Iea Oecd & World Bank - Fossil Fuel Subsidies

8/2/2019 Iea Oecd & World Bank - Fossil Fuel Subsidies

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THE SCOPE

IN 2009PHASING O

An IEA, O

Prepared for the

1This Joint Report does not express the

construed as interpreting or modifying a

as expressing any legal opinions or havi

The World

F FOSSIL-FUEL SUBS

ND A ROADMAP FOT FOSSIL-FUEL SUBS

CD and World Bank Joint Report1

G-20 Summit, Seoul (Republic of Kor

11-12 November 2010

positions of the G20 Member Countries. Nothing in this Joi

ny legal obligations under the WTO Agreements, treaty, law

g probative legal value in any proceedings.

Bank

IDIES

RIDIES

a)

nt Report shall be

or other texts, or


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Page | 2

Table of Contents

Executive Summary ................

1.The scope of fossil-fuel subs

1.1 Introduction ..................

1.2 Measuring fossil-fuel s

1.3 Estimate of global foss

1.4 Implications of phasin

1.5 Recent action taken to

2.A roadmap for phasing out f

2.1. Analytical Framework .2.2 Lessons from recent ex

References ..............................

The World

.........................................................................

idies in 2009 ....................................................

.........................................................................

ubsidies ...........................................................

il fuel consumption subsidies ..........................

out fossil-fuel consumption subsidies...........

phase out subsidies ........................................

ossil fuel subsidies ..........................................

.........................................................................erience of energy subsidy reforms ................

.........................................................................

Bank

................... 3

................... 5

.................... 5

.................. 14

.................. 17

.................. 19

.................. 22

................. 27

.................. 27

.................. 37

................. 47


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Executive Summa

This report, prepared for the G-2

Economic Co-operation and Dev

fossil-fuel subsidies in 2009 and

The IEA estimates that direct

lowering end-user prices for foss

of mechanisms can be identified

fuel production or consumptio

resources under government co

via concessional loans or guarant

compared with direct consumer

Phasing-out fossil-fuel subsidie

security, reduce emissions of gr

highlighted by estimates from th

phased-out by 2020, it would

amounts to the current consum

oil demand, the savings amount

would also represent an integral

in carbon-dioxide emissions wou

Furthermore, OECD and IEA anal

economic gains as in many

unsupportable fiscal burden on

example, the IEA estimates thatlikely to reach almost $600 billi

countries emerge from the eco

inefficient fossil fuel subsidies,

poverty alleviation, health and e

Since the commitment taken at

outside the G-20 are moving ah

extent of the potential gains will

the reforms they are pursuing.

The World Banks contribution

removal, revisited through the p

some quick diagnostics of the ke

Who has been benefittinterms and for wasteful c

removing the subsidy o

Subsidy removal will, ho

used to satisfy basic ne

2

An OECD expert workshop on 18-

types of fossil-fuel subsidies.

The Wor

ry

0 by the International Energy Agency (IEA), the O

elopment (OECD) and the World Bank, estimate

rovides a roadmap for phasing-out fossil-fuel su

ubsidies that encourage wasteful consumption

il fuels amounted to $312 billion in 2009. In addi

, also in advanced economies, which effectively

n, such as tax expenditures, under-priced ac

ntrol (e.g. land) and the transfer of risks to gov

ees). These subsidies are more difficult to identif

subsidies.2

represents a triple-win solution. It would e

eenhouse gases and bring immediate economi

e IEA that indicate that if fossil-fuel subsidies w

cut expected growth in global energy deman

ption of Japan, Korea and New Zealand combin

to 4.7 mb/d, or around one-quarter of current

building block for tackling climate change as ex

ld be cut by 2 gigatonnes.

yses suggest that subsidy reform would bring ab

cases they are creating market distortions,

government budgets and are weakening trade

, in the absence of reform, spending on fossil-fn in 2015, or 0.6 percent of global gross domes

nomic crisis, the revenues that can be saved f

r redirected to more directly tackle pressing pri

ucation, will be important.

he Pittsburgh Summit in 2009, many countries b

ad with reforms. While this is a very encouragin

only be realised if more countries raise the level

provides a road map for implementing fossi

overty lens. Such a roadmap may help policy ma

problems and the required policy response:

g from an existing subsidy? If it is primarily the r

onsumption, as is often the case, then there is a

equity grounds as well as for improved econo

wever, have a negative impact on the poor, if t

ds, rather than to encourage wasteful consump

9 November 2010 will examine methods for estimati

ld Bank

Page | 3rganisation for

s the scope of

sides.

by artificially

ion, a number

support fossil-

ess to scarce

ernments (e.g.

and estimate

hance energy

gains. This is

re completely

by 5%. This

d. In terms of

US demand. It

pected growth

out immediate

imposing an

balances. For

el subsidies isic product. As

rom removing

orities such as

oth within and

g start, the full

of ambition in

l fuel subsidy

ers in deriving

ich in absolute

trong case for

mic efficiency.

e subsidy was

tion. Schemes

ng the different


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Page | 4

assisting households wi

home heating (such as t

countries) are described.

providing incentives for

Assuming that there isthose? The answer willIf it was to make the

support programs or (se

energy access available

connection costs) with f

After the implementatienvironmentally welfare

eventual adverse social i

Lessons drawn from recent exp

fuel subsidies that largely benefi

Well designed rural elecpoor

Better-targeted compenaimed at protecting the

Moves towards automafor fossil fuels.

The World

h only the portion of residential energy costs

e US LIHEAP, successfully replicated in some Eas

Alternative schemes supporting new gas conne

emand side management are discussed.

n impact on the poor, what are the options fo

epend in part on what the intended effect of thexisting use of energy more affordable, then

cond best) lifeline tariffs can be considered. If i

to new households, then switching the subsidy

ll payment of incremental consumption costs is r

on of subsidy phasing out, the report discus

enhancing ways to reallocate the savings to miti

pacts.

erience also suggest more effective alternative

higher income households, including the followi

trification subsidies to make energy services aff

sation packages for poorest households or br

ost vulnerable.

ic price adjustments mechanisms and fully libe

Bank

that goes for

tern European

tion as well as

r ameliorating

e subsidy was.income-based

t was to make

to access (e.g.

ecommended.

es socially or

ate and offset

to regressive

ng:

ordable to the

oader reforms

ralized system


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1.The scope of fo1.1 Introduction

1.1.1 Background to th

In September 2009, G-20 leader

summit in Pittsburgh, United St

over the medium term inefficie

This move was closely mirror

November 2009. These commi

subsidies distort markets, imped

deal with climate change.During the Pittsburgh Summit, t

subsidies and suggestions for th

was presented to the G-20 T

implementation strategies and ti

The IEA, OECD, and World Bank

the November 2010 G-20 sum

extends the analysis presente

quantitative findings to include d

fossil fuel subsidies. The report c

motivations for introduci the case for reforming e estimates of energy subs modelling-based analysi recent action taken to p a road map for phasing o lessons drawn from rece

1.1.2 Defining energy s

Finding a commonly agreed def

context and countries have deci

for the purpose of this report,

lowers the cost of energy prod

price paid by energy consumers.

reasons much narrower definitio

be quantified and for which data

The Wor

ssil-fuel subsidies in 2009

report

s took a key step towards reforming energy su

ates. Together, they committed to rationalize

t fossil fuel subsidies that encourage wasteful

d by Asia-Pacific Economic Cooperation (AP

tments were made in recognition that ineffici

e investment in clean energy sources and under

he G-20 also requested a Joint Report on the s

implementation of their phase-out initiative. T

ronto Summit in June 2010, during which c

metables were tabled.

were subsequently requested to prepare this se

it meeting to be held in Seoul, Republic of Ko

in Toronto in June 2010, in particular by

ata for the year 2009 and providing a road map f

overs:

ng energy subsidies;

ergy subsidies;

idies;

of the implications of phasing-out energy subsid

ase out subsidies;

ut subsidies, revisited through the poverty lens;

nt experience of subsidy reforms.

bsidies

inition of subsidies has proven a major challen

ed to adopt their own definition of energy subsi

an energy subsidy is defined as any governme

ction, raises the revenues of energy producers

Many energy subsidies are difficult to measure,

ns are often adopted that include only those sub

are readily available. The broad definition used i

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Page | 5

sidies at their

nd phase out

consumption.

