Obstacles to Subsidy Reform in the Energy Sector

1
Obstacles to Subsidy Reformin the Energy Sector

• OECD Technical Expert Meeting on
• Environmentally Harmful Subsidies
• 3-4 November 2003
• Paris, France

Doug Koplow Earth Track, Inc. 2067 Massachusetts
Avenue, 4th Floor Cambridge, MA 02140 (617)
661-4700 DKoplow_at_earthtrack.net
2
Subsidy Reform in the Energy Sector How are We
Doing

• Not very well. Current energy bill has
• At least 16 billion in new subsidies to energy
  sectors.
• Little use of price system (fees) to
  differentiate supplies with different security
  profiles (e.g., Strategic Petroleum Reserve,
  nuclear site safety).
• Removal on many checks and balances associated
  with exploitation of energy resources on public
  lands.
• Over the past 15 years
• Recognition that subsidies are not just cash.
• Improved tracking of aggregate lending, insurance
  subsidies in US, though linkage to beneficiaries
  remains poor.
• Vastly improved access to reports, data via the
  internet.
• Numerous attempts to curb new and old subsidies
  unsuccessful.

3
Other People's Views (1)

• Survey respondents shared general pessimism on
  lack of progress.
• "I know I don't like them subsidies, but I have
  yet to discover that silver political bullet that
  would allow us to overcome the 'concentrated
  benefits, diffuse costs' angle."
• "subsidies tend to gravitate to the largest,
  most-well-connected recipients."
• "The natural resource extraction interests have
  entrenched decision makers in the US House and
  the Senate, as well as the administration that
  will back the needs of the natural resources
  industry, despite the environmental and fiscal
  impacts of the subsidy or program."

4
Other People's Views (2)

• "Our work had little impact as best I can tell"
• "Subsidies for energy are usually driven by
  non-energy objectives and are usually highly
  politicized and difficult to remove."
• "In terms of subsidy reform hard to identify an
  actual subsidy that was removed."
• "The government does not know what and where the
  subsidies are (and has little real incentive to
  find out)."
• "The fundamental barriers to reform are always
  the perceived interests of key players."

5
What's Behind the Lack of Progress?

• Rent seeking
• Symbolic and instrumental politics
• Supporting factors to subsidy perpetuation
• Fragmentation, lack of standardization of subsidy
  data
• Concentrated benefits/diffuse costs
• Skewed checks and balances regulation vs. fiscal
  policy.
• Mis-defining the solution.

6
Rent Seeking Cash is Still King

• Political entrepreneurship the powerful get the
  subsidies and reinvest in the political process
  to keep them.
• Objective is to increase expected returns not
  just about immediate cash.
• Special loans/tax breaks, or risk shifting to the
  public can be equally attractive and often less
  visible.
• Concentrated benefits/diffuse costs coalitions
  to oppose hard to assemble, maintain.
• Avoid transparency this reduces the cost of
  opposition.
• Survey respondents politics, not economics,
  main barrier to more rationale policies.

And cash equivalents.
7
Symbolic vs. Instrumental Politics (Edelman)

• Symbolic - selling and defending policies.
• Poverty alleviation, regional development.
• Industrial development, new industries, millions
  of new jobs.
• Achieving energy security/independence.
• Instrumental - actual resource transfers policies
  generate.
• Reducing risk/increasing returns for
  well-connected private investors or industries.
• Delivering jobs or pork to legislative districts.
• "Members of Congress have spent the past three
  years negotiating the resolution of difficult,
  regional issues in the bill."
• -Senate Committee on Energy and Natural Resources
  press release, October 22, 2003.

8
Data Fragmentation Inconsistency

• Fragmented sources
• Scores of agencies/ministries per country provide
  subsidies to energy sector.
• Budget data can't easily be sorted topically.
• Inadequate processing of existing data to support
  subsidy analysis
• Spending on general programs rarely allocated
  back to beneficiary groups (e.g., muni bonds,
  waterways).
• Estimation/valuation methods often lack
  transparency (e.g., tax expenditures), generating
  large variance. Estimates rarely checked by ex
  post analysis.
• International data sets often aggregated "as
  reported" by member nations (e.g., IEA energy RD
  database).

9
Comparing Regulatory and Fiscal Oversight in the
US

• Existing checks and balances often institute
  stringent controls over regulatory activities,
  lax controls over fiscal activities.

10
Mis-defining the Solution

• Cooption. Subsidies for the "new" players (e.g.,
  renewables) help pass legislation, but often
  worsen the relative economics for these less
  powerful sectors.
• Small steps should not be seen as big steps.
  "Environmental fiscal reform" and "eco-taxes"
  don't even exist until existing fees meet three
  baseline recovery conditions
• Recover costs, including opportunity cost of
  capital.
• Match baseline taxes of the wider economy.
• Internalize reasonable estimates for
  environmental/health externalities.
• "Final" steps to reform can be challenging.
  Transitional subsidies may be necessary for a
  reform package, but are ripe for political
  gaming.

11
Path to Reform Doug's 5-Step Program

• (1) Identify subsidies qualitatively.
• (2) Describe subsidies qualitatively.
• (3) Quantify transfer associated with the
  subsidies.
• (4) Quantify the impacts of these transfers.
• (5) Model potential subsidy reform.
• Take steps in order. Not all are needed prior to
  subsidy reform/removal, but each helps strengthen
  the case.
• Expect resistance at all stages fiercest
  political battles likely around increased
  transparency.
• "Publish them subsidies relentlessly. Make
  proponents defend them. The wrong folks are too
  often on the defensive politically"
• -Leading US Energy Policy Expert

12
Conditions For Reform (1)

• Policy windows multiple factors do sometimes
  align to make reform possible. To capitalize on
  these, the baseline subsidy data/metrics must
  already be in place.
• Coalitions must be wide. Environmental interests
  alone are generally insufficient fiscal
  interests often needed.
• Must be able to show benefits of reform more
  quickly and more completely than is currently the
  case.
• Plan ahead to deal with transitory costs through
  more narrowly targeted programs.

13
Conditions for Reform (2)

• Reciprocity/tax shift Reinvesting fiscal
  savings from reform strategically into reducing
  other burdens (e.g., taxes on labor) can broaden
  support for change.
• Stem the tide of new subsidies critical to
  long-term success of reform.
• Mandatory sunset provisions.
• Parity with regulatory policy Subsidy impact
  assessments to assess environmental/economic harm
  prior to legislating.
• Integrated costing of different types of
  subsidies.
• Much clearer tracking of recipients (at least by
  industrial sector), to increase the political
  costs of subsidization to recipients.