates to a growing import bill for the region, which can be a heavy burden on economic growth
Gt CO 2 emissions in APEC economies in the Current Policies Scenario 45 40 35 30 25 20 15 10 5 0 1990 2000 2010 2020 2030 2035 Gas Oil Coal World APEC s share of global CO 2 emissions increases slightly to 59% in 2035, highlighting that the region will have to play a key part if climate objectives are to be met
Iran Saudi Arabia Russia India China Egypt Venezuela UAE Indonesia Uzbekistan Iraq Algeria Mexico Thailand Ukraine Kuwait Pakistan Argentina Malaysia Bangladesh Turkmenistan Kazakhstan Libya Qatar Ecuador Billion dollars Fossil-fuel consumption subsidies for top twenty-five countries, 2010 90 80 70 60 50 40 30 20 10 0 Electricity Coal Natural gas Oil Oil products had the largest subsidies at $193 billion, followed by natural gas at $91 billion, while fossil-fuel subsidies resulting from the under-pricing of electricity reached $122 billion
Fossil-fuel subsidies can have unintended effects Fossil-fuel subsidies result in an economically inefficient allocation of resources and market distortions, while often failing to meet their intended objectives
Quantifying fossil-fuel consumption subsidies using the price-gap approach A price-gap is the amount that an end-use price is below the full cost of supply or reference price It is applicable where end-use prices are regulated and fall short of international market levels Does not capture: production subsidies, rebates to consumers, the effect of cross-subsidies, cost of investing in new capacity (electricity) What costs are represented by estimates from the price-gap approach? For net exporters, these are essentially opportunity costs For net importers, these are estimates of direct, budgetary transfers Relevant calculations Subsidy = (reference price end-use price) * consumption Reference price (fuels) = int l price (quality adj) +/- freight & insurance + local distribution + VAT Reference price for electricity is based on annual average-cost pricing: calculated from a weighted average of the cost of electricity production (according to specific power mix), plus transmission and distribution
Quantifying fossil-fuel consumption subsidies using the price-gap approach LPG Diesel International price Freight and insurance Internal distribution Value-added tax End-use price Price gap (subsidy) Gasoline 0 0.2 0.4 0.6 0.8 1.0 Dollars per litre The price-gap method compares end-use prices paid by consumers with reference prices that correspond to the full cost of supply a subsidy is present if the end-use price falls short of the reference price
Calculating electricity reference prices Input Reference Price Annual Avg. Fuel Efficiency Mix of Power Generation Avg. Cost of Generation is capped by Levelized Cost of a new CCGT Oil $/unit 38% 26% New CCGT Gas Coal $/unit $/unit 45% 36% 43% 10% Avg. Cost of Generation Reference Price Nuclear/Renewables 21% T&D and other costs The electricity reference price takes into account the cost of generation from fossil fuels, capped at the cost of a new gas CCGT plant
What data is needed for countries to make their own measurement? End-use prices To calculate reference prices: International market (spot) prices Shipping freight and insurance costs Cost of local distribution Rate of value-added tax Total final energy consumption Country imports and exports Data should be collected and applied at the same level of detail Consider sector/use, fuel grade, time period and region
Methodology for modeling fossil-fuel and CO 2 savings Calculate initial subsidisation rate (by fuel/use) Choose time period over which to model subsidy phase-out Decrease the subsidisation rate over the chosen period, raising end-use prices Fuel savings are linked to pace of change in end-use prices and the elasticity of demand CO 2 savings are calculated by applying emissions factors to fuel savings
Billion dollars Dollars per barrel Fossil-fuel consumption subsidies remain big World subsidies to fossil-fuel consumption using the price-gap approach 600 150 Rest of world 500 400 300 200 125 100 75 50 APEC eco nomies IEA average crude oil import price (right axis) 100 25 0 2007 2008 2009 2010 0 Worldwide, fossil-fuel consumption subsidies totaled $409 billion in 2010 about $100 billion higher than in 2009; among APEC economies, we estimate they reached $105 billion
