TA: Preparing for fossil-fuel subsidy reforms

India, Indonesia and Thailand

Shikha Jha, Asian Development Bank

Asia Clean Energy Forum

20 June 2014

Objectives of the study

1. Quantify subsidies

2. Estimate reform impacts

a) Households and industry sectors

b) Energy system

c) GHG emissions and the macro-economy

3. Evaluate safety nets

2

Countries covered

3

India

Indonesia

Thailand

A range of country

circumstances

Variety of subsidies and

reform approaches

Majority of electricity derived from fossil fuels

• India – 67%

• Indonesia – 86%

• Thailand – 93%

4

Scope of subsidies

• Consumption o All fossil fuels – oil, coal and natural gaso Electricity

• One area of upstream fossil-fuel supply chaino Coal (India)o Electricity (Indonesia)o Natural gas for vehicles (Thailand)

5

Comprehensive Inventory of Consumer Subsidies

• Direct spending

• Revenue forgone: Tax holidays, duty exemptions

• Losses from state-owned energy companies

• Goods, services provision at below market rates

• Credit support

6

Estimates of Consumer Subsidies

7

US$ billion

% of GDP

US$ per capita

India (FY 2011-12)

49 2.7 41

Indonesia (2012)

36 4.1 147

Thailand (2012)

7 1.9 109

8

India Indonesia Thailand

57% 68%

87%

1%

10%

15%

27%

30%

3%

Electricity

Coal

Natural Gas

Petroleum$7b

$36b

$49b

Breakdown of Consumer Subsidies

Total subsidies (US$ mil)

9

Energy type

India FY 2011-12

Indonesia 2012

Thailand 2012

Consumer 48,782 36,003 6,975

Producer 208 208 46

… are rising (US$ billion)

10

$30

$37

$29

$35

$49

$23$10

$18

$32$36

$3 $2 $3 $5$7

2008 2009 2010 2011 2012

India Indonesia Thailand

… and eating into other development priorities

11

2.7

4.1

1.91.85

0.1

2

India Indonesia Thailand

Annual public spending, 2012 (% of GDP)

Fossil fuel subsidy Social assistance

ADB subsidy estimates exceed most others

12

49

36

7

4034

4

40

22

10

32 28

7

82

45

16

India Indonesia Thailand

US$ billion

ADB 2012

Government 2012

IEA 2011

IMF 2011 pre-tax

IMF 2011 post-tax

Models to analyze reform impacts

1. SAM (Social Accounting Matrix) – I-O model

Households and industry sectors

2. MARKAL– MARKet ALlocation Model

Energy system

3. CGE – Computable General Equilibrium E3MG – energy-environment-economy

GHG emissions and macro-economy

13

Analysis of Reforms

No single model can give all the answers but consistent

patterns emerge

14

1. Negative economic impacts if public expenditure is reduced

• Subsidy reduction without reallocation of savings

o reduces consumer demand

o lowers GDP, production, incomes, employment

o increases inflation

Safety nets are important to protect the poor

15

2. Reallocation of savings offsets negative impacts of reform

16

• Fully compensating all households shows consistently positive results

• neutralizes negative employment, income, growth effects; mitigates inflationary impact

• wealthier households stimulate demand

• compensation protects the poor from higher prices

Reallocation is fundamental to allay govt fears

3. In the long run, higher energy prices

(a) reduce energy demand & emissions;

17

Projections to 2030

India Indonesia Thailand

Final energy consumption

-0.6% -0.8% -1.5%

Emissions -1.3 to -1.8% -5.1 to -9.3% 2.8%

Interventions are necessary to ensure energy poverty is not entrenched

(b) impact energy intensive sectors;

• For all countries, most affected sectors are

o Agricultureo Industry o Residential sector

• Transport is also affected in Thailand but impact on transport is limited in

o India due to low demand elasticity o Indonesia due to fuel switching

Encourage renewable, clean energy investment

18

(c) … but improve the energy mix

19

• Higher prices stimulate users to switch fuels

o India: coal and oil use

o Indonesia: coal, natural gas, petroleum, biomass

o Thailand: natural gas, petroleum, biomass, electricity

Interventions required to improve access to cleaner fuels

To sum up, subsidy reforms

• improve overall economic efficiency and equity

• reduce fiscal vulnerability

• discourage energy overuse and reduce the need for rationing

• spur investment in clean energy

20

Policy implications

• Inject subsidy savings back into the economy

• Build on government programs to cover the poor

• Ensure availability and access to cleaner fuels

• Encourage renewable energy investments

21

For More Information

Shikha Jha

sjha@adb.org

Web site: www.adb.org

-0.6

-0.4

-0.2

0

0.2

0.4

2010 2015 2020 2025 2030

Full reallocation to households

No reallocation

Indonesia: Projected Impact on GDP (% relative to baseline)

0

0.5

1

1.5

2

2.5

3

3.5

2010 2015 2020 2025 2030

Full reallocationto households

No reallocation

Indonesia: Projected Impact on Consumer Price Inflation (% relative to

baseline)

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

2010 2015 2020 2025 2030

Full reallocationto households

No reallocation

India: Projected Impact on GDP(% change relative to baseline)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2010 2015 2020 2025 2030

Full reallocationto householdsNo reallocation

India: Projected Impact on CPI(% change relative to baseline)