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SUBSIDY WATCH by gjjur4356

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									 SUBSIDY WATCH
 A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




www.globalsubsidies.org                                                                                                ISSUE 32, SEptEmbEr 2009


   cOMMENtARy                                PAGE 1                The Tough Politics of Energy Subsidy
   PAGE 1 The   Tough Politics of Energy
   Subsidy
   By David G. Victor

   PAGE 2 Transparency       as a tool for
   subsidy reform
   By Terry Collins-Williams and Robert Wolfe



   NEWS                                      PAGE 4    COMMENTARY:
   PAGE 4 Green auto subsidies poor for the            The Tough Politics of Energy Subsidy
   environment and economy
                                                       By David G. Victor
   PAGE 5 WTO     Subsidy Dispute Roundup
                                                       Governments spend staggering sums of         on health and other important public-
   WTO gives Brazil green light to retaliate against
   U.S. cotton subsidies, as other subsidy disputes
                                                       money subsidizing energy—in particular       welfare expenditures. Most of these
   loom                                                fossil fuels, but increasingly also other    subsidies also cause environmental harm
   Boeing, Airbus “launch aid” disputes: decision      forms of energy such as renewables. The      by rewarding consumption and insulating
   in first dispute released to parties, remains       latest global assessment, published last     production decisions from the full social
   confidential
                                                       year by the International Energy Agency,     cost of today’s prevailing methods for
   The U.S. follows Europe’s lead and re-starts        puts the total energy subsidy at far more    delivering energy.
   milk export subsidies
                                                       than US$300 billion annually. And that
   PAGE 7 Indonesia     poised to increase             figure is surely much smaller than the       However, it is much easier for analysts
   energy subsidies                                    real total, for it excludes many subsidies   to agree that the problem must be fixed
                                                       that are hard to measure and also omits      than to devise workable solutions. Most
                                                       a large number of countries, notably the     subsidies are not some aberration that
   REcENtly PubliShEd                        PAGE 8
                                                       highly industrialized nations that provide   can be removed from public policy with
   Slipping through the net: How EU countries          a wide variety of energy subsidies.
   evade new budget transparency rules                 (The United States, alone, adds US$50
   Responding to the Economic Crisis - Fostering       billion to the world total energy subsidy
   Industrial Restructuring and Renewal                                                                 Worldwide, most subsidies
                                                       according to a careful recent estimate by
   The Questionable Case for Subsidies                 Doug Koplow.)
   Regulation: A Comparative Perspective                                                                are showered on mature fuels
   Swamped by Subsidies: Averting a US-EU
                                                       Among analysts, there is nearly                  and technologies and subvert
   Trade War after the Great Crisis
                                                       universal scorn for such a high level of         useful market competition.
                                                       subsidisation. To be sure, subsidies
   contact:                                            have a proper role in public policy, such
   Damon Vis-Dunbar
   IISD                                                as in nurturing promising technologies       a well-honed scalpel. Rather, nearly all
   International Environment House 2                   that cannot initially survive on their own   subsidies are ingrained in a political logic
   9 chemin de balexert
   1219 Châtelaine                                     in the marketplace. But the real world       that is difficult to change; understanding
   Geneva Switzerland                                  of subsidies bears little relationship to    the political economy of energy subsidies
   phone +41 22 917-8748
   Fax +41 22 917-8054
                                                       the theoretical proper role for subsidy      is therefore an essential first step.
   dvis-dunbar@iisd.org                                in public policy. Worldwide, most
                                                       subsidies are showered on mature fuels       The dominant form of subsidy varies
   disclaimer:
                                                       and technologies and subvert useful          enormously across different fuels. Most
   Subsidy Watch is a publication of the
   International Institute for Sustainable             market competition. These subsidies          energy subsidies apply to oil products.
   Development’s Global Subsidies Initiative.          are troubling, in part, because they are a   And contrary to public opinion, most oil
   Subsidy Watch articles do not necessarily
   reflect the views of the IISD, its partners or      drain on public resources. Indeed, as the    subsidies do not seem to take the form of
   its funders                                         World Bank has shown, in many of the         handouts to big oil companies; instead,
                                                       poorest countries, governments spend         they are designed to provide highly
                                                       many times more on fuel subsidies than       visible benefits to consumers—especially

                                                                                                                             continued on page 2



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SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                   ISSUE 32, SEptEmbEr 2009

