Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

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    www.abudhabichamber.ae

    Policy Brief 

    Reference Guide for EnergySubsidies in Abu Dhabi

    March 2016Issue 03-24022016

    In association with 

    www.ihs.com

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    Reference Guide for Energy Subsidies in Abu Dhabi

    Policy Brief 

    March 20162

    ContentsContext and importance of the problem 3

    Critique of policy options 5

    Policy recommendations 7

    Cover image: IHS

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    Abu Dhabi Chamber of Commerce & Industry,

    P.O. Box 662, Abu Dhabi, U.A.E.

    Ohan S Balian, Ph.D.

    Chief Economist – Abu Dhabi Chamber

    of Commerce & Industry

    [email protected]

    www.abudhabichamber.ae

    +971 2 617 7470

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    3/16© 2016 Abu Dhabi Chamber of Commerce & Industry 3

    Executive summary Abu Dhabi has been a leader of subsidy reform

    among Gulf Cooperation Council (GCC) countries.

    Energy prices are closer to production costs

    compared with most of Abu Dhabi’s peers in the

    region. However, energy-subsidy reform remains

    high on the agenda because the ballooning

    decit begs a lower scal burden from subsidies.

    Meanwhile, maintaining energy affordability for

    residents, commercial users, and industry is a valid

    policy goal, too. Finding the right balance between

    scal requirements, affordability, conservation, and

    the preservation of competitiveness is critical for

    reform success and both sustained and sustainable

    growth. Total energy subsidies for the United Arab

    Emirates (UAE) equaled 6.5% of GDP, with natural

    gas accounting for the bulk share. Higher prices for

    natural gas would likely be affordable, even though

    higher gas costs would feed through on electricity

    costs to some extent. Higher electricity prices for

    residents are likely affordable if accompanied by

    mitigating measures, while prices for industrial

    consumers are already relatively high in comparison

    with Abu Dhabi’s regional peers yet still competitive

    on a global scale.

    Context and importance of theproblemEnergy subsidies have been a focal point of policy

    reform in Abu Dhabi in recent years. The prime

    motivation to use subsidies usually is to reduce

    the market price of a commodity for the consumer.

    This is one of the shortest denitions for a subsidy,regardless of whether it is an explicit subsidy

    (e.g., a payment to the producer or the consumer)

    or an implicit subsidy (such as a mandate for a

    government-owned commodity producer to sell

    below market prices). Any activity or decision that

    leads to a reduction of a price below market level

    may be regarded as a subsidy.

    The motivation to subsidize energy usually depends

    on which consumer group policy intends to support.

    In the case of residential households, the prime

    motivation is to make energy more affordable as

    it is a basic service and prerequisite to enjoy the

    benets of other household goods and amenities of

    modern life.

    In the case of commercial, and especially industrial

    consumers, energy costs can be a critical factor

    of competitiveness. In fact, energy is a key

    production factor for several industries, such assteel, chemicals, paper, and of course, the mining

    industry. For rms in these industries, energy costs

    are a key factor inuencing boardroom decision-

    making on large-scale investment plans.

    Subsidies also have drawbacks, though, and they

    are contentious for two primary reasons. First, since

    subsidies lower the actual price paid by consumers,

    subsidies encourage higher-than-normal demand

    for a commodity. This can lead to inefcient

    utilization and a waste of natural resources. Second,

    subsidies have an impact on government budgets.

    Most explicit subsidies increase government

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    Reference Guide for Energy Subsidies in Abu Dhabi

    Policy Brief 

    March 20164

    spending, while most implicit subsidies dampen

    revenues.

    Fiscal aspects of subsidy reform have gathered

    more attention recently, in Abu Dhabi and

    elsewhere in the GCC. It is particularly relevant for

    countries with a large and swelling budget decit

    and a high ratio of subsidies to GDP. (see chart 1)

    The oil-producing countries of the Middle East

    face a window of opportunity to pare down these

    drawbacks, given today’s era of low oil prices,

    global commitments to decreasing greenhouse

    gas emissions, and increasing natural-resource

    constraints. This opportunity is particularly relevant

    for Abu Dhabi, which has committed to both

    sustained and sustainable growth while spending a

    signicant share of its annual budget on fossil-fuel

    energy subsidies.