C) leaders in

ient fossil-fuel

ine efforts to

ope of energy

e Joint Report

ountry-specific

ond report for

rea. This work

updating the

or phasing out

ies;

nd

e in the G-20

ies. However,

nt action that

or lowers the

o for practical

sidies that can

n this report is


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Page | 6

designed to capture all of the

commonly exist.

Energy subsidies are frequently

producers or consumers, or wh

energy. Fossil-fuel consumption

have been phased out by mostmany emerging and developing

that seek to maintain or to e

subsidisation, particularly in adv

also been phased out, with th

policies and liberalisation of inte

encouraging excessive producti

resources and market distortio

fossil fuel subsidies that lead to

1.1.3 Mechanisms of go

Subsides can be further distin

administered; these include bu

(Table 1). They can be groupe

deployment of fledgling energy

end-use prices.

Subsidies to energy consumption

intended to regulate the cost

designed to provide consumers

Government interventions sup

direct subsidization of domestconsumption through direct bud

for the fuels or electricity thus

transfer is a fuel voucher, which

price. In advanced market econ

for low-income households, and

the cost of fuel purchases when

Similarly, a wide array of tax exp

of excise-tax concessions on fu

survey of practices in OECD co

terms. For example, OECD esti

year to the agricultural sector

fisheries sector.Finally, tax regi

encourage the provision by empl

of company-paid fuel for those v

Governments provide support

markets in such a way as to affe

assuming part of their risk, by se

and by undercharging for the u

one transfer mechanism is inv

The World

diverse and non-transparent types of energy

differentiated according to whether they conf

ether they support traditional fossil fuels or cl

subsidies lower prices to end-users. These typ

economies in the developed world, but are sticonomies. Production subsidies, by contrast, inv

pand domestic supply. They remain an impo

anced economies, though many subsidies in this

e shift towards more market-oriented econom

national trade. Both production and consumptio

on or consumption, can lead to an inefficien

s. Within this report a particular focus is give

asteful consumption.

vernment support to energy

guished according to the channels through w

dgetary payments, regulations, taxes and trad

d as either direct transfers, such as grants to

technologies, or indirect transfers, such as th

are provided through several common channels:

of energy to consumers, direct financial tran

with rebates on purchases of energy products

orting energy consumption often involve the

ic prices. However, many economies also sgetary transfers that do not alter the observabl

upported. In developing countries, a common

allows low-income recipients to purchase fuel a

mies, direct budgetary transfers include heating

subsidies to help particular sectors, such as ag

rices rise unexpectedly.

enditures often target consumers. These mostly

l designed to benefit particular users or areas.

ntries suggests that these could be quite imp

ates that fuel tax concessions are worth some

in OECD countries, and at least $1.4 billion p

es in a number of advanced market economie

oyers of company-owned or leased vehicles for e

ehicles.

o energy production in a variety of ways: by

t costs or prices, by transferring funds to recipie

lectively reducing the taxes they would otherwi

se of government-supplied goods or assets. Oft

olved. For example, a government may fund

Bank

subsidies that

r a benefit to

aner forms of

s of subsidies

ll prevalent inolve measures

rtant form of

category have

ic and energy

n subsidies, by

allocation of

to inefficient

hich they are

e instruments

expedite the

regulation of

: price controls

fers, schemes

and tax relief.

regulation or

pport energymarket price

orm of such a

t a discounted

-energy grants

iculture, meet

take the form

A preliminary

rtant in value

$8 billion per

r year to the

inadvertently

mployees, and

intervening in

nts directly, by

e have to pay,

en, more than

research at a


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national laboratory on how to c

guarantees to companies investi

production of such fuels, and ex

state-owned lands. The national

the fuel than it could have paid f

Table 1: Common types of energ

Direct budgetary transfers are

although the complexity of thebudget documents. In the case

have traditionally benefited the

Tax expenditures relating to th

stem from favourable tax treat

higher levels of production than

capital, special rules that allow

at which equipment becomes

subsidies. Immediate deduction

Description

Trade instruments

Quotas.

Technical r

Tariffs.

Regulations

Price contr

Demand gu

deploymen

Market-acc

Preferentia

Preferentia

Tax breaks

Rebates or

producer le

Tax credits

allowances.

Rebates, re

energy duti

energy in g

CreditLow-intere

loans to pr

Direct financial transfer Grants to p

Risk transfer Limitation

Energy-related services

provided by government

at less than full cost

Direct inves

infrastructu

Public rese

The Wor

nvert coal into a liquid transport fuel, provide g

g in synthetic fuels from coal, provide a tax cred

mpt such producers from paying royalties on c

government may, in turn, pay the producer a h

r an imported, petroleum-derived fuel.

y subsidies

the most straight-forward types of subsidie

task depends on how well they are reported iof European countries, the bulk of direct budg

oal industry.

production of energy in industrialised countri

ent for capital or intermediate inputs. These

would otherwise be demanded by the market.

usinesses to deduct depreciation faster than th

conomically obsolete can in some cases imply

(expensing) of exploration and development cost

Examples

strictions.

Tariffs on imports of crude

petroleum products, maki

fuel production more lucra

ls.

arantees and mandated

rates.

ess restrictions.

l planning consent.

l resource access.

Gasoline prices regulated a

international market levels

Regulations that prioritise

coal for power generation.

exemption on royalties,

vies and income taxes.

and accelerated depreciation

unds or exemptions on

es and CO2 taxes or for

neral consumption taxes.

Favourable tax deductions

investments in oil and gas

deposits.

Excise exemptions for fuel

international air, rail, or w

t or preferential rates on

ducers.

Loan guarantees to finance

infrastructure.

roducers or consumers.

Social payment programm

or earmarked for heat andconsumption.

f financial liability.Insurance or indemnificati

fossil fuel producers at bel

tment in energy

re.

rch and development.

Provision of seismic data f

exploration.

Government finance of act

environmental health and

mines.

ld Bank

Page | 7

rants and loan

it linked to the

al mined from

igher price for

to measure,

n governmenttary transfers

es most often

an encourage

In the case of

e actual speed

large indirect

s is also a case

oil and

g domestic fossil

tive.

t below

.

use of domestic

for depletion or

ields and coal

used in

ter transport.

energy

s conditioned on

electricity

n provided to

w-market levels.

r oil and gas

ivities relating to

safety in coal


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Page | 8

in point although the issue is

targeted at natural-resource re

there is no deduction for intere

(expensing) of investment outla

therefore not necessarily imply s

if all the existing expensing andtoo far. Meanwhile, other input

industries may be allowed to de

intermediate goods, such as raw

Governments also forego revenu

resources) under their control.

than otherwise. The most dire

provide access to domestic reso

exploits for their own use or for

a particular type of coal or a giv

provide access to intermediate

access to government land for, e

Transfers of risk to governments

the case of industrialised countr

loans but also security guarante

important are the transfers of e

which often result in governme

amounts disbursed by governme

with abandoned coal mines.

Another area of government in

development (R&D). In 2008, I

related to fossil fuels amountexpenditure is R&D related to

production; refining, transport a

coal and gas conversion.

1.1.4 Motivations for in

The rationale for the introducti

political, economic, social and

markets operate. In practice, ho

means of achieving their stated

energy subsidies include:

Alleviating energy povliving conditions of the

accessible (Box 1). For

biomass.