   The Tough Politics of Energy Subsidy                                                                                continued from page 1


   those who vote or could mount political      are hard to measure because they are            during the run up to the peak oil prices of
   opposition that would be inconvenient for    often buried inside the accounts of             2008. Still another solution is to anchor
   ruling elites. It is no accident that some   state-owned coal companies. Most take           subsidy policy into a firmer statutory
   of the biggest subsidizers are populist      the form of support for well-organized          base with sunset clauses that are hard to
   democracies—such as Iran (the world’s        labor. Still other subsidies are finely         change. The near-term politics of subsidy
   largest energy subsidizer according to       tuned to benefit other well-organized           are nasty and difficult; debates over more
   the IEA), India (#5) and Venezuela (#6).     groups. Agricultural lobbies have kept          distant policies can be easier to manage.
   Large domestic oil production—which          massive subsidies for biofuels in place
   is often not priced in state budgets to      despite mounting evidence they do little to     The best political recipe will vary with the
   reflect the full opportunity cost of using   promote energy security nor preserve the        circumstances, but we in the community
   it at home instead of export—also helps      environment.                                    of analysts probably need to refocus our
   governments muster the political support                                                     attention on the underlying political logic
   and economic wherewithal to pay for          Effective solutions are urgently needed         of subsidy programs as much as their
   these subsidy programs. Even non-            for the subsidy problem. It will be hard        harm. For too long we have focused on
   democracies, such as Saudi Arabia and        for governments to get serious about            the latter, and thanks to that the harms of
   China, mostly lavish oil subsidies in the    energy security and global warming              subsidies (if not their magnitude, which
   form of politically visible final products   without getting prices of the major fuels in    is still difficult to pin down) are well-
   to help blunt public dissent. None of        line with their real costs. One solution is     documented. The next task is to help
   these governments will soon abandon          for governments to make the full cost of        chart viable solutions.
   this practice unless their leaders are       subsidy much more visible and to regulate
   more confident in other mechanisms for       it with hard budget constraints. Many           David G. Victor is Professor of
   securing power.                              subsidies thrive because, by design,            International Relations at UC San
                                                their full cost is hidden and shifted to less   Diego and Director of the Laboratory on
   Other fossil fuels are much less visible     well-organized groups (e.g., taxpayers).        International Law and Regulation, which
   politically, which may help explain why      Another approach is to put clearer triggers     is funded by the nonpartisan Electric
   they are generally less subsidized. Coal     into subsidies so their cost does not           Power Research Institute.
   appears to be the least subsidized of all    explode when market conditions change
   the fossil fuels, although coal subsidies    quickly—as happened in many countries



   COMMENTARY:
   Transparency as a tool for subsidy reform
   By Terry Collins-Williams and Robert Wolfe

   Transparency, one of the fundamental         Subsidies are not going to go away, but         they can be used to accomplish legitimate
   norms of the trading system, is              their use might be effectively limited with     policy objectives.
   increasingly seen as an essential tool       more transparency. However, experience
   in the governance of international           with existing transparency provisions for       The original approach to subsidies
   trade. Recent initiatives to cope with       subsidies in the World Trade Organization       discipline as set out in 1947 in Article
   the trade dimensions of the current          (WTO) suggests that this route has              XVI of the General Agreement on Tariffs
   global economic crisis have focused on       promise, but that current notification          and Trade (GATT) was purely and simply
   transparency mechanisms to increase          and surveillance tools require significant      a transparency provision. Countries
   understanding of and confidence in           reform.                                         maintaining any subsidy were required
   governments’ responses to threats of                                                         to notify the extent and nature of the
   economic meltdown.                           Subsidies are a problem for the trading         subsidization, the estimated effect of
                                                system. On the one hand, they distort the       the subsidization on the quantity of the
   This brief examines the nature and use       terms of competition both domestically          affected product or products imported
   of transparency provisions in the area of    and in markets to which subsidized              or exported from its territory and the
   subsidies disciplines.                       products are exported. On the other hand,       circumstances making the subsidization
                                                                                                                         continued on page 3


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SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                     ISSUE 32, SEptEmbEr 2009

   Transparency as a tool for subsidy reform                                                                            continued from page 2


