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Fossil Fuel Subsidy and Pricing Policies

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Fossil Fuel Subsidy and Pricing Policies WPS7531 Policy Research Working Paper 7531 Public Disclosure Authorized Fossil Fuel Subsidy and Pricing Policies Recent Developing Country Experience Public Disclosure Authorized Masami Kojima Public Disclosure Authorized Public Disclosure Authorized Energy and Extractives Global Practice Group January 2016 Policy Research Working Paper 7531 Abstract The steep decline in the world oil price in the last quarter Recent experience suggests that regular and frequent of 2014 slashed fuel price subsidies. Several governments price adjustments, however small—as in Jordan and responded by announcing that they would remove subsidies Morocco—help the government and consumers to get for one or more fuels and move to market-based pricing accustomed to fluctuations in world fuel prices and with full cost recovery. Other governments took advantage exchange rates. By contrast, freezing prices, even for a few of low world prices to increase taxes and other charges on months—for socioeconomic considerations or because fuels. However, the decision to move to cost recovery and the needed adjustments are small enough to be absorbed— market prices, ending budgetary support, has not been increases the risk of reversion to ad hoc pricing and price implemented consistently across countries. Policy announce- subsidies. The more formally the decision to move to ments have varied in the way they were communicated and market-based pricing is communicated, the more public the level of detail provided. When petroleum product prices new price announcements, and the higher the frequency bounced back during the first half of 2015, some “reform- of price changes, the more likely the implementation of ing” governments failed to raise prices correspondingly. the announced pricing policy reform will be sustained. This paper is a product of the Energy and Extractives Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team 1 Fossil Fuel Subsidy and Pricing Policies: Recent Developing Country Experience Masami Kojima1 Key words: fossil fuels, oil, gas, coal, gasoline, diesel, kerosene, liquefied petroleum gas, subsidies, price gap, fuel tax JEL codes: H20, Q38, Q48 1 Masami Kojima is at the World Bank. The author is grateful for the comments provided by Oscar Calvo‐Gonzalez, Punam Chuhan‐Pole, Ndiame Diop, Marianne Fay, Joern Huenteler, Ahya Ihsan, Caterina Laderchi, Andrea Liverani, Frederico Gil Sander, Yadviga Semikolenova, Sameer Shukla, Nithin Umapathi, and Ruslan Yemtsov, all of the World Bank. The author thanks Thomas Flochel of the World Bank for gathering information on Argentina, Chile, Ecuador, Gabon, and Morocco; the Energy Research Institute in Beijing for providing information on China; Elham Hassanzadeh of Energy Pioneers for providing information on the Islamic Republic of Iran; and Yamal Soto of the Chilean Energy Commission for providing information on MEPCO. The financial support provided by the Energy Subsidy Reform and Delivery Technical Assistance Facility of the World Bank’s Energy Sector Management Assistance Program (ESMAP) is gratefully acknowledged. 2 Contents Abstract .......................................................................................................... Error! Bookmark not defined. Abbreviation ................................................................................................................................................. 1 Introduction .................................................................................................................................................. 2 Global Context .............................................................................................................................................. 5 Box 1: Pricing of liquid fuels .................................................................................................................... 10 Box 2: Pricing of natural gas .................................................................................................................... 13 Pitfalls of Price Controls .............................................................................................................................. 14 Estimating price subsidies to reimburse fuel marketers is challenging .................................................. 15 Pricing control could concentrate market power ................................................................................... 16 Aiming for price stability could backfire ................................................................................................. 17 Price smoothing schemes are seldom, if ever, self‐financing ................................................................. 18 Reimbursement delays for government‐financed, artificially low domestic prices are common .......... 20 Trade restrictions to influence prices distort the market further .......................................................... 20 Subsidies all too often create powerful incentives for commercial malpractice ................................... 22 Response to the Recent Fall in the World Oil Price .................................................................................... 24 Lower world fuel prices have advanced pricing reforms ........................................................................ 24 Implementation of price reforms has not been even ............................................................................. 27 Frequency of price adjustments may be an indication of commitment to pricing reform .................... 27 Lower fuel prices have created more space for increasing fuel taxes and other charges ...................... 30 Observations ............................................................................................................................................... 31 Concluding Remarks .................................................................................................................................... 35 Annex: Supporting Country Information .................................................................................................... 37 Algeria ..................................................................................................................................................... 37 Angola ..................................................................................................................................................... 37 Argentina ................................................................................................................................................. 38 Bangladesh .............................................................................................................................................. 41 Brazil ........................................................................................................................................................ 42 Cameroon ................................................................................................................................................ 43 Chile ........................................................................................................................................................ 44 China ....................................................................................................................................................... 47 Colombia ................................................................................................................................................. 50 Côte d’Ivoire ............................................................................................................................................ 51 Ecuador ................................................................................................................................................... 52 Arab Republic of Egypt ............................................................................................................................ 52 Gabon ...................................................................................................................................................... 54 Ghana ...................................................................................................................................................... 55 India ........................................................................................................................................................ 58 Indonesia ................................................................................................................................................
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