    While total post-tax energy subsidies have been

    relatively low for the UAE at just above 6.5% of

    GDP in 2015 (compared with 8.9% for Oman or

    13.2% for Saudi Arabia) and have been reduced

    in recent years, on a per capita basis, the UAE’s

    post-tax subsidies rank fth highest in the Middle

    Eastern subsidy league, surpassed only by Qatar,

    Saudi Arabia, Kuwait, and Bahrain.

    Subsidies for natural gas have the highest nancial

    impact by far, accounting for USD1,900 on a percapita basis. In other words, 4 out of every 100

    dirhams of the average Emirati income would be

    curtailed if gas subsidies were abandoned. (see

    charts 2 and 3)

    In a recent paper, Boersma and Grifths report a

    30% decline, or USD12.6 billion, of total energy

    subsidies between 2013 and 2015 based on

    calculations from the National Bank of Dubai

    (NBD). Based on the data, the subsidy ratio to

    GDP was reduced to slightly less than 3% of GDP

    at the same time, which is less than half of the

    International Monetary Fund (IMF) estimate.

     A leader in subsidy reform among Middle Eastern

    countries, the UAE has electricity prices that are

    4%Gas subsidies account for four out of every

    100 dirhams of average income

    Chart 1: Energy Subsidies in the MENA Region

        2    0    1    5    F    i   s   c   a    l    B   a    l   a   n   c   e   a   s   a   p   e   r   c   e   n    t   o    f    G    D    P

    Post-tax subsidies as a percent of GDPSource: IMF, IHS

    -25

    -20

    -15

    -10

    -5

    00 5 10 15 20 25 30

    Bahrain

    Iran

    Iraq

    JordanKuwait

    Lebanon

    Oman

    Qatar 

    Saudi ArabiaUnited Arab Emirates

     Yemen

    Bubble-size= post-tax

    subsidies in US$

    billions (nominal)

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    among the highest of the GCC, although rates

    vary considerably between Emiratis and foreign

    residents. Electricity prices in Abu Dhabi are lower

    on average compared with Dubai, but are still

    higher compared with Oman, Qatar, Saudi Arabia,

    Bahrain, and Kuwait. Electricity prices for nationals

    are less than one-third of the price for expatriates,

    though. Moreover, while tariffs for expatriates

    were lifted at the beginning of 2015, they were left

    unchanged for nationals. UAE energy prices are

    still signicantly below those in the United Statesand Europe and do not always cover production or

    opportunity costs.

    For industrial consumers, the average price level is

    highly competitive compared with that on a global

    basis, although in Abu Dhabi, household electricity

    prices (for national residents at least) are lower

    compared with industrial consumers. This is the

    opposite of the price structure in Europe, where

    industry users pay a much lower price on average

    than residential households.

    Further, despite the major electricity, water, and

    gasoline subsidy-reform measures made in 2015

    in Abu Dhabi, subsidies for natural gas amount to

    roughly 50% of all subsidies in the UAE and have

    not yet been addressed. Part of the subsidy effect

    on electricity comes from cheap natural gas, which

    is used as a feedstock for electricity generation.

    Gas is priced far below global market levels, partly

    because gas is regarded as being a mere by-

    product of oil production.

    In times of weakening scal revenues and

    ballooning decits, subsidy reform is obviously

    ranking higher among governments’ priorities,

    with Kuwait, Bahrain, Saudi Arabia, Oman, and

    others all commencing activity to pare down energy

    subsidies in 2015. With continued low oil prices and

    an increasingly competitive economic environment,

    phasing out fossil-fuel energy subsidies will no

    doubt continue to be an option for the UAE and

     Abu Dhabi to increase revenues and pare down

    spending.

    Critique of policy optionsThere is no one policy or mitigation approach

    that serves as a “best practice” for energy-subsidy

    Chart 2: Total energy subsidies % of GDP, 2015

    0

    5

    10

    15

    20

    25

    30

    BahrainIran Kuwait Qatar Lebanon OmanSaudi Arabia

            2        6  .        0

            1

    UAE

            1        1  .        2

            3

            1        0  .        3

            2

            8  .

            9        0

            7  .

            7        8

            6  .

            5        7

            6  .

            3        7

            1        3  .        2

            3

    Source: IMF

     Abu Dhabi industry prices competitive globally,though above GCC levels

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    reform, and the success of subsidy-reform policies or

    initiatives cannot be measured entirely by the near-

    term difference in energy prices or overall demand

    pre- and post-reform. Rather, “successful” subsidy

    reductions can only be evaluated relative to the

    underlying goals of reform, which include not only

    the country’s economic prosperity, but also long-

    term social well-being and environmental health.

