© OECD/IEA 2011

IEA analysis of fossil-fuel subsidies for APEC

Marco Baroni

Office of the Chief Economist

International Energy Agency

Kaohsiung, Chinese Taipei, 18 October 2011

© OECD/IEA 2011

Policies could dramatically alter the long-term energy outlook

Compared with the New Policies Scenario, energy demand in 2035 is

8% higher in the Current Policies Scenario and 11% lower in the 450 Scenario

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000

1980 1990 2000 2010 2020 2030 2035

Mto

e

Current Policies Scenario

New Policies Scenario

450 Scenario

World primary energy demand by scenario

© OECD/IEA 2011

Primary energy demand in APEC economies in the Current Policies Scenario

APEC energy demand expands by 44% between now and 2035 – an average rate of increase of 1.4% per year – with fossil fuels remaining dominant in the energy mix

0

2 000

4 000

6 000

8 000

10 000

12 000

1990 2000 2010 2020 2030 2035

Mto

e Other renewables

Hydro

Nuclear

Gas

Oil

Coal

© OECD/IEA 2011

Spending on oil & gas imports as a share of GDP in

APEC economies in the Current Policies Scenario

The combination of higher prices and expanded imports translates to a growing import bill for the region, which can be a heavy burden on economic growth

0%

1%

2%

3%

4%

5%

6%

7%

1990 2000 2010 2020 2030 2035

Indonesia

China

Japan

Mexico

United States

ASEAN*

Australia/

New Zealand

© OECD/IEA 2011

CO2 emissions in APEC economies in the Current Policies Scenario

APEC’s share of global CO2 emissions increases slightly to 59% in 2035, highlighting that the region will have to play a key part if climate objectives are to be met

0

5

10

15

20

25

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45

1990 2000 2010 2020 2030 2035

Gt Gas

Oil

Coal

World

© OECD/IEA 2011

Fossil-fuel consumption subsidies for top twenty-five countries, 2010

Oil products had the largest subsidies at $193 billion, followed by natural gas at $91 billion, while fossil-fuel subsidies resulting from the under-pricing of electricity reached $122 billion

0

10

20

30

40

50

60

70

80

90

Iran

Sau

di A

rab

iaR

uss

iaIn

dia

Ch

ina

Egyp

tV

enez

uel

aU

AE

Ind

on

esia

Uzb

ekis

tan

Iraq

Alg

eria

Mex

ico

Thai

lan

dU

krai

ne

Ku

wai

tP

akis

tan

Arg

enti

na

Mal

aysi

aB

angl

ades

hTu

rkm

enis

tan

Kaz

akh

stan

Lib

yaQ

atar

Ecu

ado

r

Bill

ion

do

llars

Electricity

Coal

Natural gas

Oil

© OECD/IEA 2011

Fossil-fuel subsidies can have unintended effects

Fossil-fuel subsidies result in an economically inefficient allocation of resources and market distortions, while often failing to meet their intended objectives

© OECD/IEA 2011

Quantifying fossil-fuel consumption subsidies using the price-gap approach

A price-gap is the amount that an end-use price is below the full cost of supply or reference price

It is applicable where end-use prices are regulated and fall short of international market levels

Does not capture: production subsidies, rebates to consumers, the effect of cross-subsidies, cost of investing in new capacity (electricity)

What costs are represented by estimates from the price-gap approach?

For net exporters, these are essentially opportunity costs

For net importers, these are estimates of direct, budgetary transfers

Relevant calculations

Subsidy = (reference price – end-use price) * consumption

Reference price (fuels) = int’l price (quality adj) +/- freight & insurance + local distribution + VAT

Reference price for electricity is based on annual average-cost pricing: calculated from a weighted average of the cost of electricity production (according to specific power mix), plus transmission and distribution

© OECD/IEA 2011

Quantifying fossil-fuel consumption subsidies using the price-gap approach

0 0.2 0.4 0.6 0.8 1.0

Gasoline

Diesel

LPG

Dollars per litre

International price

Freight and insurance

Internal distribution

Value-added tax

End-use price

Price gap(subsidy)

The price-gap method compares end-use prices paid by consumers with reference prices that correspond to the full cost of supply – a subsidy is present if the end-use price falls short of

the reference price

© OECD/IEA 2011

Calculating electricity reference prices

The electricity reference price takes into account the cost of generation from fossil fuels, capped at the cost of a new gas CCGT plant

Oil

Gas

Coal

InputAnnual Avg.

Fuel Efficiency

38%

45%

36%

Reference Price

$/unit

$/unit

$/unit

26%

43%

10%

21%

Mix of Power Generation

New CCGT

Avg. Cost of Generation is capped by Levelized Cost of a new CCGT

Avg. Cost of

Generation Reference

Price

Nuclear/RenewablesT&D and

other costs

© OECD/IEA 2011

What data is needed for countries to make their own measurement?