Boosting domestic eneindigenous fuel producti

The World

omplicated by the special nature of tax and r

nts. For cash-flow based natural resource tax

st expenditure, neutrality would require immed

ys. Provisions for expensing or accelerated dep

ubsidies, but for many countries it would be rele

ccelerated depreciation provisions are warrantes can also attract subsidies. For instance, worke

uct part of their wage from their personal inco

materials may be acquired free of excise duty by

e by offering the use of scarce resources (e.g. lan

his can reduce costs and thereby encourage m

ct cases relate to the conditions under which

rces of fossil fuels that a private company (or in

sale. This sometimes takes the form of a royalty

n project of oil and gas extraction. But many go

inputs, like water or electricity, at below mark

.g. the construction of roads or buildings.

are much less transparent and, as such, hard to

ies. They include measures related to capital lik

es as in the case of government-funded oil stoc

vironmental and health liabilities from producer

ts acting as insurers of last resort. An example

nts to compensate residents affected by subside

olvement in energy production is investment i

EA data suggest that total government expen

ed to almost $1.7 billion. Included under thinhanced oil and gas production; un-conventio

nd storage of oil and gas; oil, gas and coal comb

troducing energy subsidies

on of energy subsidies has often been to adv

nvironmental objectives, or to address proble

wever, they have rarely proven to be a success

goal. The most common justifications for the i

rty: Consumption subsidies have been used t

poor by making cleaner, more efficient, fuels

xample, liquefied petroleum gas (LPG) in place

gy supply: Production subsidies have been us

on in a bid to reduce import dependency. They

Bank

yalty regimes

system where

iate deduction

reciation does

vant to review

or if some gos in particular

e-tax base, or

refiners.

d or fossil-fuel

re production

governments

dividuals) then

exemption for

ernments also

et prices, and

gauge even in

e concessional

piling. Equally

s to the public

would be the

nce associated

research and

iture on R&D

s category ofal oil and gas

stion; and oil,

nce particular

s in the way

ful or efficient

ntroduction of

improve the

ffordable and

of traditional

ed to support

ave also been


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used at times to suppor

the overseas activities of

Supporting industrial dusers are a source of c

investment in energy-in

otherwise not be profita

or trade restrictions, ar

periods of economic do

Redistributing nationalconsumption subsidies t

sharing the value of ind

encourage economic div

of energy-intensive indu

Protecting the environhave introduced suppornuclear power and car

incentives to move clea

help to cost-effectively r

1.1.5 The case for refor

In recent years there has been i

subsidies as many were seen

resources and to be distorting

(Figure 1). Subsidies have been

price volatility by blurring mar

undermine the competitiveness

importing countries, subsidies o

for producers they quicken the

over the long term.

The Wor

a countrys foreign and strategic economic poli

national energy companies.

evelopment and employment: Energy subsidie

mpetitive advantage. They are sometimes used

tensive industries, such as aluminium smelting

ble. Further, production subsidies, usually in the

e often used to maintain regional employmen

nturn or transition.

resource wealth: In major energy-produci

at artificially lower energy prices are often seen

igenous natural resources. They are also used i

ersification and employment by improving the c

tries, such as petrochemicals and aluminium.

ent: Developed countries and several emergi

t programmes to aid the development of renebon capture and storage (CCS). In some cas

ner technologies quickly towards market comp

duce greenhouse-gas emissions and pollution.

ing energy subsidies

ncreasing momentum to phase out certain type

to be resulting in an economically inefficient

arkets, while often failing to meet their inten

hown to encourage wasteful consumption, exac

ket signals, incentivise fuel adulteration and s

of renewables and more efficient energy tec

ten impose a significant fiscal burden on state

epletion of resources and can thereby reduce e

ld Bank

Page | 9

ies by helping

s to industrial

to encourage

, which would

form of tariffs

, especially in

ing countries,

as a means of

in an effort to

mpetitiveness

ng economies

wable energy,s, transitional

titiveness can

s of fossil-fuel

allocation of

ded objectives

erbate energy-

muggling, and

hnologies. For

budgets, while

xport earnings


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Page | 10

Figure 1: Potential unintended e

Source: IEA World Energy Outlook 2

Among the key unintended eff

recent years are that they:

Create fiscal burden onunsupportable financial

sell it domestically at lorates, spending on oil a

levels well above those

seized the opportunity p

without having a major

consumers from the up

without provoking consu

Encourage wasteful cothereby leading to faste

rationalisation and effici

subsidies would provideproper price signals. For

may not have the choic

decide to build new, n

permanent feature of

encourage a motorist t

when her existing vehicl

Exacerbate energy prisubsidies exacerbate en

The World

fects of fossil-fuel subsidies

10 (forthcoming)

cts of subsidies that have proved to be driver

state budgets: In some cases, high energy prices

burdens on countries that import energy at w

wer, regulated prices. As a share of GDP at mand gas imports in many economies spiked in

seen during the first and second oil shocks. S

resented by the fall in prices after mid-2008 to re

impact on inflation (since the fall in world pri

ward pressure on prices resulting from subsidy

mer wrath.

nsumption: Subsidies can encourage wasteful

r depletion of finite energy resources, and can a

ency improvements in energy-intensive industri

consumers with an incentive to conserve energexample, a power company burning oil to pro

of switching to a less costly alternative overni

n-oil capacity if it expects higher input prices

he market. Similarly, a rise in the price of

alter her driving habits and/or buy a more fu

is traded or scrapped.

e-volatility: The price controls that give rise

ergy price-volatility on global markets by dam

Bank

s of reform in

have imposed

rld prices and

rket exchange008, reaching

ome countries

duce subsidies

ces cushioned

removal) and

consumption,

lso discourage

es. Eliminating

by improvinguce electricity

ght, but could

o persist as a

asoline might

el-efficient car

to fossil-fuel

ening normal


11/49

demand responses to

surprised by the robust

crude-oil prices, during

artificially low energy pr

of 131 countries carried

2008 around two-thirdinternational prices for

cost of diesel (Coady e

prices from government

and stronger demand

government revenues fo

Distort markets: Subsidimarket distortions by

countries still retain sub

the subsidy is directed

workers who had lost thunlikely to alter dema

maintain production th

high-cost local coal prod

subsidies for oil and ga

certain areas. Removing

effect of making dome

would, therefore, tend t

and production would b

prices would rise or fall

curve. In practice, the e

energy prices and consengage in similar policie

other reasons that supp

fuel production subsidie

leads to greater imports

(Steenblik and Coroya

producers, they can crea

and discourage the upta

also free up budgetary r

Lastly, lower energy pric

Depending on the degr

producers could boost e

Adverse impact on theeffects. Subsidies that e

biomass to modern fu

pollution. Subsidies for l

unit production costs t

mitigation in the long

counterproductive in re

prices dampen incentiv

The Wor

hanges in international prices. Many market

ness of global oil demand, despite the dramat

he first half of 2008. This has now been attrib

ices in many countries, which blunted market si

out by the International Monetary Fund (IMF)

of countries failed to fully pass through theasoline and half failed to pass through the full i

al., 2010). Cutting subsidies, by shifting the b

budgets to individual consumers, would lead to

response to future changes in energy prices

r other urgent needs.

es for fossil-fuel production can hinder competit

propping up less efficient producers. For ex

idies for hard coal mining. In some cases, a signi

t covering the cost of closing down mines and

ir jobs as a result of earlier rationalisation of thed and supply patterns. However, in other c

t would otherwise be uneconomic, for exampl

cers to compete against imports. Similarly, coun

s production such as through reduced royaltie

production subsidies such as these would typi

tic production less competitive compared wit

lower indigenous production. The extent to wh

e shifted to other parts of the world, and the e

as a result, would depend on the shape of the

fect of one country no longer subsidising fossil

mption is likely to be small. However, when, world prices are likely to be higher than other

ort a close review of the efficiency and effectiv

s. For example, if the removal of coal subsidies i

of higher-quality coal, it would clearly benefit th

nakis, 1995). Furthermore, by propping up

te barriers to the introduction of cleaner technol

ke of more efficient production practices. Their

esources that could be better used elsewhere in

es can result in energy being substituted for labo

ee of inter-factor substitution, removing energ

ployment and investment.

nvironment: Energy subsidies can have varying

nable poor communities to switch from the tra

els can minimise deforestation and reduce

w-carbon technologies can help to accelerate le

o decline, and reducing the overall cost of c

erm. However, the vast majority of fossil-fue

ching local and global environmental goals. Sub

s for consumers to use energy more efficientl

ld Bank

Page | 11

analysts were

ic increases in

ted in part to

nals. A survey

found that in

sharp rise inncrease in the

urden of high

a much faster

and free up

ion and create

mple, several

ficant share of

compensating

industry, so isses, subsidies

e, by enabling

tries also offer

for leases in

cally have the

imports and

ich investment

tent to which

global supply

fuels on world

any countriesise. There are

ness of fossil-

n an economy

e environment

less efficient

gies and fuels

removal could

the economy.

ur and capital.

y subsidies to

environmental

ditional use of

household air

rning, causing

limate change

l subsides are

sidised energy

y, resulting in


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Page | 12

higher consumption an

Furthermore, fossil-fuel

of renewable energy a

attractive.

