Green Growth and Fossil Fuel Fiscal Policies

Green Growth and Fossil Fuel Fiscal Policies

Green Growth and Fossil Fuel Fiscal Policies in Viet Nam - Recommendations on a Roadmap for Policy Reform Briefing Committee for Financial, Budgetary Affairs of the National Assembly Hanoi, 16 June 2014 Background Green Growth and Fossil Fuel Fiscal Policies in Viet Nam Recommendations for a Roadmap for Policy Reform based on extensive research over past 3 years Research partners include Central Institute for Economic Management (CIEM) Center for Analysis and Forecasting/ Vietnam Academy of Social Sciences (CAF/VASS) Institute of Energy Institute of Finance Energy Alliance Global Subsidy Initiative/ International Institute of Sustainable Development Work of other development partners (ADB, World Bank, GIZ, IMF, etc.) Outline How Much Are Fossil Fuel Subsidies Costing Vietnamese Citizens? What are Fossil Fuel Subsidies? Why is Reform Important? Are Electricity Prices Really Increasing? How do Electricity Prices compare to other Countries? Fossil Fuel Fiscal Policy Reform requires more than Price increases Peoples Perspectives Comprehensive Energy Sector Reform is critical

recommendations for electricity sector recommendations for petroleum markets How can short term pain be mitigated? How Much Are Fossil Fuel Subsidies Costing Vietnamese Citizens? According to International Energy Agency (IEA) subsidies on fossil fuels in Viet Nam fluctuated between US$ 1.2 and US$ 4.49 billion annually from 2007 to 2012. CONSUMPTION SUBSIDIES FOR FOSSIL FUELS (price-gap approach, in billion US$) Energy Source Oil Gas Coal Electricity Total 2007 2008 2009 2010 2011 2012 0.32 0.09 0.01

1.68 2.1 1.09 0.21 0.01 2.25 3.56 0 0.13 0.01 1.06 1.2 1.09 0.19 0.02 3.19 4.49 1.15 0.18 0.02 2.98 4.33 0.33 0.23 0.03 2.86 3.45 International Energy Agency, 2014 What Are Fossil Fuel Subsidies?

Subsidies are any government intervention that reduces cost of fossil fuels below what it would be without that intervention. In Viet Nam most fossil fuel subsidies on coal and other fuels for electricity generation. How do subsidies occur? Regulation of energy sector such as price controls or market access restrictions. Most subsidies are indirect: therefore not easily identifiable as fiscal transfers they occur through provisions to energy producers and distributors, mainly state owned enterprises (SOEs), e.g. low interest or preferential loans, low costs for inputs such as land and coal (for electricity) Subsidies result in substantial forgone revenue for Government and increasing debt of energy SOEs which will ultimately need to be borne by taxpayers. Why Is Reform Important? Short term pain for long term gain - reform now will prevent need for more significant, costly reform efforts in the future. Benefits include: Enhance national energy security Consumption of coal, gas and petroleum is increasing. Viet Nam will become a net importer of fossil fuels in near future. Increased exposure to international fossil fuel prices will require increasing transfers to energy SOEs or to consumers if domestic prices remain low. This will also be essential to limit fiscal pressures. Reducing rate of growth in domestic energy use through greater energy efficiency combined with expansion of renewable energy will reduce dependency on international energy markets. Enhance energy efficiency Energy intensity is high in Viet Nam. Ratio of energy use per US$1,000 of GDP is 237 kg of oil equivalent (world average 208 kg). Subsidies encourage inefficiencies and provide little incentive for energy efficiency.

Why Is Reform Important? Improve reliability of energy supply Rising energy demand is outpacing investments into capacity and supply constraints lead to regular power cuts. Current prices and monopoly structure of energy sector provide little incentive for investment. Facilitate investments into non-hydro renewable energy Higher GDP growth and efficiency Research shows that in medium to long-term subsidy phase-out and carbon price introduction will increase GDP growth and efficiency of economy. Improve equity and inclusiveness Current subsidies are moderately regressive, i.e. they benefit higher energy consumers/ richer citizens more. Subsidy phase out frees up resources for priority investments and mitigation measures for vulnerable households and businesses. Reduce environmental and health impacts Are Electricity Prices Really Increasing? Despite commitment to price and energy sector reform and significant price increases in average retail price, prices remained almost same in 2008-2013 and lower than those in 2002 -2007 if calculated in constant 2002 prices (i.e. adjusted for inflation). Trend of electricity prices (VND/kWh) 1,600 1,473 1,369 1,400 1,304