End-use prices

To calculate reference prices:

International market (spot) prices

Shipping freight and insurance costs

Cost of local distribution

Rate of value-added tax

Total final energy consumption

Country imports and exports

Data should be collected and applied at the same level of detail

Consider sector/use, fuel grade, time period and region

© OECD/IEA 2011

Methodology for modeling fossil-fuel and CO2 savings

Calculate initial subsidisation rate (by fuel/use)

Choose time period over which to model subsidy phase-out

Decrease the subsidisation rate over the chosen period, raising end-use prices

Fuel savings are linked to pace of change in end-use prices and the elasticity of demand

CO2 savings are calculated by applying emissions factors to fuel savings

© OECD/IEA 2011

World subsidies to fossil-fuel consumption using the price-gap approach

Worldwide, fossil-fuel consumption subsidies totaled $409 billion in 2010 – about $100 billion higher than in 2009; among APEC economies, we estimate they reached $105 billion

Fossil-fuel consumption subsidies remain big

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25

50

75

100

125

150

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100

200

300

400

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600

2007 2008 2009 2010

Do

llars

pe

r barr

el

Billio

n d

ollars

Rest of world

APEC economies

IEA average crude oil

import price (right axis)

© OECD/IEA 2011

Fossil-fuel consumption subsidies per capita and as a percentage of total GDP

The economic cost of subsidies can be more completely understood when viewed as a percentage of GDP or on a per-capita basis

Countries with higher rates Countries with lower rates

Iran

Saudi Arabia

Venezuela

UAE

Iraq

Kuwait

Turkmenistan

Qatar

Libya

Egypt

Algeria

Brunei

Pakistan

Ecuador

0

500

1 000

1 500

2 000

2 500

3 000

0% 5% 10% 15% 20% 25%

Subsi

die

s per ca

pit

a (d

ollars

per ca

pit

a)

Subsidies as a share of GDP (MER)

See below

Scale (billion $)

40

10

Russia

IndiaChina

Indonesia

Argentina

Malaysia

Thailand

Mexico

Kazakhstan

Vietnam

Philippines

Nigeria

Azerbaijan

South Africa

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50

100

150

200

250

300

0% 1% 2% 3% 4%

Subsi

die

s per ca

pit

a (d

ollars

per ca

pit

a)

Subsidies as a share of GDP (MER)

APEC

Other

Chinese Taipei

© OECD/IEA 2011

Major energy producers are among the biggest subsidisers

For net exporters of oil and gas in APEC economies, subsidies to those fuels totalled $74 billion in 2010, compared with $31 billion in net-importing countries

Fossil-fuel consumption subsidies by net importer and net exporter of oil and natural gas in APEC economies

0

20

40

60

80

100

120

2007 2008 2009 2010

Billio

n d

ollars

Exporter

Importer

© OECD/IEA 2011

Fossil-energy subsidies go mostly to the rich

Only 8% of the amount spent on fossil-fuel consumption subsidies in 2010, reached the poorest 20% of the population

Share of fossil-fuel subsidies received by the lowest income quintile by fuel in surveyed countries*, 2010

© OECD/IEA 2011

Recent pricing reforms in selected countries

Country Description of actions or announced plans

Angola Raised gasoline & diesel prices by 50% and 38% in Sept 2010. Plans to reduce fuel subsidies by 20% per year until eliminated.

IndiaScrapped regulation of gasoline prices in June 2010, with plans to do the same for diesel; Plans to eliminate cooking gas and kerosene subsidies in a phased manner starting April 2012, replacing with direct cash support to the poor.

IndonesiaPostponed a restriction of subsidised fuel for private cars in February 2011, which could push state subsidies higher than the budgeted amount. Previous plans

IranSignificantly cut energy subsidies in Dec 2010 as start of a 5-year program to bring the prices of oil products, natural gas andelectricity in line with international market- levels. Cash payments are being made to ease the impact of higher fuel prices.

Jordan Announced an expansion of their subsidy programme in January 2011 by further reducing kerosene prices and gasoline prices.

Malaysia Cut subsidies for gasoline, diesel and LPG in July 2010 as part of a gradual reform programme..

Mexico Steadily increased gasoline, diesel, and LPG prices in 2011, with the goal of eliminating subsidies.

Pakistan Raised gasoline, diesel and electricity prices in 2011, but prices increases have not kept pace with international prices. Plans are to reduce the power subsidy by 23% this year and gradually phase out.

Qatar Increased petrol, diesel and kerosene prices by 25% in January 2011.

Russia Plans to raise natural gas prices to international levels for industrial users through 2014.

South Africa Plans to raise electricity prices by 20% per year through 2015 according to the Integrated Resource Plan, approved in March 2011.

UAE Increased gasoline prices in April and July of 2010 to the highest level in the GCC

UkraineRaised gas price for households and electricity generation plants by 50% in August 2010 and announced plans to raise them by 30% in 2011.

© OECD/IEA 2011

Phasing-out fossil-fuel subsidies can reduce demand and CO2 emissions

Subsidy phase-out in APEC countries by 2020 would curb fossil fuel demand by 2.7% by then and by 3.6% in 2035 compared with a baseline in which subsidies remain as they are

Fossil fuel and CO2 emissions savings from subsidy phase out versus no phase out

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- 400

- 300

- 200

- 100

0

2012 2015 2020 2035

Gt

Mto

e

Gas

Coal

Oil

CO2 emissions(right axis)CO2 emissions(right axis)

© OECD/IEA 2011

Concluding remarks

Getting the prices right, by phasing-out fossil-fuel subsidies, is an important step towards improving energy security, while brining environmental & economic benefits

Without further reform, spending on subsidies in APEC economies is set to reach $150 billion in 2020

Subsidy phase out can have significant impact on the poor and policies must be carefully designed not to restrict access to essential energy services

Since the APEC commitment was taken, many countries have started taking measures to reduce or eliminate subsidies