Encourage fuel adulterasubstitution of subsidisekerosene intended for h

as diesel fuel due to wid

is created to sell subsi

unsubsidised and, there

the world, particularly i

subsidising countries is

countries experience los

sales in the legitimate

adulterate fuels and to s

Disproportionally benefi

often intended to help

goes to those who co

vehicles, electrical appli

Indonesia, for example,

of energy subsidies, whil

benefits (IEA, 2008a).

Threaten investment ininvestment resources.

price controls, the effecompanies is to reduc

in, maintain and expa

electricity companies ar

certain cases, for free)

them financially weak, h

and in maintaining and

prevalent within the el

sectors.

Hasten the decline of exto phase out subsidies, ocost of the subsidies but

time, such subsidies m

revenue streams, with i

oil exporters, including

petroleum products, p

demand and undermin

particularly acute if refin

The World

d greenhouse-gas emissions than would oth

subsidies undermine the development and co

d other technologies that could become mor

ion: Energy subsidies can encourage fuel adulted fuels for more expensive fuels. In some countr

ousehold cooking and lighting is diverted for un

price differentials. Smuggling can also arise, sin

dised products in neighbouring countries wh

ore, higher. This has been an issue for years in

n Southeast Asia, Africa and the Middle East.

a substantial financial transfer to smugglers,

ses from uncollected taxes and excise duties, d

arket. Removing subsidies would eliminate ince

uggle them across borders.

it the middle class and the rich: Although energ

edistribute income to the poor, the greatest b

sume the most energy, i.e. who can afford

ances, etc. The Co-ordinating Ministry of Econ

reported that the top 40% of high-income famili

e the bottom 40% of low-income families reap o

energy infrastructure: Subsidies can have an adv

here fossil-fuel consumption is subsidised thro

t in the absence of offsetting compensatioenergy companies revenues. This limits their a

nd energy infrastructure. For example, man

obliged to provide electricity at heavily subsidis

o certain sections of the community. This has

arming their capacity to invest in building new g

extending the network. Although this problem

ctricity sector, it also exists in the oil, natural

ports: Several energy-rich exporting countries ha

r expressed interest in doing so, concerned not oalso the resulting low efficiency in domestic en

y even threaten to curtail the exports that e

plications for global energy security. A numbe

ngola, Iran, Kazakhstan and Nigeria, rely on imp

rtly because low regulated prices preserve

investment in adequate refining capacity. T

ers are not reimbursed by governments for their

Bank

erwise occur.

mercialisation

economically

ation, and theies, subsidised

uthorised use

e an incentive

re prices are

many parts of

The effect in

hile recipient

ue to reduced

ntives both to

subsidies are

nefit typically

o own motor

mic Affairs of

es absorb 70%

nly 15% of the

erse impact on

ugh consumer

payments tobility to invest

state-owned

ed rates (or, in

ade many of

nerating plant

is particularly

gas and coal

ve also moved

nly by the highergy use. Over

arn vital state

r of significant

orts of refined

rtificially high

is problem is

losses.


13/49

The gains from phasing out fos

energy taxation reforms. Rising

fossil fuel production and in so

may warrant review to assess i

also found higher excise taxes o

difficulties controlling income trevenues that can help financin

fuel subsidies are phased out a

contribute to state building and

Box 1: Subsidies and energy pov

The IEAs World Energy Outlook

(over 20% of the global populati

the global population) rely on

subsidies are one means of a

affordable and accessible for the

and often ineffective means of d

but benefits are conditional up

disproportionately to middle and

Poor households may be unabl

have no physical access to the

network or a connection to a

particularly difficult to target, gi

market. In comparison, the dis

monitored and controlled. We e

and electricity in countries wicountries with electrification

represented just 15% of consu

most of these subsidies in any c

the total benefits from petroleu

(Coady, et al., 2010).

Nonetheless, the removal of e

implemented, since low-income

removal, as they spend a highe

subsidies can bring considerable

and more efficient fuels or enhsubsidies must be carefully desi

increase poverty. Providing finan

essential to smoothing the pat

energy-subsidy reform, the r

transparent. In undertaking maj

to which the economy and soc

phase-out of fossil-fuel subsidie

structural reforms are underw

The Wor

sil-fuel subsidies can be enhanced if combined

world market prices have greatly enhanced th

e cases, the royalty and tax regimes for natural

they are well balanced. Some middle-income

n energy consumption to be an attractive route

ax evasion. Wider reforms can therefore raisthe measures needed to ensure a social balan

nd, as emphasised by OECD work on Tax and

dministrative development.

erty

2010 highlights the alarming fact that today 1.4

n) lack access to electricity and 2.7 billion peopl

the traditional use of biomass for cooking. Al

lleviating energy poverty, by making energy

poor, studies have repeatedly shown them to b

oing so. The cost of these subsidies falls on the e

n the purchase of subsidised goods and thus t

higher-income groups.

to afford even subsidised energy or related se

(for example, rural communities lacking a p

n electricity grid). In general, subsidies for li

iven the ease with which such fuels can be sol

tribution of electricity and piped natural gas i

timate that subsidies in the residential sector to

h limited household access to modern enerates of under 90% or modern fuels acces

ption subsidies in 2009. There is considerable

se go to richer households. The IMF has estimat

m subsidies in 2009 accrued to the richest 40%

ven poorly targeted energy subsidies needs t

households are likely to be disproportionately af

r percentage of their household income on en

benefits to the poor when they encourage switc

ance access to electricity. Therefore, any movened so as not to restrict access to essential ene

cial support for economic restructuring or pover

h for fossil-fuel subsidy reform. In most succ

maining support has been well-targeted, t

r changes, assessments should be made regard

iety can absorb the impacts of the reform. Fur

s should be considered as a package, particul

ay or being contemplated. Pre-announcing a

ld Bank

Page | 13

with broader

e profits from

resource rents

ountries have

in a context of

considerablee when fossil-

Development,

billion people

(some 40% of

hough energy

services more

an inefficient

tire economy,

end to accrue

rvices, or may

blic transport

uid fuels are

on the black

is more easily

kerosene, LPG

y (defined asunder 75%)

evidence that

ed that 80% of

of households

o be carefully

ected by their

rgy. Similarly,

ing to cleaner

to phase-outrgy services or

y alleviation is

ssful cases of

mporary and

ing the extent

thermore, the

rly if broader

strategy and


14/49

Page | 14

timeframe for phasing in subsid

reforms (UNEP, 2008).

1.2 Measuring fossiMeasuring both energy consum

the varying definitions of what

Although measuring consumptio

enough information is published

2009. Estimating subsidies to f

single country there are typic

producer support. Many subsidi

tax concessions. And the data ne

quality or not reported.3

Developing a comprehensive a

subsidies is hindered by data conational level, few countries hav

fuel industries, and even fewer

Data are often reported only a

given expenditure to the vario

complex when lacking sufficie

expenditures requires having a

raises numerous issues having t

countries.

Despite these challenges, num

governmental organizations hav

fuel production, resulting in a cl

2010). The OECD Secretariat is

estimates of support to fossil-fu

workshops on issues relating

support.4

Given the incomplete state of i

report only estimates of support

measurements are provided. W

they have a particularly importa

energy security and the environ

3 The Global Subsidies Initiative (GSI)

Development (IISD), has estimated that

per year (GSI, 2010).4 An Expert Workshop on Estimating Su

19 November 2010.

The World

reform can help households and businesses to

l-fuel subsidies

tion and production subsidies is a complex und

constitutes a subsidy and the availability of a

n subsidies requires an extensive array of energ

to enable a reasonable estimate, as is done in

ssil-fuel production is particularly challenging.

ally several different sources, recipients and

es are administered via indirect mechanisms, su

cessary to estimate producer support are in man

nd internationally comparable set of estimate

straints and methodological and conceptual issuproduced comprehensive estimates of support

have included support provided by sub-nation

broad, programmatic levels, requiring analyst

us fuels covered by the programmes. This ca

t details on subsidy recipients. Meanwhile, q

roper benchmark against which to assess them

o do with definitions and comparability of tax

rous government agencies, academic research

recently turned their attention to subsidies be

arer picture of their nature and scope (see, e.g.,

currently working with OECD Member countri

el production and consumption, and will be or

o the identification, estimation and reporting

nformation on other types of subsidies to fossi

to fossil-fuel consumption that are revealed thr

ile representing only a subset of total subsidies

nt impact on global energy trends affecting eco

ent.