    To truly measure the impact of reform, results

    must be monitored over time and distilled from

    other confounding variables (e.g., climate, season,

    macroeconomic situation, public awareness

    of environmental issues, etc.), which inuence

    consumers’ overall energy demand as well as

    the price elasticity of demand, or the percentage

    decrease in demand associated with each percent

    of price increase.

    For example, while the dual goals of decreasing

    national budget decits and reducing carbon

    emissions can be achieved simultaneously by

    lowering fossil-fuel energy subsidies, others, such

    as reducing government spending while improving

    the overall well-being of low-income households,

    may be harder to achieve in tandem, at least in the

    short term.

     Among the menu of policy options used by other

    countries, a few general factors stand out for their

    ability to contribute to the overall success of a

    subsidy-reduction program. These include:

    • Comprehensive and well-planned

    communications campaigns: By utilizing

    multiple communication channels and choosingmessages that resonate with local stakeholders,

    governments can avoid much-feared public

    backlash, or, worse, violent protests or social

    uprisings. By including information on the amount

    of subsidy and a comparison with the national

    average on customers’ energy bills, the “smart

    bills” required by the Abu Dhabi Regulation

    and Supervision Bureau (RSB) in 2012 took a

    rst step toward educating residents about the

    actual cost of electricity. Meanwhile, in previous

    subsidy-reform efforts undertaken in both Dubai

    and Abu Dhabi, the government organized

    extensive information campaigns explaining

    the new tariff changes and played to residents’

    concerns about the value of sustainability and

    resource conservation.

    • Investment in technology, infrastructure, or

    Petroleum Coal Natural gas Electricity

    Chart 3: Post-Tax Subsidies in the UAE

    Subsidies by product, US$ billion

    6.99

    0.52

    18.22

    3.23

    Subsidies per capita by product, USD

    730.0

    54.29

    1,901.53

    337.03Source: IMF

    Tiered pricing incentivizes consumers to save energy

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    7/16© 2016 Abu Dhabi Chamber of Commerce & Industry 7

    programs that increase energy efciency: 

     Any number of measures to improve energy

    efciency (e.g., improved public-transportation

    networks, appliance standards, time-

    differentiated pricing, smart meters, etc.) can both

    decrease consumers’ burden from energy price

    increases while meeting governments’ emissions-

    reduction and scal-spending objectives. The

    tiered pricing system introduced by the Dubai

    Electricity and Water Authority (DEWA) in 2008

    provides one such example: with costs risingin accordance with usage levels, the system

    rewards the most efcient users. The RSB’s 2010

    smart-meter pilot program, which has installed

    400 smart meters in volunteers’ homes to monitor

    and better understand energy-consumption

    patterns, provides another example.

    • Carefully designed, complementary

    mitigation approaches: By determining who the

    energy price increases will impact most and how,

    subsidy-reform efforts can include measures

    to compensate adversely affected households

    for the nancial impact they will experience. In

    countries such as India, Brazil, and Iran, targeted

    cash transfers to the country’s poorest were

    chosen as a direct and visible way to offset

    the burden of higher energy prices, but other

    countries have considered and/or implemented

    a range of mitigation options, from coordinating

    increases in fuel prices with improvements in

    public transport to providing technical assistance

    to vulnerable industries or businesses.

    Meanwhile, although some tactics such as dual

    pricing based on socioeconomic class have

    proven challenging for national governments to

    implement successfully (because of the high costs

    of administration, management, and enforcement

    in identifying the correct recipients and preventing

    illegal sales through black markets), they have

    worked thus far in the UAE, perhaps because of the

    country’s unique demographics.

    In both Dubai and Abu Dhabi, electricity prices for

    residential expatriates have increased, while prices

    stayed the same for UAE nationals. Similarly, while

    also more complicated than a blanket price hike,

     Abu Dhabi has successfully implemented sector-specic electricity price reforms: following the

    2015 reforms, electricity subsidies for government

    entities were removed, a 7% price increase was

    introduced for commercial and industrial users

    under 1 megawatt (MW), and industrial customers

    using more than 1 MW experienced a 100%

    increase during summer peak hours.

