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IEA Work on Energy Subsidy Related Issues

IEA Work on Energy Subsidy Related Issues. UNEP/UNECE Expert Meeting on Energy Subsidies Geneva, 15-16 November 2007. Trevor Morgan Senior Consultant, Economic Analysis Division International Energy Agency. IEA Activities.

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IEA Work on Energy Subsidy Related Issues

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  1. IEA Work on Energy Subsidy Related Issues UNEP/UNECE Expert Meeting on Energy Subsidies Geneva, 15-16 November 2007 Trevor Morgan Senior Consultant, Economic Analysis Division International Energy Agency

  2. IEA Activities • World Energy Outlook 1999: Looking at Energy Subsidies: Getting the Price Right • IEA/UNEP Subsidy Reform Project 2000-2002: • Regional workshops • Paper on OECD subsidies • Synthesis Report to CSD-9 (New York) • Reforming Energy Subsidies summary publication (basis for 2004 UNEP report) • World Energy Outlook 2006 • Regular activities: • Country reviews (4-yearly cycle for member countries, ad hoc for non-members) • Energy prices & taxes database • Public energy R&D funding

  3. WEO-1999: Main Findings • Quantification of subsidies & impact in 8 non-OECD countries • Price-gap approach • Total value of subsidies = $95 billion • End-user prices on average 20% below full supply cost (market-based) • Removing all subsidies would • Reduce their primary demand by 13% (3.5% of world demand) • Increase their GDP by 1% per year • Lower their CO2 emissions by 16% (5% of world emissions)

  4. WEO-2006: Main Findings • Quantification of subsidies in 20 largest non-OECD countries (81% of world demand) • Price-gap approach (as for WEO-99) • Total value of subsidies = $220 billion (2005) • Biggest subsidies by fuel to oil products: c.$90 billion.. • .. and by country, to Russia: c.$40 billon • Degree of under-pricing biggest for natural gas (over half on weighted average basis)

  5. Economic Value of Subsidies in non-OECD Countries, 2005

  6. UNFCCC Paper (Morgan, 2007) • Summary of evidence from literature of • Size of subsidies • Impact on investment & emission • Prospects for reform

  7. UNFCCC Paper: Size of Subsidies ($billion, nominal terms)

  8. UNFCCC Paper: Impact on Investment & GHG Emissions • Common problems with energy subsidies • By cutting prices, can boost fossil energy use & emissions • By lowering price to producers, may cut return on investment & incentives to invest • By lowering cost of existing technology, can prevent take-up of more promising technologies • Can drain government finances • Several studies provide evidence of detrimental impact of existing fossil-energy subsidies • Subsidies to clean energy – e.g. biofuels – not necessarily cost-effective

  9. UNFCCC Paper: Subsidy Reform • Without reform, subsidies will grow in dollar terms with higher consumption (& prices?) • Reform depends on the politicians! • Principles of energy-subsidy reform • Approaches to reform: • Phasing • Compensating measures (e.g. welfare support) • Communication • Support from multi-lateral lending agencies

  10. Interpreting These Results • Biggest energy subsidies are in non-OECD countries • Most of those subsidies – mainly in form of price controls - still go to consumers of fossil fuels • Fossil-fuel subsidies have probably risen since 1999 due to higher international prices • They are dampening demand response & aggravating energy insecurity, pollution & climate change • Electricity subsidies are undermining utilities’ auto-financing capacity & ability to increase access in many cases

  11. Implications for Policy • Never subsidise consumption of fossil fuels! • May be justification for limited subsidy for • Modern energy for poor (essentially electricity) • Non-fossil energy & investment in efficient technology (to overcome market barriers) • Fuel/carbon tax is the most economically efficient to internalizing externalities • Subsidy reform must form part of broader policy reform • Big potential for subsidy reform to enhance energy security & curbing GHG emissions but enormous political barriers

  12. What More Needs to be Done? • More monitoring & analysis? • Data patchy, analyses partial & irregular • Target biggest problems (by country & sector) • Continue to alert policymakers to cost & (in)effectiveness of subsidies? • Widespread ignorance about true cost of subsidies • Policy schizophrenia – even in IEA countries! • Practical advice (but not preaching) on how to reform/remove subsidies? • Overcoming political hurdles • Success stories – reform is possible if done the right way!

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