, a Geneva-based program of the International Institut

worldwide fossil-fuel production subsidies may be of the or

pport to Fossil Fuels will be held at the OECDs Headquarte

Bank

djust to these

rtaking due to

dequate data.

y pricing data,

this report for

Even within a

categories of

ch as complex

cases of poor

s of producer

es. Even at thefor their fossil-

l jurisdictions.

to allocate a

n prove quite

uantifying tax

. This, in turn,

egimes across

ers, and non-

efitting fossil-

Koplow et al.,

es to compile

anizing expert

of fossil-fuel

il fuels, in this

ugh price-gap

to fossil fuels,

nomic growth,

for Sustainable

er of $100 billion

rs, in Paris, on 18-


15/49

1.2.1 The price-gap app

This report provides estimates

This approach compares final c

full cost of supply or, where app

of transportation and distributiend-users and subsidies to fo

approach may be conceptually,

sectors and computing reference

The price-gap approach is the

subsidies.5

It is designed to capt

those that would prevail in a co

gap approach do not capture all

be understated as a basis for

trade. For example, the metho

under-collection of energy bills (

rife. Despite these limitations, th

and for undertaking comparativ

development (Koplow, 2009).

For countries that import a giv

approach are explicit. That is, th

of imported energy (purchased

contrast, for countries that expo

subsidy estimates are implicit

represent the opportunity cost o

could be recovered if consumers

consumption themselves and imrepresent a combination of oppo

1.2.2 Reference prices

For net importing countries, ref

price: the price of a product at

plus the cost of freight and in

distribution and marketing and

are not included in the referenc

pump price in a given country is

be no net subsidy if an excise d

exporting countries, reference

product at the nearest internat

freight and insurance back to th

marketing and any VAT.

For oil products, average distrib

in the United States. The assu

5 Kosmo (1987), Larsen and Shah (19

approach.

The Wor

roach

of energy-consumption subsidies using a price-

nsumer prices with reference prices, which corr

ropriate, the international market price, adjuste

n. The estimates cover subsidies to fossil fuelssil-fuel inputs to electric power generation.

compiling the necessary price data across diffe

prices are formidable tasks.

most commonly applied method for quantif

re the net effect of all subsidies that reduce fin

petitive market. However, estimates produced

types of intervention known to exist. They, the

ssessing the impact of subsidies on economic

does not take account of revenue losses in c

particularly for electricity) is prevalent, or where

e price-gap approach is a valuable tool for esti

e analysis of subsidy levels across countries to

en product, subsidy estimates derived through

ey represent net expenditures resulting from the

t world prices in hard currency), at lower, regul

rt a given product and therefore do not pay

and usually have no direct budgetary impact.

f pricing domestic energy below market levels, i.

paid world prices. For countries that produce a

port the remainder (such as Iran), the estimatesrtunity costs and direct government expenditure

rence prices have been calculated based on th

he nearest international hub, adjusted for quali

surance to the importing country, plus the c

ny value-added tax (VAT). Other taxes, includin

e price. Therefore, in the case of gasoline, even

set by the government below the reference pric

uty large enough to make up the difference is l

rices were based on the export parity price:

ional hub adjusted for quality differences, min

e exporting country, plus the cost of internal di

tion and marketing costs for all countries were

med costs for shipping refined products, by

92) and Coady et al., (2010) among others, for exampl

ld Bank

Page | 15

gap approach.

espond to the

d for the costs

consumed bySimple as the

rent fuels and

ing consumer

l prices below

sing the price-

efore, tend to

efficiency and

untries where

energy theft is

ating subsides

support policy

the price-gap

domestic sale

ated prices. In

orld prices

Rather, they

. the rent that

ortion of their

resented heres.

import parity

ty differences,

st of internal

excise duties,

if the pre-tax

e, there would

evied. For net

the price of a

us the cost of

stribution and

ased on costs

contrast, vary

, have used this


16/49

Page | 16

according to the distance of the

costs as reported in industry

distribution costs have been est

been carried out using local pri

exchange rates.

Reference prices have been adjufuel. For example, for countries

import small volumes of higher

below observed import prices.

Unlike oil, gas and coal, electricit

reliable international benchmar

annual average-cost pricing for

from each generating option). I

for the cost of production, trans

for building new capacity, were i

fuels and annual average fuel ef$40/MWh was added to accou

residential uses, respectively. To

at the levelised cost of a combin

Some experts suggest that the a

particular, some are of the opini

should be based on their cost

applied within this analysis. The

their natural resources in a way

and that this approach more t

internally at a price below th

approach results in an economigrowth in the longer term.

Cross-subsidies between sectors

as to offset lower prices for othe

For example, in many countries

cost so as to finance lower price

situation can also be found in

able to negotiate special low ele

an average variance in prices, i

region that are often vitally im

markets. Similarly, it does not

purchases, such as the discount

fuel rebate schemes.

Box 2: Sample calculation esti

The first step is to calculate the

gasoline in 2009 and therefore

product at the border. Taking th

United States, the fob price i

The World

ountry from its nearest hub and have been take

data. For natural gas and coal, transportatio

imated based on available shipping data. All cal

ces and the results have been converted to dol

sted for quality differences, which affect the mahat rely heavily on relatively low-quality domesti

quality coal, such as India and China, reference

y is not extensively traded over national borders

price. Therefore, electricity reference prices

lectricity in each country (weighted according t

other words, electricity reference prices were

ission and distribution, but no other costs, such

ncluded. They were determined using reference

iciencies for power generation. An allowance ofnt for transmission and distribution costs for

avoid over-estimation, electricity reference price

d-cycle gas turbine (CCGT) plant.

ove method of determining reference prices ha

on that the reference price in countries that are

f production, rather than prices on internatio

basis for this view typically is that these coun

hat effectively promotes their general economic

an offsets the notional loss of value by sellin

international price. The counter-argument is

cally inefficient allocation of resources and red

, i.e. where some consumers are charged a price

r consumers, have not been taken into account i

commercial and industrial consumers often pay

s for the agriculture and residential sectors, whil

ther countries (for example, where aluminium

ctricity rates). Furthermore, as the price-gap me

t does not capture the variability in prices by

portant in giving new technologies entry poin

pick up direct subsidies to consumers that ar

d fuel coupons used by some developing countr

ating gasoline subsidies in Venezuela in 2009

appropriate reference price. Venezuela was a n

we start with the free-on-board (fob) price, or

average spot price of gasoline in 2009 at the n

calculated by subtracting the average cost

Bank

from average

and internal

culations have

lars at market

rket value of ac coal but also

prices are set

, so there is no

ere based on

output levels

set to account

as allowances

rices for fossil

$15/MWh andindustrial and

s were capped

limitations. In

net exporters

al markets as

ries are using

development,

the resource

that such an

ces economic

above cost so

n this analysis.

a price above

e the opposite

producers are

hod measures

ime-of-day or

s into energy

e tied to fuel

ies or heating-

et exporter of

the price of a

arest hub, the

f freight and


17/49

insurance to transport gasoline

0.89 bolvares fuertes (VEF) ($0.

