The Political Economy of Fossil-Fuel Subsidy Reform. Kerryn Lang The Global Subsidies Initiative 14 October 2010

Transcription

1 The Political Economy of Fossil-Fuel Subsidy Reform Kerryn Lang The Global Subsidies Initiative 14 October 2010

2 Although the benefits of subsidy reform are apparent, subsidy reformers face significant political obstacles. David Victor, The Politics of Fossil-Fuel Subsidies examines two perspectives: demand for and supply of subsidies, and offers recommendations for reformers

3 Government goals Subsidies can be used to serve a range of objectives For example: To help provide fossil fuels to low income communities as part of a worthy effort to redistribute income or help alleviate poverty. To protect environment or health: such as subsidies to LPG, electricity or cook-stoves to encourage a shift away from wood or charcoal. To support and nurture infant industries or promote exports.

4 Government goals The reality is often a mix of these legitimate objectives and political purposes. Once created, interest groups and investments solidify around the policy and make transition difficult explaining why some subsidies exist long after the original goal has been achieved.

5 Supply of subsidies Subsidies exist, not simply due to demand for them, but because they are relatively easy to supply and policymakers the world over find them politically difficult to resist. The entities providing the subsidy often do so for political advantage, such as to gain votes or secure donations for political campaigns.

6 Supply of subsidies Many arms of government are involved e.g. finance, energy, inland revenue, environment ministries each subject to its own political constituents. The ministry that sets subsidy policy often does not coordinate with the ministry that can use the resources most effectively to implement social policies.

7 Demand for subsidies: Interest groups Concentrated interest groups such as fossil-fuel producers are well organised and have access to subsidy mechanisms that are less visible e.g. tax breaks Once a subsidy is in place, firms base investments and expectations around that subsidy and then increasingly invest resources to defend the subsidy. E.g. US oil and gas industry spent $175 million in 2009 lobbying political candidates

8 Demand for subsidies: Broad-based policies Broad-based policies are used to subsidize downstream activities or fossil-fuel consumers Benefit a much larger number of more dispersed interests - these groups are not well organised but governments grant subsidies in exchange for political support These policies then get locked-in as the population believes it serves their interests.

9 Recommendations for reformers 1. Reform strategies must begin with the original objectives that led the government to create and maintain the subsidy. It may require a political strategy that compensates powerful interests or find ways to inoculate policy reform against opposition. Reformers should consult key stakeholders and may have to negotiate with industry groups or the opposition party

10 Recommendations for reformers 2. Many subsidies survive because the parties that carry the burden (i.e. taxpayers) are unaware of the cost they are paying and because the lack of information makes it difficult to pursue an informed debate over the subsidy. An effective reform strategy should have a communications plan to convey the costs, benefits and rationale for reform.

11 Recommendations for reformers 3. For those subsidies that cannot be avoided, better subsidy design can help reduce any negative effects of the subsidies and ease the task of reform in the future. For example: Transparent monitoring & adjustment mechanisms Sunset clauses: with clear conditions and timeframes

12 Recommendations for reformers 4. Subsidy reformers have more success when governments have better administrative tools in their arsenal. For example: Social safety nets such as Indonesia s BLT cash transfer system Better price-setting mechanisms - put the business functions of government at arms length

13 Key message The failure to reform subsidies lies fully in the failure to appreciate the political economy of subsidy policies -- Victor,