sectoral economic costs and benefits of ghg mitigation - IPCC

Jonathan Pershing
According to the IEA’s 1998 Coal Information, approximately 5.5% of the coal produced by the
member countries of the IEA received state aid, primarily in five countries (Japan, Germany,
Turkey, Spain and France). Of these, only France is committed to a full closure of all subsidized
production. Given the primary use of coal is in power generation, removal of such subsidies
would promote the use of other fuels (most likely natural gas), somewhat (albeit marginally)
reducing the impacts on fossil fuel exporters.
Most Annex I Parties also provide some form of subsidy – either as investment credits or tax
offset – for petroleum exploration and development. Removal of these would drive up costs of
producing oil in OECD countries, leaving a higher share of the demand to be supplied from
lower cost, developing country fossil fuel exporters. In addition, most OECD countries do not
fully price the use of infrastructure in the transportation sector.
Table 9
Country
Kuwait
Saudi Arabia
Nigeria
Venezuela
Indonesia
Investment Climate in Selected Fossil Fuel Exporting Countries
Investment Climate
up to 55% on gross profits for foreign investment partners; private
ownership limited, intellectual property rights laxly protected.
foreign owned portions of joint ventures (required for any tax
concessions) still pay up to 45% in tax on gross profits.
Foreign joint ventures allowed (outside of oil industry), although
intellectual property rights agreements are seldom enforced, labor
disputes are common, and domestic infrastructure is inadequate to serve
a country of its size.
Legal framework being simplified for foreign investment, but energybased
industries still subject to foreign controls.
Many sectors closed to foreign investment, country may lack adequate
legal protections, revised economic policy being implemented under
guidance of IMF should improve investment climate.
Sources: Kuwait and Saudi Arabia: http://www.awo.net/; Nigeria, Venezuela, Indonesia: US Department
of Commerce – National Trade Data Bank, (http://www.tradeport.org/ts/countries/climate.html).
Developing countries account for an even larger share of subsidies. A recent analyses by the IEA
of ten large developing countries suggests that the removal of these subsidies could result in CO 2
emissions reductions of 17 percent in these countries – with huge financial gains for
governments. 1 In some cases, subsidy removal could qualify for offset credits under an
international emissions trading regime (e.g., in Russia) further reducing the international costs of
meeting the Kyoto targets, and reducing possible impacts on fossil fuel exporters.
Similarly, actions by exporting countries to diversify their economies may also be largely
contingent on domestic action. For example, one of the constraints often cited in the discussion
on the development of new technology is the lack of a supportive business investment
environment – including difficulties in repatriating capital, high corporate taxation, and lack of
protection for intellectual property rights for investors. The following sample of investment
climates in fossil fuel exporting countries provides some sense of this:
While often a topic for discussion, it is extremely unlikely that current high levels of petroleum
(or energy) taxes are likely to be reduced within the OECD – although such reduction might offer
exporting countries an opportunity to increase their share of the rents from oil consumption while
keeping the final consumer price unchanged. For most countries that apply such taxes, they
provide a substantial share of the general revenue. Furthermore, most countries, under the guise
1 IEA, 1999. “Looking at Energy Subsidies, Getting the Prices Right”, forthcoming.
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