fob price is VEF 0.87 per litre. T

price consumers would see at th

any VAT. Assuming distribution

($0.08) per litre, the final refere

VAT is applied to gasoline sales i

As average end-use prices for g

price gap then amounts to VEF

gasoline, we take the price gap

litres), arriving at a gasoline subs

1.3 Estimate of gloThe value of fossil-fuel consumpfossil fuels) is estimated to amo

International Energy Agency an

IEAs finding is based on an ext

fuel consumption, as identified

economies were identified, esti

consumption. Remaining subsidi

energy consumption and prices

energy is identified as being s

However, production subsidies

implication, the figures for

contribution of OECD countries t

In absolute terms, the biggest

endowments. For a given fu

expenditures by pricing domesti

long as prices are set above th

highest of any economy), with m

highlighting that estimates for c

when viewed on a per-capita b

expressed as a proportion of t

economy. The $312 billion estim

and to fossil-fuel inputs to electr

the most heavily subsidised fu

respectively. Subsidies to electri

2009. At only $6 billion, coal sub

For the economies surveyed he

22%, meaning consumers paid r

was the most highly subsidised

natural gas are comparatively hi

markets, even as the global ma

were subsidised at an average ra

The Wor

etween Venezuela and the United States. Given

1) per litre and a shipping cost of VEF 0.02 ($0.0

complete the calculation of reference prices an

eir local pump, retail and distribution cost are a

and retail costs equal to those in the United St

ce price for gasoline in 2009 was VEF 1.04 ($0.4

Venezuela.

soline in 2009 were reported as VEF 0.06 ($0.03

0.98 per litre. To estimate the total value of

multiplied by total final consumption (estimated

idy of approximately VEF 15.6 billion ($7.3 billion)

al fossil fuel consumption subs

tion subsidies (including subsidies to electricity gunt to $312 billion in 2009. These estimates ar

do not represent the official positions of G-20

nsive survey to identify those economies that s

using the price-gap method outlined above. In

mated to represent over 95% of global subsid

sed consumption occurs in economies where r

are unavailable. The vast majority of the eco

old below a world reference price were outsi

are prevalent in both OECD and non-OECD

consumption subsidies may under-represent

o the total of production and consumption subsid

subsidies are in those economies with the la

el, net-exporting economies do not incur

energy products below their value in internatio

cost of production. Irans subsidies reached $

ost of this sum going to oil products and natural

rtain economies may appear high in dollar term

sis or as a percentage of GDP. Fossil-fuel subsi

e full cost of supply, vary considerably by fuel

ate comprises subsidies to fossil fuels used in fin

ic power generation. In 2009, oil products and n

ls, attracting subsidies totalling $126 billion a

city consumption were also significant, reachin

idies were comparatively small.

re, fossil fuels were subsidised at a weighted-a

ughly 78% of competitive market reference pric

uel, at an average rate of 51% in 2009. Subsidis

gh since many supplies are still priced within li

rket for liquefied natural gas continues to gro

te of 19%, electricity at 18% and coal at 7%.

ld Bank

Page | 17

a spot price of

) per litre, the

d arrive at the

ded as well as

ates, VEF 0.17

8) per litre. No

) per litre, the

he subsidy to

at 15.9 billion

.

idies

enerated frommade by the

countries. The

ubsidise fossil-

total, 37 such

ised fossil-fuel

liable data on

nomies where

de the OECD.

conomies. By

the relative

ies.

gest resource

hard-currency

al markets, as

66 billion (the

gas. It is worth

, but less high

disation rates,

as well as by

l consumption

tural gas were

d $85 billion,

$95 billion in

verage rate of

es. Natural gas

ation rates for

ited domestic

. Oil products


18/49

Page | 18

The magnitude of energy subsi

domestic pricing policy, exchan

prices typically have by far the

fossil-fuel prices surged in inter

energy consumption subsidies

when the total was $343 billion.in the value of subsidies betwee

be attributed to deliberate inter

gap) in order to reduce the burd

Some economies manage pric

products. Although the intent

levels, rising international ene

consumers (an effect picked-up

the situation can lead to unexpe

that the subsidies arising from

shown that governments often

prices are increasing and not tprice falls. During the rapid run-u

automatic price adjustments in o

for being slow to adjust downwa

Figure 2: Economic value of fossi


Note: Subsidy estimates are made

position of G20 countries.

0

50

100

150

200

250

300

2007

Billiondollars

The World

es fluctuates from year-to-year with changes i

ge rates and demand. Of these factors, move

greatest impact on variations in subsidy levels.

ational markets during the first half of the yea

as estimated at $558 billion, a dramatic increa

Declining world prices were the main reason for2008 and 2009. However, some of the observe

entions to raise consumer prices (thereby, shrin

n on government finances.

volatility by regulating domestic prices for

ay not be to hold average prices over a period

rgy prices can inadvertently lead to marke

by the price-gap approach). Conversely, when w

cted revenues. For example, the fall in oil prices

exicos fuel-excise mechanism all but vanished.

find it hard to increase domestic prices whe

immediately pass through the full extent of ap in world oil prices in early 2008, many econom

rder to shield consumers, but they subsequently

rd after prices fell sharply later in the year.

l-fuel consumption subsidies by type

10 (forthcoming).

by the International Energy Agency and do not repre

2008 2009

Bank

world prices,

ents in world

In 2008, when

r, the value of

se from 2007,

he sharp dropdrop can also

king the price-

ertain energy

below market

transfers to

rld prices fall,

in 2009 meant

xperience has

international

y subsequenties abandoned

faced criticism

sent the official

Coal

Oil

Gas

Electricity


19/49

1.4 Implications ofsubsidies

1.4.1 Method and assuThis section quantifies the ener

consumption subsidies and the

baseline case in which subsidy ra

in 2007-2009. Because subsidies

reasonable basis for estimatin

magnitude of subsidies may ris

premise that subsidies to consu

to higher levels of consumptio

reference, prices are calculated

To illustrate the magnitude of thgradual phase-out of all subsidi

2020.6 A growing number of

implemented, would eliminate o

important to emphasise that so

need to be a central consideratio

Box 3: The IEA energy-subsidy o

As highlighted by the G-20, incre

an essential step in building mo

to data on fossil-fuel subsidiesencourage informed debate o

allocation of resources or whe

alternative means. Transparenc

and provide a useful baseline f

(Hale, 2008; Laan, 2010).

As a contribution to the proces

establishing an online database

breakdowns by economy, by fue

systematic analysis of energy su

Energy Outlook series since 19

progress being made by econom

database on an independent bas

basis of the IEAs own survey

economies concerned.

www.worldenergyoutlook.org/s

extensive survey of end-use pric6

Although the analysis assumes t

between 2011 to 2020, the commit

medium term inefficient fossil fuel s

The Wor

phasing out fossil-fuel con

ptionsgy savings that would result from the phase-ou

implications for CO2 emissions. The compari

tes from 2010 remain unchanged relative to thei

tend to fluctuate as a result of market volatility,

g the impact of the subsidy phase-out, eve

or fall sharply in a given year. The analysis is

ers lower the end-user prices of energy product

n than would occur in their absence. The un

sing the price-gap analysis described above.

e gains possible by eliminating subsidies, the anales to fossil-fuel consumption, globally, over th

economies have already announced plans

r reduce their subsidies well before 2020 (see Se

cial and equity impacts resulting from energy su

n in the design of any phase-out programme (se

line database

asing the availability and transparency of energy

mentum for global fossil-fuel subsidy reform. I

ill raise awareness about their magnitude andwhether the subsidy represents an econom

her it would be possible to achieve the same

of subsidy data can also encourage consisten

om which progress to phase out subsides can

of increasing transparency of energy-subsidy d

o allow public access to data on fossil-fuel subsi

l and by year. This new database represents an e

bsidies that the IEA has been undertaking thro

99. It will be updated annually as a means o

ies to phase-out fossil fuel subsidies. The IEA is c

is, not at the request of the G20. It has been cons

and the energy-subsidy data has not been

The database will be av

bsidy.asp. The database has been constructe

data. A key source of data was the IEAs quarte

he complete phase out of consumption subsidies i

ment among G-20 countries is to "rationalize and ph

ubsidies."

ld Bank

Page | 19

umption

t of fossil-fuel

son is with a

r average level

this provides a

n though the

based on the

and thus lead

subsidised, or

ysis assumes aperiod 2011-

that, if fully

ction 1.5). It is

bsidy removal

Section 2.2).

subsidy data is

proved access

incidence andically efficient

objectives by

t presentation

be monitored

ata, the IEA is

dies, including

tension of the

gh the World

f tracking the

nstructing the

tructed on the

greed by the

ilable at

following an

ly publication,

all economies

se out over the


20/49

Page | 20

Energy Prices and Taxes. Other sources include official statistics, international and national

energy companies, consulting firms and investment banks research reports. The IEAs network

of energy and country experts and their local energy contacts have also contributed

substantially to the identification and verification of end-user prices. Additional data were

extracted from databases, reports and personal communications with various organisations,

including the Asian Development Bank, IMF, Latin American Energy Organization and theEuropean Bank for Reconstruction and Development.

