Should energy be subsidized? Case Study

Should Energy be

subsidized?

Presented By:

Singhzee’s Economics Group

VS

Renewable

Non-Renewab

le

Objectives

To learn about subsidy and its various forms

To evaluate whether energy should be subsidized or not

To assess the pros and cons of shifting energy subsidies from non-renewable sources (NRES) to renewable(RES)

What is Subsidy?

Government financial assistance In the form of

GrantsTax breaksExemptions Price Controls

Subsidy: the Whys?

Lowering Price and CostEnsuring Power Supply=DemandProviding Access to the PoorPreserving Domestic

Competitiveness Maintaining Employment

Types of SubsidiesGovernment Intervention ExampleDirect Financial Transfer Grant to Producer/Grant to Consumer

Low Interest or Preferential Loans to Producer

Preferential tax treatment Rebates, exemptions, duties, levies, tariffs, etcTax CreditAccelerated Depreciation

Trade Restrictions Quotas, technical restrictions

Direct Government Energy related services

Direct investment in energy infrastructurePublic R&D

Regulation of the energy sector

Price ControlMarket Research Restriction

Case Overview January 2007, Subsidy Transfer

Proposal US$ 14 billion

June 2007, still languishing in senate

Subsidy came into focus Increase in energy prices of 06/07Arguments for and against

subsidy

Should Energy be Subsidized? Class POLL

64%

24%

12%YESNOMAYBE

YOU VOTED!!!

Subsidy Statistics

Economic Zone US$OECD 10 billion

20 of the largest nations outside OECD

48 billion

Annual Fossil-fuel Consumption Subsidies US$ 230 billion(1992)Regional Studies (1997)

Subsidy Statistics

Year US$2009 110 billion2010 412 billion2011 523 billion

International Energy Agency(IEA)

Source :IEA(www.worldenergyoutlook.org)

Energy Subsidies: PROS

Energy Access to the Poor Improvement of Living StandardControl on InflationReduction of Air Pollution and

Deforestation (E.g. Senegal)

Energy Subsidies: PROS

Cross-SubsidiesExample: KEPCO

Customer Type Payment (%) of the Total Cost

Commercial Customers

134%

Industrial Sector 96%

Agricultural Sector 48%

Increased Consumption of Energy

Irresponsible Use of Energy(Esp. Developed countries)

Energy Subsidies: CONS

Energy Subsidies: CONS

Faster Depletion of Fossil Fuels Increased GHG Emissions

Energy Subsidies: CONS

Distortion of Costs and Prices(Non-Renewable Sources)

Substantial Environmental Damage(Electricity Generation)

Heavy Burden of Government Finances

Increased Trade Deficit

Unbalanced benefits to HI and LI groups

Transfer of Subsidies: PROSRenewable Sources: More Competitive

NRE

S

RES

Transfer of Subsidies: PROSSolution to GHG EmissionsHelp Save Environment

Transfer of Subsidies: PROS Initiatives taken by Some countries

Nation

Period

Subsidies subject to reduction

Amount of

Reduction(US$)

EFFECT

China 1990-1997

Annual Fossil Fuels Subsidies

24.5b to 10b

•Coal Consumption ↓ by 14%(1996-2000)•CO2 Emissions ↓ by 17%(1997-2000)

1993-1995

Coal Subsidies 750m to 240m

Tax on high-sulfur coals

Chile 1995•CO Emissions ↓ by 8%(1996)

Transfer of Subsidies: PROS

Energy SecurityEmploymentForeign Exchange(E.g. Denmark,

Australia, Japan)Saving of billions of dollars(through

redirection of subsidies budget)

Transfer of Subsidies: CONS

Shift of

Subsidies from NRES

TO RES

High Energ

y Prices

Inflation

Burden on the Poor

Low Energy

production

Environment

al Hazar

ds

Future Outlook

THANK YOU !!!