MENA needs subsidy reform for sustainable development

Updated 12 July 2014
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MENA needs subsidy reform for sustainable development

Global spending on energy subsidies totaled $492 billion in 2011. Middle East and North Africa (MENA) countries alone accounted for nearly half of that amount, making the burden of subsidies on public resources quite substantial. While total spending on energy subsidies in MENA reached 8.6 percent of GDP in 2011, there was significant variation among the countries of the region. In countries like Iraq and Egypt, spending on energy subsidies reached 11 percent of GDP while it was 3 percent of GDP in Tunisia. Within the GCC, spending on energy subsidies ranged from 10 percent of GDP in Saudi Arabia to around 6 percent in the UAE and 3 percent in Qatar. Countries in MENA could therefore benefit from reforming their subsidy systems for a number of reasons.
First, large spending on subsidies consumes a large portion of public resources rendering them unsustainable even in the short-run for some countries. Furthermore, for energy-importing countries, subsidies tend to create external imbalances, increasing the risk of a balance of payments crisis.
Second, subsidies could also hamper economic growth as the government directs its resources away from growth-enhancing spending towards paying subsidy costs. In many countries in the region, subsidy costs far outstrip spending on education or health. This can have long-term consequences on the economic welfare of the region’s populations. Moreover, subsidies make the cost of capital artificially cheaper relative to labor wages, creating incentives for firms to switch from labor to capital-intensive industries. This leads to lower job creation in a region with high unemployment and a young population.
Third, empirical evidence suggests that the benefits of energy subsidies tend to be skewed toward high-income sectors of the population. The richest 20 percent of the population in developing countries is estimated to receive six times more in fuel subsidies than the poorest 20 percent. In some cases, the numbers can be even more extreme. The IMF estimates that the richest fifth of the population in Egypt captures 71 percent of the benefits from diesel subsidies compared with 1 percent for the poorest fifth.
Finally, there are other distortions created by subsidies beyond the direct economic consequences. Subsidies keep fuel prices artificially below the price determined by market forces. This leads to an overconsumption of energy with adverse impact on the environment, health and traffic congestion. It also creates incentives for smuggling as the domestic price is pushed below prices in neighboring countries. For example, reportedly Algerian fuel is smuggled into Tunisia and Yemeni oil is smuggled into Djibouti.
While the case for subsidy reforms is strong, their success is far from guaranteed. The IMF has recently documented 28 episodes of energy subsidy reforms worldwide. Five of these episodes failed to achieve their objectives while 11 others were only partially successful. Among the successful reform programs, two measures were particularly crucial.
The first is appropriate phasing-in of price increases. Too fast an increase in energy prices can generate a backlash against reforms. This is what led to the failure of the Mauritania attempt to reform energy subsidies in 2008. Conversely, removing subsidies too slowly can result in partial and incomplete reforms.
Second, it is important to provide social safety nets to the poor as subsidies are removed. Despite capturing a smaller share of the overall benefit, poor households would still be impacted both directly, as subsidies are removed, and indirectly as their removal is likely to result in higher consumer prices, squeezing the real income of poor households. Ideally, targeted cash transfers to the poor should replace energy subsidies but these tend to be complex to administer. However, the positive experience of Iran in 2010 shows that even indiscriminant cash transfers to all segments of the population can play a key role in the success of the reforms and in redistributing the resources from the rich to the poor.
Implementation concerns notwithstanding, MENA countries could benefit from reforming spending on subsidies to rebalance their economies, boost growth and employment and support more sustainable and efficient economic development.


Energy giants spent $1bn on climate lobbying, PR since Paris: watchdog

Updated 20 min 14 sec ago
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Energy giants spent $1bn on climate lobbying, PR since Paris: watchdog

  • Firms under pressure to explain how greener laws will hit business models

PARIS: The five largest publicly listed oil and gas majors have spent $1 billion since the 2015 Paris climate deal on public relations or lobbying that is “overwhelmingly in conflict” with the landmark accord’s goals, a watchdog said Friday.
Despite outwardly committing to support the Paris agreement and its aim to limit global temperature rises, ExxonMobil, Shell, Chevron, BP and Total spend a total of $200 million a year on efforts “to operate and expand fossil fuel operations,” according to InfluenceMap, a pro-transparency monitor.
Two of the companies — Shell and Chevron — said they rejected the watchdog’s findings.
“The fossil fuel sector has ramped up a quite strategic program of influencing the climate agenda,” InfluenceMap Executive Director Dylan Tanner told AFP.
“It’s a continuum of activity from their lobby trade groups attacking the details of regulations, controlling them all the way up, to controlling the way the media thinks about the oil majors and climate.”
The report comes as oil and gas giants are under increasing pressure from shareholders to come clean over how greener lawmaking will impact their business models.
As planet-warming greenhouse gas emissions hit their highest levels in human history in 2018, the five companies wracked up total profits of $55 billion.
At the same time, the International Panel on Climate Change — composed of the world’s leading climate scientists — issued a call for a radical drawdown in fossil fuel use in order to hit the 1.5C (2.7 Fahrenheit) cap laid out in the Paris accord.
InfluenceMap looked at accounts, lobbying registers and communications releases since 2015, and alleged a large gap between the climate commitments companies make and the action they take.

 

It said all five engaged in lobbying and “narrative capture” through direct contact with lawmakers and officials, spending millions on climate branding, and by employing trade associations to represent the sector’s interests in policy discussions.
“The research reveals a trend of carefully devised campaigns of positive messaging combined with negative policy lobbying on climate change,” it said.
It added that of the more than $110 billion the five had earmarked for capital investment in 2019, just $3.6bn was given over to low-carbon schemes.
The report came one day after the European Parliament was urged to strip ExxonMobil lobbyists of their access, after the US giant failed to attend a hearing where expert witnesses said the oil giant has knowingly misled the public over climate change.
“How can we accept that companies spending hundreds of millions on lobbying against the EU’s goal of reaching the Paris agreement are still granted privileged access to decision makers?” said Pascoe Sabido, Corporate Europe Observatory’s climate policy researcher, who was not involved in the InfluenceMap report.
The report said Exxon alone spent $56 million a year on “climate branding” and $41 million annually on lobbying efforts.
In 2017 the company’s shareholders voted to push it to disclose what tougher emissions policies in the wake of Paris would mean for its portfolio.
With the exception of France’s Total, each oil major had largely focused climate lobbying expenditure in the US, the report said.
Chevron alone has spent more than $28 million in US political donations since 1990, according to the report.
AFP contacted all five oil and gas companies mentioned in the report for comment.
“We disagree with the assertion that Chevron has engaged in ‘climate-related branding and lobbying’ that is ‘overwhelmingly in conflict’ with the Paris Agreement,” said a Chevron spokesman.
“We are taking action to address potential climate change risks to our business and investing in technology and low carbon business opportunities that could reduce greenhouse gas emissions.”
A spokeswoman for Shell — which the report said spends $49 million annually on climate lobbying — said it “firmly rejected” the findings.
“We are very clear about our support for the Paris Agreement, and the steps that we are taking to help meet society’s needs for more and cleaner energy,” they told AFP.
BP, ExxonMobil and Total did not provide comment to AFP.

FACTOID

$ 28m

Chevron alone has spent more than $28 million in US political donations since 1990, according to the report.