In many emerging countries, governments subsidise fossil fuel consumption to keep domestic prices low so as to make energy more affordable for consumers and firms.¹ According to the International Energy Agency (IEA)’s measurement and definitions (see box 1), in 2012 worldwide fossil fuel consumption subsidies totalled USD 544 billion, including USD 135 billion for electricity (IEA, 2013).² The consumption subsidies are large in some non-OECD countries. In some cases, they represent a substantial share of a government’s budget.
For years the OECD, but also the IMF and the World Bank, have recommended that governments “rationalize and phase out over the...
The Indonesian government subsidises the consumption of electricity and oil products for both households and firms. These subsidies, as measured using the price gap approach (see Box 1) are large given that the country is a net energy importer. In 2011, Indonesia was ranked the 10th country in the world in terms of total government expenditures on fossil fuel consumption subsidies (see Figure 1) following mostly big energy exporters (e.g. Iran, Saudi Arabia, Russia, Iraq, UEA and Venezuela) and larger economies (e.g. China and India). Figure 2 shows that Indonesia, was ranked 18th for the share of energy subsidies in...
The modelling approach developed for this report is designed to assess the impacts of phasing out the energy consumption subsidies on the welfare of households through their income and expenditure.
Because households are different, both in terms of their income structures and their expenditures pattern, they will be affected differently by the reform. At first sight, households that spend a relatively large fraction of their income on energy will be, ceteris paribus, more penalized by the subsidy phase out because of thee direct effect of higher energy prices. However, it is not straightforward to assess the total effect for these...
It is important to present the reconciled household data that are used as inputs in the model. Firstly, because this data set is a construction, elaborated from different sources, sufficient information must be provided to make comparisons possible with other data. Secondly, by considering the budget shares of energy in total consumption by household quantiles, it will be possible to evaluate whether, based on these data, the current subsidy scheme is progressive or regressive. Thirdly, a presentation of these data will help to understand which element of the household heterogeneity drives the distributional impact in the various scenarios.
The reconciled...
The macroeconomic projections follow the OECD Economic Outlook and the corresponding long-term projections (Chateau et al., 2014a). The energy assumptions used in the baseline scenario are those of the current policy scenario (CPS) from the World Energy Outlook 2013 (IEA, 2013; Chateau et al., 2014b). For all the regions, all the energy policies, assumed after 2011 in the CPS scenario, are taken into account except the reforms to the consumers’ energy subsidies.14
Following the illustrative scenario designed for the simulations contained in the joint report by IEA, OECD, OPEC & World Bank for the G20 (2010), and in line with Burniaux...
For each phase out scenario, the outcomes of the models are compared to the baseline scenario, where the subsidies remain at their 2011 levels. Besides the distributional impacts, the economic efficiency and environmental impacts of the policy reform will also be considered. The efficiency of the reforms will be assessed by looking at both the variations in GDP and the variations in the aggregate consumers’ real income equivalent (as a welfare indicator). Climate benefits are measured by the changes in GHG emissions. Other environmental benefits, such as improved local air quality, can unfortunately not be assessed within the current framework....
This paper provided a quantitative assessment of fossil-fuel subsidy reforms in Indonesia. It introduced an enhanced modelling framework, by combining the OECD’s dynamic general equilibrium model ENV-Linkages with a dedicated module for assessing the distributional consequences of reform for specific household groups in Indonesia.
The illustrative simulations investigated in this report suggest that it is possible to reconcile the economic environmental and distributional performances of the policy reform. The phase out of energy consumption subsidies contributes to a 10% to 12% decrease in energy-related CO2 emissions and to a 7.3% to 8.3% decrease in GHG emissions at the 2020 horizon...
