2015/FMP/WKSP1/016 Session: 5 Fossil Fuel Subsidy Reform Submitted by: United States Workshop on Fiscal Management Through Transparency and Reforms Bagac, Philippines 9-10 June 2015
Fossil Fuel Subsidy Reform U.S. Department of the Treasury
Global FF Subsidies: Definitions Producer subsidies: Price received by producers is higher than benchmark price. Consumer subsidies: Price paid by consumers is below benchmark price. Pre-tax subsidies: Price paid is lower than supplier s cost. Post-tax subsidies: Pre-tax subsidy + efficient taxation to account for externalities and under-taxation. Benchmark price is typically global price for traded products. For electricity, benchmark price is cost-recovery price for producers.
Global FF Subsidies: Levels On a pre-tax basis, energy subsidies for fossil fuels and electricity are expected to total $333 billion in 2015 (IMF). Petroleum is most heavily subsidized, followed by electricity, natural gas, and a very small amount of subsidy for coal. Pre-tax subsidies are highest in developing economies, led by MENA. On a post-tax basis, energy subsidies for fossil fuels and electricity are expected to total $5.3 trillion in 2015 (IMF). Addresses negative environmental and health impacts. Addresses under-taxation of fossil fuels.
Global FF Subsidies: Issues Adverse effects on fiscal balances and public debt. Many developing countries subsidies reach 3-8% of GDP. Consumption subsidies discourage investment in the energy sector and diminish private sector competitiveness. Price volatility translates to balance of payments difficulties and lower energy security.
Global FF Subsidies: Issues (2) Causes overconsumption of fossil fuels, discouraging investment in renewables and energy efficiency. Eliminating global subsidies would result in 13 percent decrease in energy-related CO 2 emissions (IMF). Subsidies divert resources from government spending in other sectors. Some countries spend more on subsidies than education or health. Subsidies are typically regressive. On average, richest 20 percent capture six times more of subsidies than poorest 20 percent.
Barriers to Reform Lack of Information and Lack of Transparency: Inefficient subsidies are not wholly reflected in the budget, and citizens are rarely aware of the subsidy level Lack of Trust in Government: Even when citizens are aware, they may not believe governments will use savings to their benefit Concerns for the Poor: There may be negative impacts for poor citizens, even though the subsidies are regressive Economic Concerns: Potential negative impacts on inflation and competitiveness, exacerbated by weak macroeconomic conditions Opposition from interest groups Source: IMF (2013)
Best Practices for Subsidy Reform Government Ownership: Reforms are most successful when part of a government s broader domestic agenda Public Communication: Educating the public on the timing and necessity of reform generates broad political and public support Gradual Approach: Phasing subsidy reform allow households and enterprises to adjust and governments to roll out social safety nets Targeted Cash Transfers: Well-targeted measures to mitigate the impact of price increases are more equitable use of government funding and offset the impact of price increases on the poor Depoliticize Price Setting: Rule-based automatic-price adjustments reduce the probability of politically-motivated reform reversal Source: IMF (2013)
Fossil Fuel Subsidy Reform in Multilateral Fora The United States is seeking international engagement and commitment on this issue. In 2009, leaders in G-20 and APEC agreed to rationalize and phase-out inefficient fossil fuel subsidies. In 2013, G-20 and APEC agreed to methodologies for voluntary fossil fuel subsidy peer reviews.
Fossil Fuel Subsidy Peer Reviews: Why Peer Reviews? Identify and quantify existing subsidies Identify reform mechanisms for existing subsidies Encourage frank dialogue around the issue Encourage additional countries to engage
Fossil Fuel Subsidy Peer Reviews: Process 1. A country or group of countries volunteers for review 2. The countries conduct a self-review of their own subsidies by convening domestic and outside experts 3. The countries undergo peer review with experts from other countries, international organizations, and others 4. The results are presented to the review country
Fossil Fuel Subsidy Peer Reviews: Status In APEC, Peru has completed a peer review, New Zealand has a peer review ongoing, and the Philippines, Vietnam and Chinese Taipei have committed to undertake a peer review in the future. In G-20, United States and China are first countries undergoing a joint peer review. Mexico and Germany will participate in the second round of peer reviews.
U.S. Fossil Fuel Subsidies: Producer The United States has identified 11 fossil fuel producer tax preferences, totaling $4.7 billion per year*. The three largest preferences are all over $1 billion per year, and include: Expensing of intangible drilling costs ($1.5 billion) Percentage depletion for oil and gas wells ($1.3 billion) Domestic manufacturing deduction ($1.3 billion) President Obama s budget has proposed eliminated these preferences annually, but Congress has not acted. *Nominal average annual figure based on 10-year revenue estimate
U.S. Fossil Fuel Subsidies: Consumer The United States has identified one consumer subsidy, the Low-Income Home Energy Assistance Program (LIHEAP), at $3.4 billion in 2014. President Obama does not propose to eliminate this subsidy.
Fossil Fuel Subsidies in APEC Consumer subsidies in APEC estimated at U.S. $105 billion in 2010 around 25% of the global estimate. Reaching about 3% of GDP in some countries, or over $800 per person. Around 8% of benefits reaching the poorest 20% of the population. IEA estimates accounting for 12 APEC economies.
APEC Subsidies by Type