experience across asia - iisd.org
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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