1,200 1,077 971 1,000 871 860 800 707707 783761 790 701 789 645 600 795 610 586 495 518 514 527

518 526 400 200 0 2002 2003 2004 2005 2006 2007 Current prices (VND/kWh) 2008 2009 2010 Constant 2002 prices (VND/kWh) Source: based on Vu et al., 2013, updated with data from State Bank of Vietnam 2011 2012 2013

How do electricity prices compare to other countries? Average electricity prices (UScent/kWh) Country 8 (latest available data) Australia 22-46.56 2013 Brazil 34.20 2013 China 7.5-10.7 2013 Germany 31.41 2012

India 8.0-12.0 2012 Indonesia 8.75 2012 Japan 2012 Malaysia 20-24 7.0914.76 Mexico 19.28 2012 Philippines 30.46 2012 Singapore 21.53

2011 South Africa 8.0-16.0 2011 7.0 7 6.6 6.3 6 5.7 5.3 5 US cents/k Wh 4.64.6 5.0 4.9 5.0 5.0

5.0 5.4 5.1 4.5 4.1 3.8 4 3.6 2.9 3 2.9 2.7 2.5 2.5 2.5 2 1 0 2002 2003 2004 2005

2006 Current prices (UScent/kWh) 2007 2008 2009 2010 2011 2012 2013 Constant 2002 prices (UScent/kWh) Source: based on Vu et al., 2013, updated with data from State Bank of Viet Nam Year 2012 Source: http://energyusecalculator.com/global_electricity_prices.htm, assembled from various sources Fossil fuel fiscal policy reform more than price increases because Most subsidies are indirect and occur through preferential treatment of energy SOEs, structure of energy sector provides little incentive for investments into new capacity

Lack of competition in sector provides little incentive for greater efficiencies Liberalising prices under monopolistic conditions and in absence of strong, independent regulators, increases inefficiencies and structural problems Research shows that public sceptical of rationale of price increases, widespread lack of transparency and perceptions of inefficiencies of energy sector SOEs Peoples Perspectives In your opinion what are the main obstacles to reform? (in rank of priority) Vulnerable Households Lack of transparency, limited information about energy monopolies Adverse impact on welfare of households Adverse impact on enterprises, particularly in economic downturn Inflationary pressures Experts Adverse impact on enterprises, particularly in economic downturn Monopoly/ oligopoly structure of energy markets Lack of transparency Weak mitigating measures and capacities In your opinion what are the main incentives / drivers of reform (in rank of priority) Vulnerable Households Losses of energy SOEs Introduction of competition in market Facilitation of energy savings Source: Nguyen et al, 2013.

Experts Losses of energy SOEs Attraction of investment into energy sector Encouragement of energy savings and technology upgrading therefore comprehensive energy sector reform is critical Recommendations for electricity sector include: Enhancing competition in electricity markets Improving EVNs functional efficiency Improving transparency of price setting mechanisms Introducing cost-reflective and predictable pricing Improving efficiency and transparency of energy SOEs Strengthening electricity market regulation Introducing incentives to attract on-grid renewable power investments Moving towards carbon pricing therefore comprehensive energy sector reform is critical Recommendations for petroleum markets include: Enhancing competition in downstream petroleum markets Improving efficiency of downstream SOEs Better competition and market regulation Flexible, cost-reflective petroleum product pricing Reform of Petroleum Stabilisation Fund (PSF) Strengthen regulation, transparency and management of PSF Phasing out of PSF in medium-term How Can Short-Term Pain Be Mitigated?

Higher energy consumers benefit more from current subsidy regime, reform represents opportunity to make energy and fiscal policies more inclusive. Reform frees up resources for investments and for mitigating adverse impacts on households and businesses. While some mitigation measures are already in place Cash transfers to poor and vulnerable households should be expanded Impact of new Incremental Block Tariff and reformed cash transfers (decision 28/2014/QD-TTG effective 1 June 2014) on poor and vulnerable needs to be assessed Cash transfers need to be integrated in broader social protection framework Cash transfers for small farmers and household businesses should be introduced. Support to SMEs and selected enterprises to encourage energy efficiency should be enhanced through e.g. energy audits, capacity building on energy savings, support for technology improvements, access to capital, tax breaks, etc. For more information and background reports: http:// www.vn.undp.org/content/vietnam/en/home/library/environment _climate/green_growth_and_fossil_fuel_fiscal_policies_in_viet_na m /

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