Case studies: Lessons Learned From Attempts to Reform Fossil-Fuel Subsidies
The GSI has developed a broad range of case studies of fossil-fuel subsidy reform. This includes a review of subsidies and reform attempts across APEC economies; an analysis of experience with subsidy reform in Iran; and a series of papers focusing on lessons learned from Brazil, France, Ghana, India, Indonesia, Poland and Senegal.
Fossil-Fuel Subsidy Reform in APEC Economies
Asia-Pacific Economic Cooperation (APEC) economies are estimated to have spent at least US$ 105 billion subsidizing fossil-fuel consumption in 2010. This estimate excludes subsidies for fossil-fuel production, which the GSI estimates could be worth more than US$100 billion per year worldwide. Some APEC economies are spending up to 2.8 per cent of national gross domestic product (GDP) or as much as US$ 840 per capita, despite evidence that fossil-fuel subsidies tend to be regressive, with only around 8 per cent of the benefits reaching the poorest 20 per cent of the population. These subsidies incentivize fossil-fuel production and consumption, increasing energy demand and exacerbating harmful emissions, undermining APEC’s sustainable green growth agenda.
In November 2009 APEC Leaders agreed to “rationalise and phase out over the medium term fossil-fuel subsidies that encourage wasteful consumption, while recognising the importance of providing those in need with essential energy services.” The APEC Secretariat commissioned the GSI to prepare this report as part of the Energy Working Group’s (EWG) program to implement the APEC Leaders’ commitment over the medium term.
The report is divided into three parts:
- It draws on existing literature to provide an overview of the types and magnitude of fossil-fuel subsidies in APEC economies; their economic, environmental and social impacts; and issues raised by the private sector and political economy challenges (Sections 1–7).
- It provides new case examples of reform efforts in seven APEC economies that illustrate key elements of a subsidy reform strategy and draw lessons that can be shared with other policy-makers (Section 9).
- It outlines a framework for planning and implementing subsidy reform, along with policy options and suggestions for capacity building (Sections 8 and 10).
Recent Developments in Iran's Energy Subsidy Reforms
In 2009, the International Energy Agency estimated that Iran’s subsidies for fossil-fuel consumption were US$66 billion, the highest of any country. In 2010, it took bold economic reforms to phase out energy subsidies with the aim of preventing wasteful consumption, equitably distributing national wealth, strengthening the competitiveness of key industries and increasing the country’s export capacity. The reform plan has been praised by international organizations, including the International Monetary Fund, for its well-designed mitigating measures, including a substantive cash transfer scheme.
Almost two years into the reforms and within the context of harsh economic conditions mostly resulting from international sanctions, questions have arisen as to the success or failure of the reform plan. A soaring inflation rate, dramatic volatility in the foreign exchange market and rising commodity prices have significantly undermined the price reforms and the value of cash handouts which have been paid on a nationwide scale to compensate for the higher energy prices.
This policy brief outlines recent developments since the reforms were implemented and sheds some light on the impacts that the reforms – once referred to as the country’s “grand economic surgery” – have had.
Case Study: Lessons Learned From Indonesia's Attempts to Reform Fossil-Fuel Subsidies
This report examines Indonesia's attempts to reform fossil-fuel subsidies. It reviews the history of fossil-fuel subsidies in the country and focuses on the performance of two policies that have been used to support reform. The first is the Bantuan Langsun Tunai, an unconditional cash transfer program used to help cushion low-income households from price increases in 2005 and 2008. The second program, begun in 2007, aims to make low-income households use liquefied petroleum gas (LPG) instead of kerosene, as it is cheaper to subsidize, cleaner and more efficient. The report concludes that both these policies appear to have achieved the Indonesian government's objectives.
Case Study: Brazil's Experience With Fossil-Fuel Subsidies and Their Reform
This paper examines how Brazilian governments have tried to justify fossil-fuel subsidies and looks at the interest groups who have benefitted from them and tried to maintain them. The Brazilian experience is useful for understanding the rationale for subsidies in countries with large regional and social disparities. The lessons learnt from liberalizing Brazil's energy market focus on how governments have tried to address the reasons used by interest groups to lobby for the continuation of existing subsidies.
Case Study: Attempts to Reform India's Kerosene Subsidy
This report examines attempts to reform India's long-standing subsidy on residential kerosene. At least one third of the subsidized kerosene is diverted to the black market for use as a transport fuel - a lucrative business for corrupt fuel distributors who, in turn, bribe government officials to obtain licenses to distribute or blend the fuel and to maintain the subsidy.
Case Study: Restructuring Poland's Coal-Mining Industry
This report examines the reform process in the context of Polish coal mining. Soon after the economic transition began in 1989, demand for coal declined but controls on coal prices remained in place. A reform program endorsed by the Solidarity trade union, and backed by substantial public funds for closing mines and providing social benefits, was at least a partial success. Today, coal companies have nearly achieved long-term viability and the process of privatization has commenced.
Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons From Ghana, France and Senegal
This paper draws on case studies the GSI has commissioned on fossil-fuel subsidy reform in Brazil, France, Ghana, India, Indonesia, Poland and Senegal. It identifies six stages that improve the chance that a reform process will lead to lasting change: research of subsidy costs, benefits and reform impacts; establishment of clear reform objectives and parameters; construction of a coherent reform policy, including a timeframe, complementary policies to offset unwanted secondary impacts and a communications strategy; effective implementation; monitoring evaluation and adjustment; and finally institutional measures to prevent back-sliding.