The long-term effects of energy subsidies: lessons for Thailand

However, in most cases, economists would say that fossil-fuel subsidies are blunt and very expensive tools that fail to reach their targeted beneficiaries. Further, they often lead to a range of unintended consequences such as under-investment in the energy sector, fuel smuggling, wasteful practices of energy consumption, increased air pollution and emissions of greenhouse gases.  

Let’s ask ourselves what is an energy subsidy? There are two main categories of energy subsidy: those designed to reduce the cost of consuming energy, called “consumer subsidies”, and those aimed at supporting domestic production, called “producer subsidies”. In practice, energy subsidies in both categories come in a range of different forms.  

Typically, the mechanisms by which governments support the production and consumption of energy are as follows: 1) direct financial transfers – grants to consumers, grants to producers, low-interest or preferential loans and government loan guarantees; 2) preferential tax treatment – tax credits, tax rebates, exemptions on royalties, duties or tariffs, reduced tax rates, deferred tax liabilities and accelerated depreciation on energy supply equipment; 3) trade restrictions – tariffs, tariff-rate import quotas and non-tariff trade barriers; 4) energy-related services provided directly by government at less than full cost – government-provided energy infrastructure, public research and development; and 5) regulation of the energy sector – demand guarantees, mandated deployment rates, price controls, environmental regulations and market-access restrictions.

Obviously, someone has to pay for energy subsidies, which most often is the government. This creates fiscal burden and opportunity cost for energy subsidies. Fossil-fuel subsidies can become an unbearably heavy burden on government budgets. But beside their direct costs to governments, energy subsidies also have opportunity costs. Tying up budgetary resources to support energy production and consumption means that governments divert these funds from other urgent needs such as development of public transport and social infrastructure, and improving social safety nets, healthcare and education systems.

Whatever the good intentions may be, there are unintended consequences of energy subsidies on fossil fuels. First, the main beneficiaries of fossil-fuel subsidies are, in most cases, the rich and middle class rather than the poor.  IMF research in June 2010 showed that that richest households (top 20 per cent) benefit 42 per cent from energy subsidy programmes, while the poorest households (bottom 20 per cent) benefit only 8.9 per cent.  

Second, maintaining energy prices at a low level on the domestic market makes the energy sector unattractive for investors. This restricts countries’ capacity to provide better energy services to citizens. For instance, under-investment means that countries cannot produce quality refined petroleum products within the national borders, or extend and maintain electricity infrastructure.  

Third, by stimulating energy demand, energy subsidies encourage faster depletion of fossil-fuel reserves. Thailand’s energy reserves are now estimated to last only for another 20 years. Looking into the future, energy subsidies will lead to growing imports of fossil fuels from the current high level of 20 per cent of total annual import value, thus affecting energy security for Thailand.  Fossil-fuel subsidies promote wasteful practices of energy consumption and make “green” energy technologies less competitive as compared to conventional energy sources.  

Fourth, subsidies result in a growing retail price disparity between different fuels or the same fuel across national borders. This leads to fuel smuggling, the emergence of black markets and non-authorised use of subsidised fuels. Such practices as, for example, installation of cooking LPG cylinders on cars, may not only be illegal but also dangerous. Last, but not least, all of the above-mentioned unintended outcomes of energy subsidies lead to increased air pollution and emissions of greenhouse gases.

I think that it is time we debunked the myth of energy subsidies for the poor. Actually, they benefit the rich rather than the poor. In addition to the mentioned IMF study, several other studies show that most of the benefits of fuel subsidies are harnessed by high-income groups. 

The International Energy Agency (IEA) estimates that out of the $US409 billion spent on fossil-fuel consumption subsidies in 2010, only $35 billion, or 8 per cent of the total, reached the poorest 20 per cent of the population.  Since fuel subsidies are usually provided per unit of energy such as per litre of gasoline or diesel, those who consume the most energy receive the largest share of the subsidy, with the largest consumers of energy and recipients of subsidies being the wealthiest households and those in urban areas.

In Thailand, it is estimated that the approximate cost of energy subsidies is about Bt168.8 billion in energy tax reduction and subsidy in 2011.  Particularly, diesel excise tax reduction costs the government about Bt106.5 billion annually, the LPG subsidy adding another Bt45 billion per year, and the NGV policy costing another Bt17 billion. It is indeed a huge cost to society, as well as creating economic distortion.  

Keeping retail diesel prices below benzene prices will only lead to more consumers shifting to diesel vehicles. A policy framework for sustainable energy subsidy reform is needed in Thailand. Looking ahead, policy-makers will have to come up with a sustainable energy reform plan. Challenges will lie ahead on decontrolling energy prices, assessing and managing the negative impacts of reform and finding ways to build public acceptance of the reform plans. 

It is hoped that we will see a sustainable energy policy in Thailand within the next few years.

 

Dr Chodechai Suwanaporn is executive vice president, economics and energy Policy, PTT Public Company Limited, [email protected]