experience across asia - iisd.org

EXPERIENCE ACROSS ASIA CHALLENGES OF SUBSIDY REFORM

Shikha Jha Asian Development Bank

South East Asian Forum Fossil-fuel subsidy reform: Challenges and opportunities

20-21 November 2012, Bali, Indonesia

Importance of Energy Subsidies in Asia

Energy needs in developing Asia driven by high growth & poverty

Fastest demand growth, esp fossil-fuel ¼ of global energy; China accounts for ½

No access to basic electricity services 700 million (~ 20% of population)

Reliance on traditional biomass 1.6 billion (> 44% of population)

The poor spend larger % on fuel and light India Philippines

6

7

8

9

10

11

12

13

1 2 3 4 5 6 7 8 9 10

%

Monthly per capita exp deciles

Rural

5.0

5.5

6.0

6.5

7.0

1 2 3 4 5 6 7 8 9 10

%

Income deciles

Rural

Source: Household Consumer Expenditure in India, 2007-08; Report No. 530; 2009 Philippines FIES

Subsidies not uniform across the region

Retail Gasoline Prices in Developing Asia

0

40

80

120

160

US

cents

/liter

Gasoline

US Premium Gas Retail PriceOct 2008

Complex energy pricing systems

Liberalized – market-determined prices

Automatic – formula-based adjustment

Price controls – administered, regulated, or ad-hoc adjustment

34%

18%

48%

Gasoline Pricing Mechanisms in 44 countries (2006)

Liberalized Automatic Ad hoc

Source: IMF 2008. Fuel and Food Price Subsidies: Issues and Reform Options

Challenges of subsidy reform

Interest-group influence

Lack of support from vested interests

LICs: Promote economic growth, shield the poor

Producing countries: Comparative advantage

Industry lobby: much higher subsidy to renewables, agriculture

Vote banks

Poor people

Other stakeholders, e.g., civil society, politicians

Off-budget subsidies

Free power to farmers (e.g., India)

Tax rebates and exemptions on consumption (e.g., cheaper kerosene in Bhutan, India, Indonesia)

Tax breaks to mining and quarrying industry (e.g., Australia)

Waiver of import duties (e.g., Indonesia)

Logistical difficulties

Users are organized differently – Government’s ability to deal with interest groups varies

Poor consumers lack voice

Production industries using gas and coal are well organized and influential

Collusion among distributors

Responsible offices — foreign affairs, finance, energy, tax, national planning: Requires coordination

Energy System & Vertically Integrated State Enterprises

Coal

Extraction

Coal R

esourc

es

Oil Import

Gas Import

Prim

ary

Coal

Prim

ary

Oil

Prim

ary

Gas

Coal Power

Plant

Gas Power

Plant

Oil Power

Plant

Hydro Power

Plant

Oil Heating

Plant

Cogeneration

Ele

ctric

ity

Dis

trict H

eat

Gas

Oil

Coal

Ele

ctric

ity

Dis

trict H

eat

Gas

Oil

Coal

Coal

Transport&

Distribution

Oil Transport&

Distribution

Gas

Transport&

Distribution

Electricity

Transport&

Distribution

District Heat

Transport&

Distribution

Industria

l Heat

Industria

l E

lectric

ity

Resid

entia

l/Com

merc

ial H

eat

Resid

enta

il/Com

merc

ial E

lectric

ity

Tra

nsport

Coal Ind.

Oil Ind.

Gas Ind

Elec. Ind.

Coal R/C.

Oil R/C

Gas R/C

Elec. R/C

DH R/C

Oil Trp

RESOURCES PRIMARY SECONDARY FINAL DEMAND

Developing country-specific issues

Characteristics Typical developed

country

PRC

Vietnam

Indonesia

Political discretion in price setting

Low Moderate Moderate High

Dominance by state- owned vertically- integrated utilities

Low some

exceptions

High High High

Central planning in the electricity sector

Low some

exceptions

High High High

Political difficulty of reform

Mixed Moderate N/A (Just starting)

High

Difficulty in finding instruments to compensate low-income households for price changes

Low Moderate Moderate Moderate

Source: World Bank, 2011, Climate Change and Fiscal Policy: A Report for APEC

Solutions should address specific challenges and issues facing a country

Thank you!

Shikha Jha: sjha@adb.org