Climate Change 2001:
Working Group III: Mitigation
Other reports in this collection Price and Subsidy Policies

Price signals can only influence demand and supply if they actually reach economic agents and if those economic agents have the opportunity to respond to them. In Russia, energy intensity increased by 30% between 1990 and 1998, while energy prices also increased tremendously (IEA, 1997b, p. 50)14. Experience shows that it takes time for economic agents to adjust their behaviour to new price signals, not only because of capital stock turnover, but also because consumers often do not have an accurate knowledge of their energy consumption, or the technical capacity to reduce it. Various types of energy market reforms and the pace of energy price reforms are designed to create and clear channels for market signals to work.

It is a difficult policy challenge, and therefore a time-consuming process, to bring prices into line with real costs. This is true both in developing countries, where the poor pay a high cost for low-quality energy services (or a low cost that is heavily subsidized) and in developed countries. Although data on energy subsidies are incomplete, partly because such support is difficult to identify and measure, some evidence indicates that subsidies on coal production, including transfers from both consumers and taxpayers, are declining in a number of OECD and developing countries. Recent data suggest that the total producer subsidy estimates for the coal production of Germany, UK, Spain, Belgium, and Japan, which amounted to over US$13 billion at the beginning of the 1990s, had declined to less than US$7 billion by 1996 (OECD, 1998a, 1998b). In addition, case studies in the energy supply sector identified the following areas for potential subsidy reforms: removal of coal-producer grants and price supports; reforming subsidies to investment in the energy supply industry; and regulatory reform to eliminate non-tariff barriers to the energy trade (OECD, 1997a, 1997b).

An IEA (1999b) analysis of fossil energy subsidies in China, Russia, India, Indonesia, Iran, South Africa, Venezuela, and Kazakhstan–which accounted for 27.5% of the world’s total energy demand in 1997–claimed that removing such subsidies would lower CO2 emissions by 16% in these countries, amounting to a 4.6% reduction in global emissions15.

The transport sector–to give an important example–is another sector that receives subsidies detrimental to the environment. Transport is indirectly subsidized through infrastructure financing and through tax benefits, which enhance the transport volume. According to Shelby et al. (1997), energy subsidies were higher than those to transportation for the OECD area. They also found for the USA that larger CO2 savings could be achieved through reform of indirect rather than direct transport subsidies, such as free parking and supporting the highway infrastructure. Reform policies to internalize external the effects will, according to one study, probably lower sector-wide emissions by 10–15% (OECD, 1997c)16. These findings are in line with the results from other work on internalizing the external cost of transportation (ECMT, 1998). The same studies also indicate that local communities can better carry out policy reform in the transport sector, because transport subsidies may originate at the local level and local communities are more likely to value other ancillary benefits through policy reform (OECD, 1997c; ECMT, 1998). The transport sector is only mentioned as an example, because it is responsible for a large share of the national emissions in many countries17.

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