1.4.2 Energy demand

Compared with a baseline case in which subsidy rates remain unchanged, the complete phase-

out of consumption-related fossil-fuel subsidies between 2011 and 2020 would cut global

primary energy demand by 5%, or 738 Mtoe, by 2020 (Figure 3).7 This reduction is equivalent to

the current energy consumption of Japan, Korea, and New Zealand combined. Furthermore,

reductions in energy demand (relative to the baseline) would continue to be realised after 2020

as consumers continue to change their behaviour over time.Where consumption is subsidised, eliminating energy subsidies would reduce dependence on

imports and lead to an immediate improvement in the fiscal position of many governments.

Moreover, exposing consumers to market-driven price signals would strengthen and accelerate

the demand response, which in turn would contribute to reducing volatility in global markets.

The phase-out of energy subsidies would have several other positive effects on long-term

energy security by encouraging diversification of the energy mix and slowing down the

depletion of finite fossil-fuel resources.

Figure 3: Impact of fossil-fuel consumption subsidy phase-out on global primary energy demand

Source: IEA World Energy Outlook 2010 (forthcoming)

7Although the analysis assumes the complete phase out of consumption subsidies in all economies

between 2011 to 2020, the commitment among G-20 countries is to "rationalize and phase out over the

medium term inefficient fossil fuel subsidies."

8 000

10 000

12 000

14 000

16 000

1990 1995 2000 2005 2010 2015 2020

Mtoe No subsidy

removal

Subsidy removal2011-2020


21/49

1.4.3 CO2 emissions

The phase-out of fossil-fuel cons

related CO2 emissions by 5.8%

remain unchanged (Figure 4). T

equivalent to the current combItaly. Reduced demand growth f

matter and other air pollutants.

Our analysis illustrates the impo

fuel subsidies in addressing cli

commitments under the Copenh

chance of limiting the global te

gases in the atmosphere is limit

(ppm CO2-eq). Based on IEA esti

45% of the additional yearly i

required to meet the 2C goal.

phase-out programme would be

removal, such as creating a co

policy objectives, including the r

Figure 4: Impact of fossil-fuel

emissions


Box 4:Subsidies for low-carbon

Policy support for low-carbon e

drivers underpin this trend: firs

and, second, a desire to divers

especially in 2005-2008). Job

especially as a contribution to re

0

5

10

15

20

25

30

35

40

1990 2005

Gt

The Wor

umption subsidies over 2011-2020 would reduce

y 2020 compared with a baseline case in whic

his amounts to savings of 2 gigatonnes (Gt) of

ined emissions of Germany, France, the Unitedor fossil fuels would also lead to lower emission

rtance of the G-20 commitment to phase out in

ate change and the role it could play in imp

agen Accord. According to climate experts there i

perature increase to 2C if the concentration

d to around 450 parts per million of carbon-diox

mates, fossil-fuel consumption subsidies in 200

vestment in low-carbon technologies and en

However, a portion of the funds liberated thr

need to be directed towards the costs involve

prehensive social welfare net, in order to ens

duction of energy poverty, are also achieved.

onsumption subsidy phase-out on global ener

10 (forthcoming)

energy sources

nergy has increased considerably over the pas

, the effort to constrain growth in greenhouse

ify the supply mix (prompted particularly by

creation has been another factor in govern

ducing unemployment following the economic cri

2008 2015 2020

No sub

Subsid2011-2

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Page | 21

global energy-

subsidy rates

CO2 by 2020,

Kingdom andof particulate

efficient fossil-

lementing the

s a reasonable

of greenhouse

ide equivalent

amounted to

rgy efficiency

ugh a subsidy

d with subsidy

ure that other

y-related CO2

decade. Two

-gas emissions

igh oil prices,

ent support,

sis.

sidy removal

y removal020


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Page | 22

In the context of this growing policy support, some forms of low-carbon generation have grown

significantly during the last decade. Renewables-based electricity output increased by nearly a

third from 2000 to 2008; wind power expanded seven-fold and photovoltaic generation grew

16-fold during the same period. At the same time, global consumption of biofuels quadrupled.

Along with this growth in deployment, renewable technologies have experienced a fall in costs.

Cost reductions are essential to large scale development of renewable energy. Most renewable

energy technologies are capital-intensive, requiring significant upfront investments, and most

cannot currently compete on price with conventional sources.

Government support for emerging low-carbon technologies can lead to design improvements

and the widespread deployment that is necessary to make them cost-competitive. The scope for

further cost reductions for these emerging technologies is generally greater than for the more

mature fossil fuel technologies. By contrast, fossil fuel prices are expected to increase in the

future. Subsidies for low-carbon energy can take the form of consumption or production

subsidies. A wide variety of mechanisms can be used to deliver the support, including portfolio

standards, green certificates, feed-in-tariffs, premiums, and production, consumption andinvestment tax incentives.

The IEA estimates that worldwide government support to renewable electricity and biofuels

amounted to $57 billion in 2009 up from $44 billion in 2008 and $41 billion in 2007. These

estimates do not include subsidies for renewable heat technologies or other emerging low-

carbon energy technologies such as CCS.

While subsidies for renewable energy can yield benefits, they can also be ineffective or

inefficient if not well-designed. Good policy design for renewable energy subsidies involves

paying close attention to non-market barriers, ensuring that support is predictable and

transparent in order to attract investors, reflecting improvements in technology over time by

reducing subsidies in line with declining costs, matching support to the needs of individual

technologies at differing stages of development, and considering the wider effects of new

technologies on the energy system as a whole (IEA 2008b).

In addition to providing support as defined above, governments are engaged in the substantial

continuing effort in research and development (R&D) to bring down the costs of renewable

energy technologies and improve their performance. Some renewable technologies are mature

or almost mature and do not require significant additional R&D, while others depend on further

supportive R&D policy measures for their widespread diffusion. Total spending on R&D for

renewable electricity technologies and biofuels reached $5.6 billion in 2009, with 45% of this

amount provided by governments.See Annex 4 for more discussion on mechanisms to support low-carbon energy technologies.

1.5 Recent action taken and plans to phase out subsidiesFollowing the commitment made by the G-20 countries to rationalize and phase out over the

medium term inefficient fossil fuel subsidies that encourage wasteful consumption, each G-20


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member has submitted impleme

In addition to the implementat

Pittsburgh agreement many eco

implemented or proposed refor

that would prevail in an undi

producers (Table 2).These efforts contributed to a s

consumption subsidies in 2009

also had a more noticeable imp

the moves have varied from eco

lasting reform will take hold, in

overcome.

In October, 2010, Angola mad

subsidies as part of its plans to a

countrys oil sector. The first c

diesel prices by 38%. Angola isproduct demand, but is seeking

self sufficient in refined products

In Canada, the oil and gas se

provisions. Changes at the fede

these preferences. In the 2003 f

tax changes to be phased in o

resource allowance with a dedu

measures were intended to im

remission order which had allo

respect of the Syncrude oil san

budget, Canada announced thatphased out over the 2011-2015

minerals. Draft regulations to im

In less than a generation, Chi

become the worlds fastest-gro

global energy markets. China ha

closer to global market levels an

have contributed to the significa

for crude oil produced in China a

grades of oil sold in internatio

generally match the internation

coal and began to introduce a

are now largely set by direct neg

natural gas market, prices remai

May 2010, the government ann

following an increase in gas tran

more efficiently, and should

domestic exploration and produ

8 Details of these subsidy re

/Annexes_of_Report_to_Leaders_G20_I

The Wor

ntation strategies and timetables to implement t

ion strategies planned by G-20 members in re

nomies both within and outside the G-20 have i

s to bring their domestic energy prices into line

torted market or to rationalise support given

all but meaningful reduction in the IEA estima

relative to 2008. Preliminary data also suggest

ct on estimated subsidy levels in 2010. The key

omy to economy, as have expectations over the

view of the political and social barriers that fi

the first of a series of planned cuts to gasol

ttract foreign investment into the downstream s

ts led to immediate increases in gasoline pric

currently dependent on imports for around 70o build new refining capacity to enable the coun