Subsidies per capita (dollars per capita) Subsidies per capita (dollars per capita) Fossil-fuel consumption subsidies per capita and as a percentage of total GDP Countries with higher rates Countries with lower rates 3 000 300 2 500 Qatar Kuwait UAE Scale (billion $) 40 250 Russia Kazakhstan Malaysia 2 000 Saudi Arabia 10 200 1 500 150 Argentina Thailand 1 000 500 0 Brunei Libya Ecuador Pakistan See below Venezuela Turkmenistan Algeria Iran Iraq Egypt 0% 5% 10% 15% 20% 25% Subsidies as a share of GDP (MER) 100 50 0 China Mexico Chinese Taipei South Africa Philippines Nigeria Azerbaijan India Indonesia Vietnam APEC Other 0% 1% 2% 3% 4% Subsidies as a share of GDP (MER) The economic cost of subsidies can be more completely understood when viewed as a percentage of GDP or on a per-capita basis
Billion dollars Major energy producers are among the biggest subsidisers Fossil-fuel consumption subsidies by net importer and net exporter of oil and natural gas in APEC economies 120 100 Exporter Importer 80 60 40 20 0 2007 2008 2009 2010 For net exporters of oil and gas in APEC economies, subsidies to those fuels totalled $74 billion in 2010, compared with $31 billion in net-importing countries
Fossil-energy subsidies go mostly to the rich Share of fossil-fuel subsidies received by the lowest income quintile by fuel in surveyed countries*, 2010 Only 8% of the amount spent on fossil-fuel consumption subsidies in 2010, reached the poorest 20% of the population
Recent pricing reforms in selected countries Country Angola India Indonesia Iran Jordan Malaysia Description of actions or announced plans Raised gasoline & diesel prices by 50% and 38% in Sept 2010. Plans to reduce fuel subsidies by 20% per year until eliminated. Scrapped regulation of gasoline prices in June 2010, with plans to do the same for diesel; Plans to eliminate cooking gas and kerosene subsidies in a phased manner starting April 2012, replacing with direct cash support to the poor. Postponed a restriction of subsidised fuel for private cars in February 2011, which could push state subsidies higher than the budgeted amount. Previous plans Significantly cut energy subsidies in Dec 2010 as start of a 5-year program to bring the prices of oil products, natural gas and electricity in line with international market- levels. Cash payments are being made to ease the impact of higher fuel prices. Announced an expansion of their subsidy programme in January 2011 by further reducing kerosene prices and gasoline prices. Cut subsidies for gasoline, diesel and LPG in July 2010 as part of a gradual reform programme.. Mexico Pakistan Steadily increased gasoline, diesel, and LPG prices in 2011, with the goal of eliminating subsidies. Raised gasoline, diesel and electricity prices in 2011, but prices increases have not kept pace with international prices. Plans are to reduce the power subsidy by 23% this year and gradually phase out. Qatar Increased petrol, diesel and kerosene prices by 25% in January 2011. Russia Plans to raise natural gas prices to international levels for industrial users through 2014. South Africa Plans to raise electricity prices by 20% per year through 2015 according to the Integrated Resource Plan, approved in March 2011. UAE Ukraine Increased gasoline prices in April and July of 2010 to the highest level in the GCC Raised gas price for households and electricity generation plants by 50% in August 2010 and announced plans to raise them by 30% in 2011.
Mtoe Gt Phasing-out fossil-fuel subsidies can reduce demand and CO 2 emissions Fossil fuel and CO 2 emissions savings from subsidy phase out versus no phase out 0 2012 2015 2020 2035 0.0 Gas Coal - 100-200 -0.3-0.6 Oil CO 2 emissions (right axis) - 300-0.9-400 -1.2 Subsidy phase-out in APEC countries by 2020 would curb fossil fuel demand by 2.7% by then and by 3.6% in 2035 compared with a baseline in which subsidies remain as they are
Concluding remarks Getting the prices right, by phasing-out fossil-fuel subsidies, is an important step towards improving energy security, while brining environmental & economic benefits Without further reform, spending on subsidies in APEC economies is set to reach $150 billion in 2020 Subsidy phase out can have significant impact on the poor and policies must be carefully designed not to restrict access to essential energy services Since the APEC commitment was taken, many countries have started taking measures to reduce or eliminate subsidies