Appendix B. Assessing the Environmental and Health Impacts of Energy Subsidy Reform
- Benedict Clements, David Coady, Stefania Fabrizio, Sanjeev Gupta, Trevor Alleyne, and Carlo Sdralevich
- Published Date:
- September 2013
This appendix describes the methodologies used to provide calculations of the impact of energy subsidy reform on CO2 emissions, SO2 emissions, and other local pollutants. Here we consider a scenario in which energy prices are raised to levels that would eliminate tax-inclusive subsidies for petroleum products, coal, natural gas, and electricity. For each product, after calculating the increase in prices that is needed to eliminate tax-inclusive subsidies, we estimate how much the quantity demanded decreases for the product. The decrease in quantity demanded is determined by the assumption for the elasticity of demand for the product. The details on how this is estimated for each product are described below.
A price elasticity of −0.4 is assumed for gasoline, diesel, and kerosene (Parry, 2011). The reduction in CO2 emissions is then calculated by multiplying the reduction in consumption by the CO2 coefficient of 0.0023 tons per liter of gasoline. The CO2 coefficient is assumed to be 16 percent higher for diesel and kerosene (Parry, 2011).
The reduction (in percentage terms) in other local pollutants owing to fossil fuel combustion is approximated by the reduction in fuel consumption. Gasoline combustion produces only a small amount of SO2, and thus the impact of petroleum subsidy removal on SO2 is not estimated.
The reduction (in percent) in coal consumption is calculated by assuming a price elasticity of −0.2 (Energy Information Administration [EIA], 2012).1 The reduction in CO2 emissions resulting from the removal of coal subsidies is then estimated as the same reduction (in percent) in total CO2 emissions from coal, based on Organisation for Economic Co-operation and Development (OECD) data.
The reduction (in percent) in natural gas consumption is calculated by assuming a price elasticity of −0.3 (EIA, 2012). The reduction in CO2 emissions is then estimated as the same percent reduction in total CO2 emissions from natural gas, based on OECD data. As noted previously, the impact of natural gas use on local pollution is assumed to be relatively small.
Electricity subsidies increase the consumption of coal, natural gas, and other generation fuels because of excess demand for electricity. However, for the following reasons, these effects on emissions are not quantified in this paper:
In some countries, part of the electricity subsidies is due to inefficiencies in the electricity sector. In other words, part of the problem is not that prices are too low but that costs are too high. Thus, successful subsidy reforms could reduce these inefficiencies without raising prices and suppressing demand.
Data limitations make it difficult to quantify the environmental impact of electricity subsidy removal. For example, price and cost data are limited, and there is a lack of information on the marginal energy source for electricity generation, which may be different from the average.
The environmental impact of price increases in fuel, coal, and natural gas as inputs for electricity generation is already incorporated in the calculations of these energy products. In addition, electricity subsidies are relatively small as a share of total posttax subsidies, so this omission is expected to have only a small impact on the overall estimates.
The methods used here are used to provide some rough estimates of the magnitude of the impacts over the longer term. They have several limitations. For example, they do not take into account the substitution between different energy products and resulting offsetting effects (e.g., there could be some offsetting increase in emissions if subsidy removal raises the price of natural gas to coal).
An upward adjustment is made to the EIA estimate because it is generally viewed as being on the conservative side.