1 May 2017

Change Makers Leap Forward as Momentum for Fossil Fuel Subsidy Reform Grows

There is a pressing need for faster reform, urgency and political commitment. These were the opening highlights of the fifth high-level event on fossil fuel subsidy reform, organized by the Friends of Fossil Fuel Subsidy Reform (“Friends”), Global Subsidies Initiative and the World Bank on April 21, in the context of the 2017 International Monetary Fund and World Bank Spring Meetings held in Washington, D.C. The side event was attended by country officials, members of international organizations and civil society groups.

The panelists demonstrated that, despite important reform measures that have been taken, the path to fossil fuel subsidy reform (FFSR) might be long when the objective is to achieve sustainable, long-lasting and optimal reforms. Panelists also concluded that reform requires an important process of learning from other countries’ experiences. Peer reviews were identified as an excellent tool to help in this learning process and especially to bring the discussion of FFSR forward to a broader public, including civil society. In addition, this process of peer reviews is becoming more consolidated with participation. To support the case for reform, Armenia, the Philippines, New Zealand and Mexico shared their experiences and insights with the audience, offering a very wide scope of reform experiences.

The event was opened by Laura Tuck, Vice-President of the Sustainable Development Practice Group at the World Bank. Ms. Tuck acknowledged the progress made, giving the examples of the China and United States’ peer reviews, but expressed the need for faster and more coordinated global reform. Following Ms. Tuck, Dr. Joerg Stephan, G20 Deputy in the Finance Ministry of Germany, talked about the importance of FFSR in the German G20 presidency agenda, specifically raising the phase-out of inefficient subsidies by 2025. Dr. Stephan emphasized that FFSR has the dual benefit of being a positive policy against climate change that generates budgetary savings. He also encouraged other countries to follow voluntary peer reviews (as Germany has undertaken alongside Mexico), and reminded the packed audience of the opportunity for reform offered by current low oil prices.

The panel was moderated by John Panzer, Director of Macro Economics & Fiscal Management Global Practice from WB and included a presentation from Vardan Aramyan, Finance Minister from Armenia. He presented the key learnings of reform undertaken in the electricity sector, which included the unbundling of the sector, the privatization of electricity companies and the creation of policies to incentivize much needed investments. Mr. Aramyan insisted on the importance of good governance and financial efficiency. Also, he considered that, in Armenia, energy efficiency is an effective tool for compensating the poor for higher energy prices.

Gil S. Beltran, Undersecretary of the Department of Finance in Philippines, explained how the Philippines had reformed their highly regressive fuel subsidies in 1997, following the Asian Crisis. Before the reform, 90 per cent of energy subsidies were going to the rich, and the country was cutting their investments in health and education to maintain it. Mr. Beltran explained that the reform process involved all stakeholders and government officials, noting the inefficiencies of the subsidy and the benefits of reform. Mr.Beltran explained that they are still learning from the reforms and were now expecting to pass a new bill in Congress that will allow gasoline taxes to be adjusted with inflation, among other fiscal policy changes.

New Zealand Ambassador to the United States Hon. Tim Grosser reminded the audience that the rationale for FFSR in New Zealand is climate change, without forgetting the impact on fiscal policies. He focused his presentation on the importance of defining the goals of reform in order to progress. He considered the G20 formula to phase out “inefficient” fossil fuel subsidies “wise,” and supported the traffic light system in trade negotiations (i.e., classifying subsidies according to their trade distortions). He also considered the benefits of multilateral or plurilateral negotiating approaches, as demonstrated in the Free Trade Agreement (FTA) between the EU and Singapore, which involves a progressive elimination of fossil fuel subsidies. Ambassador Groser summarized his intervention in three points to success in reforms: i) build the political case (as the Friends are doing), ii) seize the moment of relatively low oil prices, and iii) put a price to fossil fuel externalities in the future.

Last but not least, Miguel Messmacher Linartas, Mexico Undersecretary for Revenues at the Secretariat of Finance and Public Credit, shared the case of his country’s gradual and holistic oil sector reform, moving from a monopolistic national oil company (Pemex) and administered fuel prices to a fully competitive sector with fuel prices that follow international markets. Focusing on the fuel prices, the objective is to apply international oil prices with a fixed excise tax adjusted for inflation by the end of 2017. This is expected to provide the country with revenues equivalent to 1.5 per cent of GDP in 2017.

Mr. Messmacher explained that, at the beginning of reforms in 2015, domestic fuel prices were still determined by the government, as the sector was undergoing liberalization in order to incentivize new actors. In 2016, domestic prices were still administered by the government, but for the first time they changed with variations in international markets. This year (2017) began with monthly adjustments and, as of March, daily adjustments have been introduced gradually in different regions of the country. Mr. Messmacher concluded that the population is more accepting of daily adjustments, since they mitigate large monthly changes. He also informed the audience of the challenges of reform, including explaining the concept of “opportunity costs” to the population of an oil-producing country.

Susan Ulbaek, Executive Director of the World Bank Nordic Board, closed the event, summarizing and lauding the work done by the countries participating in the panel and the groups organizing the event.

Link to the poster here.

Key Reports:

Linked to the G20 and Peer Review: Building on Momentum, Recommendations from the GSI on FFSR at the G20

Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in the Philippines

The Friends group was formed in June 2010 to support G20 and APEC leaders’ commitments to phase out inefficient fossil fuel subsidies. The Friends encourage the G20 and APEC to implement their initiative as soon as possible, with maximum ambition and transparency.

Friends of Fossil Fuel Subsidy Reform are

  • Costa Rica
  • Denmark
  • Ethiopia
  • Finland
  • New Zealand
  • Norway
  • Sweden
  • Switzerland
  • Uruguay