Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms Integrative Report
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Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms Integrative Report Unsustainable budgetary cost of selling oil, gas, and coal at low prices has propelled energy subsidy reform in developing Asian economies. This report measures the size of associated subsidies on these fossil fuels including direct transfers, tax exemptions, subsidized credit, and losses of state enterprises in India, Indonesia, and Thailand. An analysis of complex interactions between economic, social, energy, and environmental issues shows that the initial rise in energy prices due to a reduction or removal of the subsidies will nudge households and businesses to shift to alternative fuels, make investment in clean energy attractive, increase energy supply, reduce energy shortages, and cut greenhouse gas emissions. Using the money freed up from subsidies to compensate poor households and to increase government budgets will offset the negative effects of the initial price rise, promote sustainable energy use, and help allay the fears of reform. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to the majority of the world’s poor. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. FOSSIL FUEL SUBSIDIES IN ASIA TRENDS, IMPACTS, AND REFORMS INTEGRATIVE REPORT ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org FOSSIL FUEL SUBSIDIES IN ASIA TRENDS, IMPACTS, AND REFORMS INTEGRATIVE REPORT ASIAN DEVELOPMENT BANK Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2016 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org; openaccess.adb.org Some rights reserved. Published in 2016. Printed in the Philippines. ISBN 978-92-9257-298-3 (Print), 978-92-9257-299-0 (e-ISBN) Publication Stock No. RPT157816-2 Cataloging-In-Publication Data Asian Development Bank. Fossil fuel subsidies in Asia: trends, impacts, and reforms—Integrative report. Mandaluyong City, Philippines: Asian Development Bank, 2016. 1. Energy Sector. 2. Fossil Fuel Subsidies. 3. Developing Asia. I. Asian Development Bank. 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Note: In this publication, “$” refers to US dollars. All photos are from ADB. Contents Tables, Figures, and Boxes v Foreword vii Acknowledgments viii Highlights x Abbreviations xii Executive Summary xiii 1 Fossil Fuel Subsidies: The Need for Reform 1 2 Linking Fossil Fuel and Electricity Policies: Subregional Experience 5 3 Measuring Subsidies 9 An Unconventional Approach 10 Country Inventory of Subsidies 12 4 Reforming Fossil Fuel Subsidies 17 Modeling Framework, Reform Scenarios, and Impacts 18 Macroeconomic Impacts of Subsidy Reform 21 Impacts on the Energy Sector 22 Environmental Impacts 23 Distributional Implications 24 5 Policy Choices 28 Findings and Lessons from Country-Level Analysis 28 Deploying Fiscal Savings from Reform 29 Implementing Reforms 35 iv Contents 6 Responding to Oil Price Gyrations 38 End of the Supercycle or a Temporary Blip? 41 Drivers of Recent Oil Price Behavior and the Price Outlook 44 Political Economy of Reforms in India, Indonesia, and Thailand 46 7. Summary and Conclusion 49 Background Papers 51 References 52 Appendixes 1 How Other Models Assess the Impacts of Fossil Fuel Subsidy Reform 57 2 Main Characteristics of the Reform Impact Models Used in the Three Study Countries 59 Tables, Figures, and Boxes Tables 1 Energy and Fossil Fuel Subsidy Situations in India, Indonesia, and Thailand 3 2 Access to Modern Energy Services in Southeast Asia, 2011 5 3 Share of Consumption Subsidies in the Full Cost of Supply, 2013 9 4 Coverage of Inventories 14 5 Summary of Identified Subsidies in India, Indonesia, Thailand 15 6 Strengths and Weaknesses of Economic and Energy Models Used for the Analysis 19 7 Scenarios of Fossil Fuel Subsidy Removal 19 8 Assumptions Used in the Models’ Projections 20 9 Economic Impacts 21 10 Energy Sector Impacts 23 11 Environmental Impacts 24 12 Impact Analysis Summary: Households 25 13 Subsidy Reform Impacts: Short- versus Long-Term Outcomes 28 14 Government Expenditure 30 15 Recent Developments in Fuel Subsidy Reforms in India, Indonesia, and Thailand 46 Figures 1 Sources of Electricity Generation in India, Indonesia, and Thailand 3 2 Interlinked Approach to Subsidy Estimation and Reform Analysis 4 3 Subsidies for Direct Use and Power Generation Inputs, 2011 7 4 Fossil Fuel Subsidies and Energy Inefficiency 8 5 Scope of Estimated Subsidies 13 6 Comparison of Alternative Subsidy Estimates, 2011–2012 15 7 Breakdown of Total Consumer Subsidies, 2012 16 8 Complexity of Reforms 17 9 Magnitude of Fossil Fuel Subsidies Compared with Social Assistance, 2012 32 vi Tables, Figures, and Boxes 10 Policies to Reduce Negative Impacts of Reform 36 11 Movement of Subsidies in Tandem with Oil Prices, 2005–2012 38 12 Oil Price Movements 42 13 Brent Crude Spot Price, Jan 2014–May 2015 42 14 Brent Crude Spot Price, 1986–2015 43 15 Oil Production Cost Blocks 45 16 Economic Impacts of a 10% Oil Price Drop on Asian Economies 47 Boxes 1 Alternative Methods of Calculating Subsidies 10 2 Fossil Fuel Subsidy Reforms and the Poor 31 3 Priorities for Subsidy Reform 35 4 Fraud and Diversion of Subsidies within Countries and across Borders 39 Foreword nergy subsidy reform has emerged as one of the most important policy challenges for developing Asian economies. Government expenditure on fossil fuel subsidies which covers the gap between Eglobal and domestic prices exceeds public spending on education or health in some Asian countries. High fossil fuel subsidies can wreck government budgets. They accrue largely to the rich and reduce incentives for investment in renewables and energy efficiency. Moreover, fossil fuels (coal, oil, and gas) are major carbon emitters, and burning coal, the most carbon-intensive energy source, has serious climate-change implications. In 2009, the Group of Twenty and Asia-Pacific Economic Cooperation committed to rationalizing and phasing out inefficient fossil fuel subsidies; unfortunately, there has been little progress. As people get used to low prices, subsidy reform becomes difficult: powerful beneficiaries oppose it and governments fear social unrest when prices rise due to reforms. But this mindset must change as the benefits of subsidy reform are potentially immense. The substantial drop in oil prices has opened a new window of opportunity to put an end to these harmful subsidies. This study comes at a critical moment to shed new light on energy pricing. It offers guidelines for reforms and the formulation of long-term energy strategies.