   necessary. Article VI did authorize the         increasing understanding of the intent         to digest subsidy notifications by others.
   imposition of countervailing duties in          of trade measures. The agreements              There may be scope for enhancing the
   specific cases, but only to subsidies           on Technical Barriers to Trade and             WTO Secretariat’s role in this respect,
   affecting imports into a country’s own          Sanitary and Phytosanitary Measures            especially with regard to highly detailed
   market. There was, therefore, no                provide examples of collaborative              and complex notifications. More work is
   disciplining effect on export competition       approaches where information is shared         needed on the old chestnuts of defining
   in third markets or domestic competition        and Committee examination promotes             and measuring subsidies, because
   in the subsidizing country. Only later          understanding of questions before they         transparency works best if providers and
   did GATT signatories agree to impose            transform into trade disputes. In the case     users of information can agree on what
   substantive constraints on their ability to     of subsidies, the nature and detail of the     and how much is to be notified.
   grant subsidies.                                information required appears to give rise
                                                   to apprehension of self-incrimination.         The WTO could also expand third-party
   It took close to 50 years to agree on                                                          notification of subsidies. Many international
   a more comprehensive approach to                As a consequence, the Members’ record          organizations and NGOs have detailed
   subsidies. The 1995 Agreement on                of subsidies notification is abysmal both in   information on subsidies’ practices that
   Subsidies and Countervailing Measures           respect of timeliness and completeness.        would be useful to the SCM Committee.
   (ASCM) expanded the notification
   obligations of WTO Members with                                                                Finally, the Committee should pay closer
   detailed requirements for annual                                                               attention to the intended audience.
   notification of any defined subsidy and
                                                       Subsidies are a problem for                Members should consider how to
   a mandate for the WTO Subsidies and                 the trading system. On the                 aggregate information both for internal
   Countervailing Measures Committee                                                              WTO purposes in the Committee, and
                                                       one hand, they distort the
   (SCM) to examine these notifications on a                                                      for use by other economic actors and the
   regular basis.                                      terms of competition both                  public. Closer co-ordination of notification
                                                       domestically and in markets                and surveillance provisions with the Trade
   After the entry into force of the ASCM, the                                                    Policy Review function might reinforce
   SCM committee designed a questionnaire              to which subsidized products               Members and the Secretariat’s efforts.
   for subsidy notifications and established           are exported. On the other                 Providers of information must see how
   procedures for annual Committee review                                                         doing so helps them meet their own
   of notifications. They don’t work. Some             hand, they can be used to                  objectives, but if transparency is to be a
   Members face resource constraints,                  accomplish legitimate policy               force for reform, the information must be
   while others face complications of                                                             analyzed and made widely available for
                                                       objectives.
   internal government co-ordination and                                                          those who can influence governments.
   jurisdictional authority—some federations,
   for example, have never notified subsidies      The Committee’s capacity to conduct            The subsidies domain should represent a
   granted by sub-national government              real surveillance of the Agreement’s           model of how transparency contributes to
   entities. Other problems arise from a           transparency provisions, much less to          understanding of trade actions, but to do so
   lack of understanding of some of the            assess the impact of subsidy practices,        effectively will require a significant reform
   key elements of the substantive subsidy         is hamstrung. Attempts by the Committee        of existing commitments and practices.
   disciplines within the ASCM, including the      to address these problems have resulted
   definition of a subsidy and the concept         only in cosmetic changes without               Terry Collins-Williams is the former
   of specificity. The complexity of the           addressing the underlying issues.              Director-General Multilateral Trade
   questionnaire format in itself is reported to                                                  Negotiations, and Lead Canadian
   represent an obstacle.                          Our gloomy conclusions notwithstanding,        Negotiator, Non-Agricultural Market Access
                                                   we believe that transparency should            (NAMA), Department of Foreign Affairs and
   The purpose to be served by the                 play a significant and increased role in       International Trade.
   transparency provisions is also a               subsidies’ discipline.
   problem. Transparency seems to work                                                            Robert Wolf is a Professor at the School of
   best in the trading system where it             Many Members need help, however,               Policy Studies, Queen’s University.
   furthers goals of sharing information and       to meet their reporting obligations and



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SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                    ISSUE 32, SEptEmbEr 2009