    Policy recommendationsPhasing out subsidies has the potential to support

     Abu Dhabi’s dual policy goals of sustained and

    sustainable economic growth in principle. Although

     Abu Dhabi has been a leader in subsidy reform

    among the GCC, a further reduction of subsidies

    seems affordable for virtually all consumer groups

    and could be achieved without affecting Abu

    Dhabi’s economic competitiveness.

    However, as Abu Dhabi considers its path

    forward, it should acknowledge there is no overall

    “best” practice to follow as nowhere else hasa similar geopolitical context, natural-resource

    base, economic status, industrial portfolio, and

    demographic composition. Rather, policymakers

    must articulate the goals of subsidy reform up front

    and understand that achieving these goals will

    require tradeoffs.

    Based on successful subsidy-reform efforts in other

    parts of the world and approaches used historically

    in the UAE, as Abu Dhabi continues its efforts to

    reform energy pricing, four considerations should

    remain at the forefront:

    100%is the percentage total electricity prices were

    lifted by Abu Dhabi

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    Reference Guide for Energy Subsidies in Abu Dhabi

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    March 20168

    • The messages and channels used to

    communicate with residents regarding the

    necessity and value of changes to energy pricing

    • The timing, frequency, magnitude, and sequencing

    of subsidy reductions

    • Infrastructure, technologies, or standards that can

    be used to improve energy efciency while helping

    businesses and residents to maintain economic

    performance and lifestyle

    • Mitigation approaches that protect the region’s

    most vulnerable households and industries

    Specically, if energy prices are ultimately going to

    reect production costs and global market rates, Abu

    Dhabi will need to continue to educate nationals and

    expatriate residents alike regarding the true costs of

    energy production, value of resource conservation,and risks of climate change. The government will

    want to take advantage of periods when energy

    prices are low and reforms can be justied in a

    logical and rational manner. The increase of motor

    fuel prices in July 2015 is a case in point as fuel

    prices dropped again on lower oil after a short-lived

    bounce. Further, by introducing measures to improve

    energy efciency among energy-intensive industries,

    nationals, and low-income households, Abu Dhabi

    can simultaneously decrease energy-subsidy

    expenditures, reduce greenhouse gas emissions,

    and support the region’s populace as it adapts to a

    carbon and resource-constrained world.

    Sources consulted orrecommended• Boersma, Tim and Grifths, Steve (2016),

    “Reforming Energy Subsidies: Initial Lessons from

    the United Arab Emirates.” Brookings Institution &

    Masdar Institute. Available at:

    http: //www.brookings.edu/~/media/research/les/ 

     papers/2016/01/reforming-energy-subsidies-

    uae/brookings_masdar_reforming_energy_

    subsidies_uae_nal.pdf

    • Coady, David, Parry, Ian, Sears, Louis, and

    Baoping, Shang (2015), “How Large Are Global

    Energy Subsidies?” IMF Working Paper No. 105,

    Washington DC. Available at: https://www.imf.org/ 

    external/pubs/ft/wp/2015/wp15105.pdf 

    • Whitley, Shelagh and van der Burg, Laurie (2015),“Fossil Fuel Subsidy Reform: From Rhetoric to

    Reality.” New Climate Economy, London and

    Washington, DC. Overseas Development Institute.

     Available at: http://newclimateeconomy.report/ 

    misc/working-papers

    • Arab Future Energy Index: Energy Efciency,

    Regional Center for Renewable Energy and

    Energy Efciency (RCREEE), 2015. Available

    at: http://www.rcreee.org/sites/default/les/afex_

    ee_2015_engish_web_0.pdf

    Source: Boersma, Tim and Griffiths, Steve (2016)

    Chart 4: Electricity costs in the GCC

    0

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    25

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    ResidentialCommercialIndustrial

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    http: //www.brookings.edu/~/media/ research/les/papers/2016/01/reforming-

    energy-subsidies-uae/brookings_masdar_

      reforming_energy_subsidies_uae_nal.pdf 

     • وو   ووس  ورز  ون  وري  ودد ودي

     رو "؟ط ا مدا م " (2015)

     واطن ا ور  دوق اد ادو رم 105

    https://www.imf.org/external/pubs/ft/  :

    wp/2015/wp15105.pdf 

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

    10/16ظبي

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

    11/16

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

    14/16ظبي

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

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    Abu Dhabi Chamber of Commerce & Industry,

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  • 8/16/2019 Ohan Balian 2016 Reference Guide for Energy Subsidies in Abu Dhabi. Policy Brief, Issue 03-24022016, March 2016.

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