© OECD/IEA 2011 IEA analysis of fossil-fuel subsidies for APEC Marco Baroni Office of the Chief Economist International Energy Agency Kaohsiung, Chinese Taipei, 18 October 2011
© OECD/IEA 2011
IEA analysis of fossil-fuel subsidies for APEC
Marco Baroni
Office of the Chief Economist
International Energy Agency
Kaohsiung, Chinese Taipei, 18 October 2011
© OECD/IEA 2011
Policies could dramatically alter the long-term energy outlook
Compared with the New Policies Scenario, energy demand in 2035 is
8% higher in the Current Policies Scenario and 11% lower in the 450 Scenario
6 000
8 000
10 000
12 000
14 000
16 000
18 000
20 000
1980 1990 2000 2010 2020 2030 2035
Mto
e
Current Policies Scenario
New Policies Scenario
450 Scenario
World primary energy demand by scenario
© OECD/IEA 2011
Primary energy demand in APEC economies in the Current Policies Scenario
APEC energy demand expands by 44% between now and 2035 – an average rate of increase of 1.4% per year – with fossil fuels remaining dominant in the energy mix
0
2 000
4 000
6 000
8 000
10 000
12 000
1990 2000 2010 2020 2030 2035
Mto
e Other renewables
Hydro
Nuclear
Gas
Oil
Coal
© OECD/IEA 2011
Spending on oil & gas imports as a share of GDP in
APEC economies in the Current Policies Scenario
The combination of higher prices and expanded imports translates to a growing import bill for the region, which can be a heavy burden on economic growth
0%
1%
2%
3%
4%
5%
6%
7%
1990 2000 2010 2020 2030 2035
Indonesia
China
Japan
Mexico
United States
ASEAN*
Australia/
New Zealand
© OECD/IEA 2011
CO2 emissions in APEC economies in the Current Policies Scenario
APEC’s share of global CO2 emissions increases slightly to 59% in 2035, highlighting that the region will have to play a key part if climate objectives are to be met
0
5
10
15
20
25
30
35
40
45
1990 2000 2010 2020 2030 2035
Gt Gas
Oil
Coal
World
© OECD/IEA 2011
Fossil-fuel consumption subsidies for top twenty-five countries, 2010
Oil products had the largest subsidies at $193 billion, followed by natural gas at $91 billion, while fossil-fuel subsidies resulting from the under-pricing of electricity reached $122 billion
0
10
20
30
40
50
60
70
80
90
Iran
Sau
di A
rab
iaR
uss
iaIn
dia
Ch
ina
Egyp
tV
enez
uel
aU
AE
Ind
on
esia
Uzb
ekis
tan
Iraq
Alg
eria
Mex
ico
Thai
lan
dU
krai
ne
Ku
wai
tP
akis
tan
Arg
enti
na
Mal
aysi
aB
angl
ades
hTu
rkm
enis
tan
Kaz
akh
stan
Lib
yaQ
atar
Ecu
ado
r
Bill
ion
do
llars
Electricity
Coal
Natural gas
Oil
© OECD/IEA 2011
Fossil-fuel subsidies can have unintended effects
Fossil-fuel subsidies result in an economically inefficient allocation of resources and market distortions, while often failing to meet their intended objectives
© OECD/IEA 2011
Quantifying fossil-fuel consumption subsidies using the price-gap approach
A price-gap is the amount that an end-use price is below the full cost of supply or reference price
It is applicable where end-use prices are regulated and fall short of international market levels
Does not capture: production subsidies, rebates to consumers, the effect of cross-subsidies, cost of investing in new capacity (electricity)
What costs are represented by estimates from the price-gap approach?
For net exporters, these are essentially opportunity costs
For net importers, these are estimates of direct, budgetary transfers
Relevant calculations
Subsidy = (reference price – end-use price) * consumption
Reference price (fuels) = int’l price (quality adj) +/- freight & insurance + local distribution + VAT
Reference price for electricity is based on annual average-cost pricing: calculated from a weighted average of the cost of electricity production (according to specific power mix), plus transmission and distribution
© OECD/IEA 2011
Quantifying fossil-fuel consumption subsidies using the price-gap approach
0 0.2 0.4 0.6 0.8 1.0
Gasoline
Diesel
LPG
Dollars per litre
International price
Freight and insurance
Internal distribution
Value-added tax
End-use price
Price gap(subsidy)
The price-gap method compares end-use prices paid by consumers with reference prices that correspond to the full cost of supply – a subsidy is present if the end-use price falls short of
the reference price
© OECD/IEA 2011
Calculating electricity reference prices
The electricity reference price takes into account the cost of generation from fossil fuels, capped at the cost of a new gas CCGT plant
Oil
Gas
Coal
InputAnnual Avg.
Fuel Efficiency
38%
45%
36%
Reference Price
$/unit
$/unit
$/unit
26%
43%
10%
21%
Mix of Power Generation
New CCGT
Avg. Cost of Generation is capped by Levelized Cost of a new CCGT
Avg. Cost of
Generation Reference
Price
Nuclear/RenewablesT&D and
other costs
© OECD/IEA 2011
What data is needed for countries to make their own measurement?
