UNECE Guidelines Reforming Energy Pricing and Subsidies

1. UNECE Guidelines Reforming Energy Pricing and Subsidies Charlotte Griffiths Sustainable Energy Division UN Economic Commission for Europe

2. ECE Energy Series No 21 • Published in 2003 • Prepared jointly by the UNECE Committee on Environmental Policy and the Committee on Sustainable Energy • Guidelines available in English, French and Russian

3. Background… • At their annual sessions in 2001, the UNECE Committees on Sustainable Energy and on Environmental Policy established a Task Force on Environment and Energy for the period 2002-2005 • Mandate: to develop non-legally binding guidelines for decision makers on reforming energy prices to support sustainable energy development. • Driving force - political commitments of UNECE member States to shift national economies and energy markets towards a more sustainable path of development.

4. Scope of the Programme of Work Focus on three key elements: • review and assessment of energy pricing in economies in transition with the aim of elaborating guidelines on energy pricing for policy makers in time for the May 2003 Kiev Ministerial Meeting of the Environment for Europe process; • Analysis of energy subsidization in western and eastern countries of the UNECE with the aim of elaborating guidelines on the issue; and • Assessment of methodologies for internalizing environmental costs through the use of fiscal instruments, including taxation, and measures to promote their use, to be completed by the end of 2005.

5. Key Objectives Reforming energy prices to achieve the objectives of sustainable energy development in the UNECE region, including: • assisting economies in transition in their efforts to raise energy prices to levels approximating their “economic” value or to international market levels, in conjunction with measures to alleviate the full impact of higher energy prices on those least able to absorb higher prices; • assisting policy makers to phase out, in a socially responsive manner, energy subsidies for environmentally damaging sources of energy; and • promoting both the development and use of mechanisms to internalize external costs of energy production and consumption and promoting the more extensive use of fiscal instruments to meet environmental objectives.

6. Working Methods • Through a Task Force to which energy and environmental experts were designated by a number of UNECE Governments and international organizations. • Substantive work and consultations were carried out through use of electronic correspondence. • Workshop on Enhancing the Environment by Reforming Energy Prices, hosted by the Czech Ministry of the Environment in June 2000 – aim to compare approaches in developed market economies and in countries in transition to internalizing the environmental costs in energy prices.

7. Output Non-legally binding guidelines for policy makers that were endorsed by Ministerial “Environment for Europe” Conference, Kiev, 2003. - General guidelines to be used by policy makers when reforming national energy pricing and subsidy schemes - Guidelines suggest the best policy options and measures to alleviate the full impact of higher energy prices on those least able to absorb them - Also suggest policy measures and related tools for flexible energy price adjustments and removal of harmful subsidies.

8. Summary of Reforming Energy Subsidies Recommendations Recalling the recommendation of WSSD Plan of Implementation, to take action to phase out energy subsidies that inhibit sustainable development; as well as energy-related decisions of the Aarhus Ministerial Conference “Environment for Europe”(1998), UNECE Governments are encouraged to: 1. Reform energy subsidies as part of a broader process of economic and institutional reform aimed at placing more emphasis on the market, removing trade barriers, improving governance of the energy sector and promoting sustainable development. 2. Ensure that price signals reflect to the maximum possible extent the full costs and benefits, including externalities, of supplying and consuming different forms of energy. 3. Remove any subsidies that fail to achieve demonstrable net environmental or social benefits.

9. Recommendations continued 4.Favourregional development, education & training, health & social welfare policies over energy subsidies in addressing social issues. 5.Targetsubsidies, where they are justified, at clearly defined groups & technologies, and devise mechanisms that ensure the benefits of those subsidies go only to those targeted categories. 6.Carry outa thorough and coherent analysis of all the economic, social and environmental costs and benefits associated with existing or planned subsidy schemes to ensure that the case for them is valid. Where it is not possible to assess properly the full implications of a given subsidy, seek to remove it. 7.Where a subsidy scheme is justified, design it so that it does not undermine incentives for producers and suppliers to provide a service efficiently or for consumers to use energy efficiently, and does not harm the financial health of energy-service providers. 8. Prevent cost of energy-subsidy schemes from becoming a serious burden on national finances, and abandon any schemes that involve excessive administration costs.

10. Recommendations continued 9. Ensure the financial costs and channels through which financial transfers, within subsidy programmes, are made are fully transparent, and communicate that information to the public. 10. Ensure limited duration & regular review of energy-subsidy programmes. 11. Implement reforms in a phased manner, where the economic and social consequences are profound, to soften the financial pain of those who stand to lose out and give them time to adapt. 12. Consider introducing compensating measures that support poor household incomes in more direct & effective ways than via subsidies. 13. Communicate clearly to the general public the overall benefits of subsidy reform to the economy and to society as a whole. 14. Apply all means for amicable settlement of accounts by non-paying customers including financial charges & fines. Cutting of supplies by energy service providers to non-paying poor households should be applied with care, and under exceptional circumstances.

11. Future … • Guidelines on Energy Pricing and Subsidies completed with Ministerial endorsement. • UNECE is mandated to undertake follow-up work on energy subsidies – e.g. review of extent to which guidelines have been adopted. • Assessment of methodologies for internalizing environmental costs through the use of fiscal instruments, including taxation, and measures to promote their use, however proved more difficult and was not pursued. • Since 2003 no substantive activities at UNECE. • Welcome this initiative and opportunity to cooperate with UNEP and others. • UNECE can assist in implementing policy agenda.