Global Energy Subsidies Reform: Inclusive Approaches to Welfare Assessment

37 Pages Posted: 18 Jul 2017

See all articles by Maksym Chepeliev

Maksym Chepeliev

Purdue University, Department of Agricultural Economics

Dominique van der Mensbrugghe

World Bank

Date Written: May 15, 2017

Abstract

For several decades energy subsidies remain on the top of international policy agenda, serving as one of the most debated and widely used policy tools. Several major international organizations have attempted to quantify global energy subsidies and provide assessment of their potential reform. This includes studies by Organization for Economic Co-operation and Development (OECD), International Energy Agency (IEA) and International Monetary Fund (IMF). While most of these contributions provide estimates of economy-wide effects, they lack consistent assessment of environmental co-benefits of subsidies elimination, which can have a significant influence on aggregate results and their regional distribution.

In this paper, we apply a multistep framework to analyze two global energy subsidies scenarios, which include elimination of pre-tax consumer and post-tax local pollution subsidies. Computable general equilibrium GTAP-E-Power model is used to implement energy subsidy policies, quantify economic impacts, estimate energy use changes and CO2 emissions. Energy use changes are linked to emission of air pollutants and pollution-mortality impacts are estimated based on the population exposed by pollution and corresponding mortality risks. Finally, welfare benefits related to reduced mortality rates are assessed using country-adjusted willingness-to-pay measure from direct valuation studies.

Results show that inclusion of mortality related benefits has significant impact on net welfare estimates. In case of pre-tax subsidies elimination, such approach turns two regions under consideration from net welfare losers to gainers and triples welfare benefits for China. Much more significant impacts occur in case of pollution subsidies elimination as net world welfare lost (-$400.9 billion) is turned into gain ($606.7 billion) with even more substantial changes on regional level. Considered energy subsidy policies show to substantially reduce air pollution-associated mortality rates – between 20.4 thousand (in case of pre-tax consumption subsidies) and 705.1 thousand (post-tax pollution subsidies) people annually. Global CO2 emission reduces from 2.8% to 28% depending on scenario.

Keywords: Energy subsidies, air pollution, global reform, welfare co-benefits, CGE modelling, GTAP

Suggested Citation

Chepeliev, Maksym and van der Mensbrugghe, Dominique, Global Energy Subsidies Reform: Inclusive Approaches to Welfare Assessment (May 15, 2017). Available at SSRN: https://ssrn.com/abstract=3001239 or http://dx.doi.org/10.2139/ssrn.3001239

Maksym Chepeliev (Contact Author)

Purdue University, Department of Agricultural Economics ( email )

1145 Krannert Building
West Lafayette, IN 47907
United States

Dominique Van der Mensbrugghe

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-0052 (Phone)
202-522-1159 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/dvandermensbrugghe

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