End-use prices
To calculate reference prices:
International market (spot) prices
Shipping freight and insurance costs
Cost of local distribution
Rate of value-added tax
Total final energy consumption
Country imports and exports
Data should be collected and applied at the same level of detail
Consider sector/use, fuel grade, time period and region
© OECD/IEA 2011
Methodology for modeling fossil-fuel and CO2 savings
Calculate initial subsidisation rate (by fuel/use)
Choose time period over which to model subsidy phase-out
Decrease the subsidisation rate over the chosen period, raising end-use prices
Fuel savings are linked to pace of change in end-use prices and the elasticity of demand
CO2 savings are calculated by applying emissions factors to fuel savings
© OECD/IEA 2011
World subsidies to fossil-fuel consumption using the price-gap approach
Worldwide, fossil-fuel consumption subsidies totaled $409 billion in 2010 – about $100 billion higher than in 2009; among APEC economies, we estimate they reached $105 billion
Fossil-fuel consumption subsidies remain big
0
25
50
75
100
125
150
0
100
200
300
400
500
600
2007 2008 2009 2010
Do
llars
pe
r barr
el
Billio
n d
ollars
Rest of world
APEC economies
IEA average crude oil
import price (right axis)
© OECD/IEA 2011
Fossil-fuel consumption subsidies per capita and as a percentage of total GDP
The economic cost of subsidies can be more completely understood when viewed as a percentage of GDP or on a per-capita basis
Countries with higher rates Countries with lower rates
Iran
Saudi Arabia
Venezuela
UAE
Iraq
Kuwait
Turkmenistan
Qatar
Libya
Egypt
Algeria
Brunei
Pakistan
Ecuador
0
500
1 000
1 500
2 000
2 500
3 000
0% 5% 10% 15% 20% 25%
Subsi
die
s per ca
pit
a (d
ollars
per ca
pit
a)
Subsidies as a share of GDP (MER)
See below
Scale (billion $)
40
10
Russia
IndiaChina
Indonesia
Argentina
Malaysia
Thailand
Mexico
Kazakhstan
Vietnam
Philippines
Nigeria
Azerbaijan
South Africa
0
50
100
150
200
250
300
0% 1% 2% 3% 4%
Subsi
die
s per ca
pit
a (d
ollars
per ca
pit
a)
Subsidies as a share of GDP (MER)
APEC
Other
Chinese Taipei
© OECD/IEA 2011
Major energy producers are among the biggest subsidisers
For net exporters of oil and gas in APEC economies, subsidies to those fuels totalled $74 billion in 2010, compared with $31 billion in net-importing countries
Fossil-fuel consumption subsidies by net importer and net exporter of oil and natural gas in APEC economies
0
20
40
60
80
100
120
2007 2008 2009 2010
Billio
n d
ollars
Exporter
Importer
© OECD/IEA 2011
Fossil-energy subsidies go mostly to the rich
Only 8% of the amount spent on fossil-fuel consumption subsidies in 2010, reached the poorest 20% of the population
Share of fossil-fuel subsidies received by the lowest income quintile by fuel in surveyed countries*, 2010
© OECD/IEA 2011
Recent pricing reforms in selected countries
Country Description of actions or announced plans
Angola Raised gasoline & diesel prices by 50% and 38% in Sept 2010. Plans to reduce fuel subsidies by 20% per year until eliminated.
IndiaScrapped regulation of gasoline prices in June 2010, with plans to do the same for diesel; Plans to eliminate cooking gas and kerosene subsidies in a phased manner starting April 2012, replacing with direct cash support to the poor.
IndonesiaPostponed a restriction of subsidised fuel for private cars in February 2011, which could push state subsidies higher than the budgeted amount. Previous plans
IranSignificantly cut energy subsidies in Dec 2010 as start of a 5-year program to bring the prices of oil products, natural gas andelectricity in line with international market- levels. Cash payments are being made to ease the impact of higher fuel prices.
Jordan Announced an expansion of their subsidy programme in January 2011 by further reducing kerosene prices and gasoline prices.
Malaysia Cut subsidies for gasoline, diesel and LPG in July 2010 as part of a gradual reform programme..
Mexico Steadily increased gasoline, diesel, and LPG prices in 2011, with the goal of eliminating subsidies.
Pakistan Raised gasoline, diesel and electricity prices in 2011, but prices increases have not kept pace with international prices. Plans are to reduce the power subsidy by 23% this year and gradually phase out.
Qatar Increased petrol, diesel and kerosene prices by 25% in January 2011.
Russia Plans to raise natural gas prices to international levels for industrial users through 2014.
South Africa Plans to raise electricity prices by 20% per year through 2015 according to the Integrated Resource Plan, approved in March 2011.
UAE Increased gasoline prices in April and July of 2010 to the highest level in the GCC
UkraineRaised gas price for households and electricity generation plants by 50% in August 2010 and announced plans to raise them by 30% in 2011.
© OECD/IEA 2011
Phasing-out fossil-fuel subsidies can reduce demand and CO2 emissions
Subsidy phase-out in APEC countries by 2020 would curb fossil fuel demand by 2.7% by then and by 3.6% in 2035 compared with a baseline in which subsidies remain as they are
Fossil fuel and CO2 emissions savings from subsidy phase out versus no phase out
-1.2
-0.9
-0.6
-0.3
0.0
- 400
- 300
- 200
- 100
0
2012 2015 2020 2035
Gt
Mto
e
Gas
Coal
Oil
CO2 emissions(right axis)CO2 emissions(right axis)
© OECD/IEA 2011
Concluding remarks
Getting the prices right, by phasing-out fossil-fuel subsidies, is an important step towards improving energy security, while brining environmental & economic benefits
Without further reform, spending on subsidies in APEC economies is set to reach $150 billion in 2020
Subsidy phase out can have significant impact on the poor and policies must be carefully designed not to restrict access to essential energy services
Since the APEC commitment was taken, many countries have started taking measures to reduce or eliminate subsidies