.

ctor has traditionally benefited from certain

ral level, however, have moved toward the grad

ederal budget, the government introduced a nu

er a five-year period, including the replaceme

tion for actual provincial royalties and mining ta

prove the neutrality of the resource tax syst

ed deduction of both royalties and the resourc

ds project expired at the end of 2003. In th

the accelerated depreciation allowance for oil speriod, although it still exists for mines extractin

lement the phase-out were released on May 3,

a, which was a largely self-sufficient energy

wing energy consumer (and importer) and a

s made significant progress in bringing domesti

d is continuing to push ahead with new reforms

nt reduction in energy intensity experienced sin

re already determined on the basis of the price f

nal markets. Prices for many refined oil prod

al levels. In 2007, China lifted its remaining pri

arket-based pricing system. Coal prices for po

otiations between coal producers and power co

n relatively low compared to those on internatio

unced a 25% increase in onshore natural gas be

mission fees. The increase should induce consu

ccelerate investment by Chinas national oil

ction and development of LNG and long-distan

forms are available at http://www.g20.org/Docu

nefficient_Fossil_Fuel_Subsidies.pdf

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is phase-out.8

sponse to the

n recent years

with the levels

to fossil-fuel

es for energy-

hat they have

drivers behind

likelihood that

st need to be

ine and diesel

egment of the

s by 50% and

of its refinedtry to become

avourable tax

ual removal of

ber of income

nt of the 25%

es paid. These

m. A special

e allowance in

2007 federal

ands would beg conventional

010.

onsumer, has

ajor player in

energy prices

. These efforts

e 1980. Prices

or comparable

ucts also now

e controls for

er generation

panies. In the

al markets. In

chmark prices

ers to use gas

companies in

e pipeline gas

ents2010/expert-


24/49

Page | 24

import projects. After launching a programme to eliminate the preferential tariff arrangements

for certain energy-intensive industries and increase the electricity prices for non-residential

users in 2009, the government has recently released a proposal to introduce a tiered electricity

pricing mechanism for residents (under which prices would increase with consumption).

Earnings from energy taxes in India, which go predominantly to the state governments, far

outweigh the cost of subsidies, which is borne by the central government. Nonetheless, thecountry is in the process of energy price and tax reform (Government of India, 2010). In June

2010, the federal government announced that gasoline prices would henceforth be market-

driven and the intention to later apply market-driven pricing for diesel. It also announced

immediate price increases for diesel, LPG and kerosene. Natural gas pricing reform was also

implemented in mid-2010, allowing state-run Oil & Natural Gas Corp. (ONGC) and Oil India Ltd.

(OIL) to sell gas from new fields at market rates instead of regulated prices. Furthermore, the

price of natural gas more than doubled under the regulated price regime in 2010. Reforms in

Indias steam coal industry are expected to slowly bring domestic coal prices in line with import

parity levels, with due allowance for quality differences. In June 2010, state-owned Coal India

Ltd, which is responsible for almost 90% of the countrys coal production, announced that it

would move to price its premium grades on an import parity basis. As more than 80% of Indiaselectricity is generated from coal, the implementation of the coal pricing reforms can be

expected to impact power prices.

Indonesia has a long history of directly subsidising energy as a means of supporting the incomes

of poor households. The size of energy subsidies has fluctuated widely over the past decade,

following movements in international prices and the exchange rate and adjustments to the

subsidy schemes. Previously, subsidies were available for industry and all segments of the

population, but coverage has become increasingly targeted and the number of subsidised fuels

has declined. In 2010, Indonesia announced plans to eliminate energy subsidies by 2014. The

gap between international and domestic prices is to be progressively reduced, in an effort to

minimise the impact on the poor. According to Indonesias 2011 state budget, 11% of

government expenditure in 2011 will be devoted to energy-consumption subsidies, compared

with 13% in 2010 and 19% in 2008. Indonesia has an ongoing programme to phase out the use

of kerosene in favour of LPG. The energy ministry is considering a new plan to restrict the use of

subsidised fuel to motorcycle, public transportation vehicles and cars purchased before 2005. In

June 2010, the Indonesian government raised power tariffs by an average of 10%. This will

reduce the overall burden of electricity subsidies on the state budget and boost revenues for

Indonesias state power company.

With vast reserves, Iran is one of the worlds largest oil and natural gas producers. Oil and gas

activities play a central role in supporting Irans economy, generating about 80% of its export

revenues in 2008. Heavily-subsidised energy consumption has left a legacy of inefficient energy

use, environmental degradation, inadequate investment and fuel import dependence. In early2010, a law outlining far-reaching subsidy reform was enacted in Iran. The subsidy reform law

calls for gradual implementation (over 2010-2015) of market-based energy pricing and the

replacement of subsidies by targeted assistance to lower income groups. Among the key

objectives of the law are to increase the prices of oil derivatives to 90% of the Persian Gulf

export price, the price of household gas tariffs to 75% of the Persian Gulf export price, and the

price of electricity to a level that reflects the full cost of production. To compensate for higher

prices and the impact on low-income groups, 50% of the fiscal benefit resulting from increased

prices would be redistributed to low-income consumers via direct cash and non-cash payments.


25/49

Despite Mexico being the world

have represented a serious ec

increasing reliance on refined

liquefied petroleum gas were eq

period 2005 to 2009 (Nationa

arrangements for refined prodestimated that gasoline and dies

by late 2012. As part of the pr

government have been increa

poor customers with better targ

cash transfer connected to Opor

cover their energy needs. This is

and avoids creating incentives fo

Substantial progress has been

electricity pricing, especially in t

terms) have been increased con

2007, the government adoptedand export markets by 2011.

following the surge in oil prices d

market restructuring began in 2

scheduled for 2011. A process o

sector is due to commence in 20

In South Africa, subsidised elect

inability of utilities to enforce pr

electricity capacity. Rolling blac

and plans to further raise tariff

South Africa (NERSA) granted E

approximately 25% per year ov

Basic Electricity programme, whi

amount of free electricity for ess

The United Arab Emirates com

2010 which are aimed at bringin

the losses state-run fuel retailers

by 26%. There have been report

neighbouring Oman (where pric

cross the border specifically to p

in the United Arab Emirates

international market levels.

The Wor

s seventh-largest crude-oil producer, subsidised

nomic strain on the government budget and

roduct imports. Subsidies for electricity, gasoli

uivalent to more than one and a half per cent o

l Energy Strategy). Mexico is currently refor

cts and, contingent on international market cel subsidies could be eliminated by late 2010 and

ocess, retail prices for gasoline, diesel and LP

ing on a monthly basis since December 2009 w

ted subsidies. Starting in 2008 the government i

tunidades that is intended to help very low-inco

preferable to price subsidies, as it is better targe

r environmentally harmful increases in energy co

made in Russia to introduce more market-b

he industrial sector. Gas tariffs for Russian indu

istently since 2000, by approximately 15% to 25

he goal of achieving equal profitability from salhe target date for full parity was extended

uring 2008 and the subsequent economic downt

06, and full liberalisation of the wholesale mar

scaling back retail electricity price subsidies for

1.

ricity pricing, coupled with non-payment by cus

operty rights, has led to a lack of investment an

outs have provided strong impetus for recent

s in coming years. In 2010, the National Energ

skom, the state utility, permission to raise av

r 2010-2013. Through cross-subsidies, it will m

ch provides targeted subsidies to the poor throu

ential services.

enced a series of planned increases to gasoline

g prices in line with international market levels

had been incurring on gasoline sales. To date, pr

s, however, that the moves have pushed up sale

s are now much lower) by United Arab Emirates

urchase fuel. Unlike gasoline, prices for most of

have already been deregulated and fluctuate

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Page | 25

energy prices

ontributed to

ne, diesel and

GDP over the

ing its excise

nditions, it isthose for LPG

set by the

hile protecting

mplemented a

e households

ed at the poor

nsum

Iea Oecd & World Bank - Fossil Fuel Subsidies

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Transcript of Iea Oecd & World Bank - Fossil Fuel Subsidies