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Adrien Vogt-Schilb Climate Change Economist [email protected]
Managing distributional impacts of fossil fuel subsidy reform
A political economy issue
The UK Slavery Abolition Act of 1833 paid 20 million pounds in compensation to plantation owners in British Colonies about $21 billion in present day value and almost 40 percent of the British budget at the time
Ambitious policy reform requires taking care of the political economy
2
The impact of fossil fuel subsidy reform on consumers can be problematic
Problem:
People are not fond of energy price hikes.
Problem because: - It is a policy objective to protect poor and vulnerable households - Consumers, especially the middle class, are voters
Energy price hikes may hurt consumers
3
Are energy price hikes progressive or regressive?
Chilean example: it may seem at first that gasoline price hikes are progressive…
5
Current spending on gasoline and diesel (% of income)
0.05%
0.1%
0.2%
0.3%
0.4%
Bottom Second Third Fourth Top
Cost of a 25c/L increase in gasoline prices (% of income)
0.3
1.0
1.7
2.5
3.0
Bottom
Second
Third
Fourth
Top
…but gasoline price hikes have an indirect impact on all consumption items…
%
Public transport 6.3
Electricity 2.0
Durables 1.4
Food 0.6
Household services 0.6
Clothes 0.3
Entertainment 0.3
Communication 0.2
Personal care 0.2
Education and Health 0.2
Water 0.2
Price hikes in all goods due to gasoline price increase (% of current price)
0.3
0.3
1.0
1.2
1.4
2.3
3
3
5
8
12
25
38
0.1
3.0
2.7
2.4
5.7
0.7
7
1
13
12
5
11
37
Gas
Diese and gasoline
Durables
Clothes
Communication
Water
Entertaiment
Electricity
Education and Health
Personal care and expenditures
Public transport
Food
Household services
Top Bottom
Household budget
…such that the total, direct + indirect, impact of gasoline prices hikes tends to be regressive
7
0.0% 0.1% 0.2%
0.3% 0.4%
1.4% 1.3%
1.3% 1.2%
1.1%
Bottom Second Third Fourth Top
Public transport
Food
Indirect impact
Direct impact 0.05%
0.1%
0.2%
0.3% 0.4%
Bottom Second Third Fourth Top
Regressive vs progressive may matter less than
how to manage the impacts of price hikes on consumers
In cash and in kind transfers have both been used to compensate vulnerable households
9 Communication is key to the acceptability of these reforms
While poor consumers are affected most relative to their income, rich consumers pay the bulk of
energy price hikes...
10
132
201
256
344
625
BottomSecond Third Fourth Top
Indirect
Direct
0.0% 0.1% 0.2%
0.3% 0.4%
1.4% 1.3% 1.3%
1.2%
1.1%
Bottom Second Third Fourth Top
Cost of a 25c/L increase in gasoline prices…
…relative to household’s income … in asbolute terms (millions of dolars)
…a small fraction of fiscal revenues from subsidy removal is thus sufficient to
compensate poor and vulnerable consumers
11
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100
Cu
mu
lati
ve c
ost
Share of consumers
132
201
256
344
625
BottomSecond Third Fourth Top
Indirect
Direct
All countries and fuels are different, but in all cases a modest fraction of fiscal revenues
is enough to compensate vulnerable consumers
12
Bottom Second Third
Argentina Diesel and gasoline 8.7 21.9 39.7
Electricity 12.2 27.4 45.3
Natural Gas and LPG 12.1 27.2 45.8
Bahamas Diesel and gasoline 10.9 27.0 47.1
Electricity 12.7 29.6 49.6
Barbados Diesel and gasoline 5.3 14.1 25.9
Electricity 8.5 20.5 35.6
Chile Diesel and gasoline 8.5 21.4 37.8
Electricity 12.5 27.3 44.3
Natural Gas and LPG 10.9 27.6 47.4
Costa Rica Diesel and gasoline 5.6 15.7 30.1
Electricity 11.9 26.7 44.2
Natural Gas and LPG 15.4 33.9 53.7
Ecuador Diesel and gasoline 8.0 20.0 35.0
Electricity 10.0 24.2 41.2
Natural Gas and LPG 15.7 33.6 52.2
Guatemala Diesel and gasoline 5.4 14.7 28.2
The rest of revenues can fund long-term (pro-poor) development goals
13
Energy taxes are good fiscal policy
14
9 11
17
2
Corporate tax VAT Income taxes Diesel tax (similar tocarbon tax)
Tax
evas
ion
(%
)
Liu, A. A. 2013. “Tax Evasion and Optimal Environmental Taxes.” Journal of Environmental Economics and Management 66: 656–70
Is it only about consumers?
Subsidy reform and energy taxes affect more than just consumers
16
Impacts on consumers
Impacts on workers
Stranded assets
17
You do not want higher energy prices if you just bought…
One particular issue is stranded assets
Managing stranded assets
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• Transform losers into winners • Worker retraining • Green pilot projects in negatively
affected areas • Automakers and electric cars
• Avoid stranded assets in the first place • Gradual phase down of subsidies
and phase in of carbon prices • Energy efficiency standards on new
cars, buildings and appliances • Moratorium on new coal and gas
power plants?
Rozenberg, Julie, Adrien Vogt-Schilb, and Stephane Hallegatte. “Instrument Choice and Stranded Assets in the Transition to Clean Capital” IDB WP 2017.
Managing distributional impacts of fossil fuel subsidy reform
• Even if the reform is good for
the country, some households will be negatively affected by energy price hikes
• Affected households can be compensated using a fraction of fiscal revenues
• Preparation and
communication are key
Adrien Vogt-Schilb Climate Change Economist [email protected]
Thank you for your attention
