Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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Analytical Framework 2.4.2 Identifying Linkages A framework for capturing and quantifying the type of environmental, economic and social effects of subsidy reform outlined above is presented in Figure 2.3. Implementation of the framework begins with a fiscal “incidence analysis”. This involves identifying the ultimate recipients – sectors or groups – of the subsidy under investigation, and assessing how subsidy reform would affect prices, the quantity of energy produced and consumed and incomes (the composition and level of production in the economy). The starting point of integrated analysis is, therefore, the economic dimension. At a macro level (i.e. in terms of aggregate well being, growth etc.), previous analyses have shown the effects of the removal of energy subsidies to be generally beneficial. For details see the annex to this chapter. This does mean, however, that these economic impacts will be the most important, or that they are the key to the problem. There are also important environmental and social effects that do not necessarily work in the same direction as the economic impacts and that must be included in any integrated assessment. Figure 2.3: Integrated Assessment Framework On the environmental side, the changes in the volume of production will directly affect natural resource input requirements and emissions of pollutants to air, water and land. The extent of these changes will depend on, among other things, environmental policies. If a recipient sector is subject to strict environmental standards, then the magnitude of actual changes in emissions resulting from subsidy reform may be mitigated. However, pollutioncontrol regulations rarely result in zero emissions. Indeed, many countries set emission limits based on best-available abatement technology for coal-fired power plants that are lessstringent than those for gas-fired power plants. Removing a subsidy that favours electricity generation from solid fuels, even if the affected plants are subject to “strict environmental standards”, could still result in a shift towards much cleaner power generation. 29
Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms The economic and environmental impacts described above will also have social implications. Hence a social assessment is a critical part of any overall integrated assessment. This should look particularly closely at how the changes in prices affect the use of energy by vulnerable groups and how the mix of fuels they use changes. For example, a reduction in subsidies to commercial fuels (gas, kerosene, LPG, etc.) can make them so expensive that households resort to non-commercial fuels, such as wood, which causes environmental degradation and increase exposure to indoor air pollution. Estimates of worldwide premature deaths due to indoor air pollution are put at 2 million. 13 Other important social impacts include: (a) employment (reduced demand for the less subsidised energy resulting in loss of jobs and hardship), (b) education (poor households whose use of electricity may be so reduced that children cannot use enough of it for homework), (c) infant mortality (a recent World Bank study looked at demographic and health data from over 60 low-income countries and found that in urban areas linking households to electricity is the only key factor reducing both the infant mortality rate and the under-five mortality rate, and that this effect is large, significant and independent of incomes 14 ) and (d) problems of cold among poor elderly households (a World Bank study has shown a strong correlation between low indoor winter temperatures and illness in Eastern Europe). 15 These impacts, especially health related, are clearly important and have major social implications, especially in developing countries. Indeed any program of subsidy removal would need to track them with great care, additionally paying special attention to urban/rural differences. While the focus of the impacts of subsidy removal in the previous paragraph has been on the poor it is also important to note that there can be big effects on the better off as well. Often it is they who have benefited most from the subsidies and who will have most to lose as subsidies are removed. For examples, see the Annex to this chapter. Once the effects of the policy reforms and their inter-linkages have been established, the task of an integrated assessment is to weigh up the different outcomes against each other. This is far from straightforward if the changes are very different in nature. For example, changes in income cannot easily be compared to a fall in the emissions of SO2 that may result from a reduction in coal subsidies due to the difficulties in assigning a monetary value to an environmental improvement. Likewise an increase in the share of expenditure on energy in poor households and an increased use of non-commercial fuels have impacts that can be quantified but not easily compared with the changes in budget expenditures and other economic impacts. 2.4.3 Measuring Welfare in a Common Unit Measuring and expressing welfare effects in common units helps integration of the analysis of the different types of effects resulting from energy-subsidy reform. The most common unit of measurement is financial, as it is easily understood. Moreover, financial units are commonly used to measure economic welfare. The monetisation of welfare changes brought about by environmental changes is more problematic and controversial. Since environmental changes are generally not expressed directly in market prices, these values must be imputed in other ways. The methodologies used for this imputation are still developing and are not, as 13 Smith and Metha, (2000). 14 Wang, Bolt and Hamilton (2003). 15 Coping With the Cold, World Bank Technical Paper No 529, 2002 30
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Oil Subsidies in Indonesia 7. Oil S
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Energy Subsidies in Korea 8. Energy
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Analysis of Findings of Country Cas
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Designing and Implementing Energy S
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Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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