INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE IEA Work on Energy Subsidy Related Issues Trevor Morgan Senior Consultant, Economic Analysis Division International Energy Agency UNEP/UNECE Expert Meeting on Energy Subsidies Geneva, November 2007

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE IEA Activities World Energy Outlook 1999: Looking at Energy Subsidies: Getting the Price Right IEA/UNEP Subsidy Reform Project :  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

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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 CO 2 emissions by 16% (5% of world emissions)

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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)

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Economic Value of Subsidies in non- OECD Countries, 2005

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE UNFCCC Paper (Morgan, 2007) Summary of evidence from literature of  Size of subsidies  Impact on investment & emission  Prospects for reform

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE UNFCCC Paper: Size of Subsidies ($billion, nominal terms) OECDNon-OECDWorld Oiln.a (IEA) (GTZ) Natural gasn.a (IEA)n.a. Coal5.8 (IEA) (EC)10-13 (IEA)16-23 Electricityn.a (IEA)n.a. Nuclear4 (R&D only)n.a.16 (Stern) Renewables1 (R&D only)n.a.16 (stern) Total20-30 (IEA) 32 (EEA) (Koplow, US only) (IEA) 160 (v.de Beers) (IEA) 240 (v.de Beers)

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE 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!