February 25, 2010
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MR. GUPTA: Good day to you all. I will begin with a very short overview of the study including the results.
Perhaps a brief background behind the study would be in order. In one of the G-20 meetings last fall, the heads of state called on countries to phase out and rationalize inefficient petroleum product subsidies over the medium-term while providing targeted support for the poorest. In this context, the staff position note that is being released today updates our previous analysis and projections of petroleum product subsidies, and discusses reform options, including the need to protect the poor. We have been studying these subsidies because of the impact on the budget, economic efficiency, and the environment. Petroleum product subsidies constitute roughly two-thirds of all fossil fuel subsidies.
What are the two key findings? First, our estimates based on data of 145 countries show that petroleum product subsidies have started to rise with the rebound in international prices. They are projected to reach almost 1 percent of world GDP (gross domestic product) in 2010. This estimate is based on a benchmark that also includes a 30 cent per liter tax to correct for externalities such as pollution and congestion and the need to raise revenue including for maintaining and constructing roads. I should note that the actual average gasoline tax in OECD countries is much higher. In terms of distribution of subsidies, G-20 countries account for over 70 percent of the subsidies with a sizable share for emerging G-20 countries.
The second finding is that the halving of subsidies in some one hundred subsidizing countries would improve fiscal balances by about 1 percent of GDP on average. This magnitude of fiscal improvement is not insignificant for many countries that have accumulated large amounts of public debt during the recent financial crisis.
Before concluding, I would like to emphasize that as subsidies are phased out, the poor in many countries will need to be shielded through social safety nets. The capacity to implement social programs varies across countries and they may need to rely on an imperfect targeting mechanism to protect the poor in the short- to medium-term. Thank you.
QUESTIONER: I had a question. I just got the report so I apologize that I haven't looked through it totally. When you talk about subsidies, how do tax subsidies fit in? Because here in the U.S. a lot of the oil companies will claim that they don't get any subsidies, although they do get some general tax breaks. Can you talk about how you determine if a tax break is a subsidy?
MR. GUPTA: Let me explain how we have calculated the subsidies. As I explained to you, the calculation of subsidies is based on a benchmark price and the benchmark here includes a tax of 30 cents a liter. In the U.S. this tax is somewhat lower. It's about 13 to 14 cents a liter. In most countries this taxation is much higher and the studies which have been carried out estimate that the required tax to correct for externalities, such as the pollution and road congestion that arise from the use of vehicles, ranges from 25 to 35 cents a liter for the U.S. and for other advanced countries. So we have used a tax of 30 cents a liter for our estimate of tax-inclusive subsidies for the world. If we take a benchmark price that does not include any taxes, we get a lower estimate of subsidies, which we call pre-tax subsidies in the paper. In that case, the magnitude of subsidies falls from around 1 percent of GDP to one-third of that amount; subsidies in these countries arise because petroleum products are sold below the marginal costs of supply. In practice, the taxation in many countries is much, much higher than the benchmark we have assumed here in the study.
QUESTIONER: I guess so. Then the study focuses on the actual taxes on the price of fuel, the actual taxes placed on a liter or here a gallon of fuel?
MR. GUPTA: It's based on an average tax of 30 cents per liter on all types of petroleum products. That's one benchmark price we've used. We've also used another benchmark price that incorporates taxation of 40 cents per liter. As I said before, we also present an estimate which doesn't have any tax at all, to give you a range of estimates that one can get for subsidies. I should clarify regarding the first question that the subsidies we are talking about are consumer subsidies and not producer subsidies. We are not estimating producer subsidies which require a different methodology.
QUESTIONER: I believe that answers the question. These are consumer subsidies?
MR. GUPTA: Yes.
QUESTIONER: Thank you. That answers it.
QUESTIONER: I have a question about the section on the cross-border spillover effects. I understand that if you have a subsidy on the pump price of gasoline that makes it too cheap that it's subject to smuggling. But I do understand the reverse which is you said when removing petroleum subsidies can benefit from multilateral cooperation. How is there a spillover from a country removing a subsidy?
MR. GUPTA: What we are saying is that subsidies have two types of spillover effects. One is that it causes smuggling, another is environmental effects. In case of smuggling, essentially the country which is subsidizing ends up subsidizing consumers of another country rather than its own citizens so that there is a spillover effect. If there is multilateral cooperation then environmental spillovers arising from subsidies could be brought down. This is how the current discussion about restraining greenhouse emissions is taking place--in multilateral fora. So that's the aspect that we highlighted in the paper, that multilateral cooperation can bring down the spillover effects particularly in the case of the environment.
QUESTIONER: It says that if some countries fail to act, countries won't necessarily remove the subsidies unless all countries do it because of the free rider program, but I'm not really sure I understand. Are you just talking about environmental issues?
MR. GUPTA: This is predominantly environmental, yes.
QUESTIONER: Because obviously there is no fiscal spillover from removing a subsidy.
MR. GUPTA: There is also a cost to a country which is benefiting from subsidies. To give you an example, Nigeria used to maintain a very low price for petroleum products. While benefits of this policy also accrued to its neighbors, this policy nevertheless constrained the ability of those countries to tax petroleum. So some kind of policy cooperation can give the country some flexibility in implementing its tax policy.
QUESTIONER: Thank you. That makes sense.
QUESTIONER: Thanks for doing this today. I also just downloaded the report so excuse for going over some basic things. Could you move back a little bit to the comments you were making about the environment and talk about the expected greenhouse gas reductions that you projected here and how you came to that? Also was this report done at the request of the G-20, and how will this be used going forward as they work to try to phase out?
MR. GUPTA: You have two questions so I'll take them in the order you raised them. On the impact of removing subsidies on greenhouse gases, we didn't really estimate this number on our own. What we did was we looked at the calculations done by the International Energy Agency on the relationship between emissions and removal of subsidies. Then we used the same relationship in our analysis and we came up with the number that halving of tax-inclusive subsidies would reduce greenhouse gases by about 15 percent over the long-term. I understand that this estimate is based on a study of 20 countries. We are not specialists in that area but we are recognizing the environment impact based on the studies which others have done.
The second question you raised was how would this study be used. We have been working in this area for the last 4 or 5 years and we produced two papers on the impact of rising food and fuel prices in 2007/2008. Also, at the request of the G-8 in 2008 we produced a paper on fossil fuel subsidies along the same lines. In this particular instance, the request from G-20 was made to international financial institutions and the work has been started by the World Bank, IEA (International Energy Agency), OECD (Organization for Economic Cooperation and Development) and OPEC (Organization of Petroleum Exporting Countries). We are providing our estimates to them as well. I went to their meeting last week and made a presentation of our estimates. So we are contributing to the work of those agencies, and we are also making available all the data that we have put together because IEA has data for some 39 countries, whereas we have data from 145 countries. Incidentally, these data will also become available on the Fund's website today.
QUESTIONER: Thanks so much.
