Energy Subsidy Reform Assessment Framework : Modeling Macroeconomic Impacts and Global Externalities
This note provides guidance on the different economy-wide modeling tools that can be utilized to quantify the economic effects of energy subsidy reform. ESRAF defines an energy subsidy as a deliberate policy action by the government that specifi...
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/815971530883640016/Modeling-Macroeconomic-Impacts-and-Global-Externalities-Energy-Subsidy-Reform-Assessment-Framework-ESRAF-Good-Practice-Note-7 http://hdl.handle.net/10986/30259 |
| Summary: | This note provides guidance on the
different economy-wide modeling tools that can be utilized
to quantify the economic effects of energy subsidy reform.
ESRAF defines an energy subsidy as a deliberate policy
action by the government that specifically targets
electricity, fuels, or district heating and that has one or
more of the following effects: i) It reduces the net cost of
energy purchased; ii) It reduces the cost of energy
production or delivery; iii) It increases the revenues
retained by those engaged in energy production and delivery
(energy suppliers). Subsidies are provided through four
primary mechanisms: 1) Budgetary transfers of government
funds; 2) Government-induced transfers between producers
and consumers; 3) Forgone taxes and other government
revenues; 4) Under pricing of goods and services. Examples
include government control of energy prices that are kept
artificially low (referred to as consumer price subsidies
hereafter); budgetary transfers to energy suppliers or tax
expenditures granted to energy suppliers to keep costs down
to benefit consumers, producers, or both; underpricing of
goods and services, such as fuels, land, and water used by
energy producers; subsidized loans; and shifting of risk
burdens, such as the assumption of risks created by energy
supply or use through limits on commercial liability. Among
the economy wide modeling tools, the main focus of this note
is computable general equilibrium (CGE) models. Partial
equilibrium models are discussed only briefly The latter
models, by carefully mapping the details of energy
production technologies including substitution between fuel
types and process and efficiency improvements (Bohringer and
Rutherford 2008), can generate important insights to shape
the design of a reform. However, they tend to have limited
or no interaction between the market of interest and the
rest of the economy. As a result, they are unable to measure
the indirect and dynamic effects that a reform can generate,
particularly with respect to energy-consuming sectors, the
prices of goods and services that use energy as an
intermediate input, and the impact of all of these changes
on investment, industrial structure, and household welfare.
The rest of the note is organized as follows. It begins
with a brief overview of the different types of modeling
tools in section two. Existing studies on estimating the
effects of energy price subsidy reforms are outlined in
annex A. The literature review shows that the bulk of
studies use a CGE model for examining the effects of energy
subsidy reform. Macrostructural models do this much better
and can be used to quickly quantify the likely macroeconomic
impacts of a reform, and have the advantage of requiring
relatively few data and being easier to work with than CGE
models. A guide to using macrostructural models to estimate
the short-term effects of energy subsidy reform is presented
in section three. The various macrostructural models that
are available are included in annex B. Section four presents
a guide to using CGE models to estimate the long-term
effects of reform. A more detailed discussion of CGE models
is included in annex C The feasibility of using any given
model will depend heavily on the availability of data,
requirements for which are discussed in section five. After
briefly touching on empirical studies on energy reform in
section six, section seven concludes with some highlights
and guidance on the issues to consider when choosing a model
to carry out energy price subsidy reform. |
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