   NEWS:
   Cash for clunkers poor for the environment and economy
   Since the outset of the global economic       in fuel efficiency over the clunkers they      longer because the requirements are less
   crisis, governments have rescued              traded in, and US$4,500 for a 10 mpg           stringent.
   companies and industries deemed too           improvement. With trucks the results
   large or important to fail.                   were even worse, allowing combinations         Dr. Chameides argues that if the
                                                 that offer a single mpg improvement to         U.S. Congress was serious about the
   As public opinion has mounted against         qualify for US$3,500.                          environment it would not have enacted a
   these handouts, politicians have looked                                                      bill that allows for new cars to qualify with
   for ways to help struggling industries        The program was so successful in               a minimum of 22 mpg (11 litres per 100
   without attracting public scorn. Perhaps      attracting buyers that the US$1 billion        km*) when the current Corporate Average
   the most prominent of these efforts are       originally allotted to it ran out in a week,   Fuel Economy (CAFE) Standards is
   the so-called “cash for clunkers” subsidies   leading Congress to approve another            already at 27 mpg (9 litres per 100 km).
   which have been implemented in almost
   a dozen European countries, the United                                                       He also points to other environmental
   States, China and Mexico.                                                                    impacts associated with the program,
                                                     Analysts have charged that
                                                                                                such as the mining of ore for new cars
   The basic scheme has governments                  the cash-for-clunkers schemes,             and the disposal of toxic components in
   providing consumer vouchers for trading           which are often designed                   the old cars. “In general encouraging
   in older, high-pollution vehicles that can                                                   people to buy new stuff and throw
   be put towards the purchase of newer,             by auto industry lobbyists,                away old stuff is not good from an
   theoretically lower-polluting vehicles.           are being used to dress up                 environmental point of view,” he
   The idea seems like a win-win for car                                                        concludes.
   companies, dealers, consumers and the
                                                     as environmentally friendly
   environment.                                      policy what amount to auto                 At the same time, the benefits to the
                                                                                                auto sector and the economy as a whole
                                                     industry bailouts.
   However, analysts have charged that                                                          have been questioned. Richard Feinberg,
   the cash-for-clunkers schemes, which                                                         professor of retail management at Purdue
   are often designed by auto industry                                                          University, says that consumers who take
   lobbyists, are being used to dress up         US$2 billion on 6 August 2009.                 advantage of the programs will now be
   as environmentally friendly policy what                                                      spending less elsewhere in the economy
   amount to auto industry bailouts.             Bill Chameides, Dean of the Nicholas           at an estimated amount of US$300
                                                 School of the Environment at Duke              million a month, leaving a dent in the
   The United States’ program, which began       University, says that in principle taking      important retail sector. “Moving money
   in January 2009, was billed as being both     cars with higher emissions off the road        from monthly paychecks to pay down
   good for the environment and the ailing       and replacing them with cars with lower        payments and interest on car loans is a
   auto sector.                                  emissions will eventually lead to lower        terrible idea for stimulating the economy,”
                                                 overall emissions.                             he says.
   Yet as Senator Feinstein, who co-
   sponsored the original bill, admitted in      But first a new vehicle must “payback”         In terms of economic benefits, it would
   a June 22 column entitled “Handouts           its manufacturing emissions. On                have been better to pick 750,000
   for Hummers”, the bill that came out          average the manufacture of a new car           families at random and given them each
   of the House of Representatives was           creates between 3 to 12 tonnes of CO2          US$4,500 to spend, concludes Professor
   “tailored perfectly to the auto industry’s    per vehicle.                                   Feinberg.
   specifications.”
                                                 According to Dr. Chameides’                    The United States is not alone, however,
   The final Car Allowance Rebate System         calculations, the average new car              in offering consumer vouchers to
   (CARS), which went into effect in late        bought under the cash for clunkers             encourage the purchase of new cars: 11
   July, gave customers US$3,500 towards         bill would take 5.5 years to pay back,         European countries, China and Mexico
   the purchase of cars that provided a mere     assuming a 4 mpg gain in fuel efficiency.      have similar programs.
   4 miles per gallon (MPG) improvement          With trucks the payback time would be
                                                                                                                         continued on page 6


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SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                    ISSUE 32, SEptEmbEr 2009

   NEWS:
   WTO Subsidy Dispute Roundup
   WTO gives Brazil the green light to retaliate against U.S. cotton subsidies, as               subsidies are having on farmers in their
   other subsidy disputes loom                                                                   countries.

   A World Trade Organization (WTO) compliance panel has issued its decision authorizing         Group coordinator and Burkina Faso
   Brazil to retaliate against the United States for failing to abide by previous WTO rulings    Minister of Trade, Mamadou Sanou,
   which determined U.S. subsides to cotton illegal.                                             complained that there had been no
                                                                                                 response from the U.S. on the issue
   In its ruling, handed down on 31 August 2009, the WTO panel determined that Brazil            and warned that there would not be a
   could retaliate against the U.S. in the amount of US$147.4 million for the fiscal year        conclusion to the Doha Round of WTO
   2006, and an annual amount for subsequent years, estimated at US$294.7 million based          negotiations without reform of U.S. cotton
   on 2006 data.                                                                                 subsidies.

   The ruling falls short of the US$2.68 billion in countermeasures Brazil had been seeking.     Boeing, Airbus “launch aid” disputes:
                                                                                                 decision in first dispute released to
   Notably, the panel granted Brazil a very limited right to suspend certain obligations under   parties, remains confidential
   the TRIPS Agreement (intellectual property) and the GATS (trade in services). Cross-
   sector retaliation is only permitted in the event that the total amount of countermeasures    On 4 September 2009 a WTO panel
   Brazil is authorized to impose in a given year exceeds a certain threshold, pegged            handed down an interim ruling in the
   initially at US$409.7 million.                                                                long running dispute between the United
                                                                                                 States and the European Commission over
   Brazil has threatened to suspend U.S. pharmaceutical patents as one form of retaliation.      “launch aid” in the form of soft loans to the
                                                                                                 European aircraft manufacturer Airbus.
   Under WTO rules, cross-sector retaliation is only allowed when it is not “practicable or
   effective” for a country to retaliate in the same sector, in this case consumer goods.
   Brazil had argued that “the costs and welfare-reducing effects resulting from the
   adoption of countermeasures exclusively in that sector would render such an alternative
                                                                                                     The Office of the United States
   not practicable,” and thus asked for authority to retaliate in other sectors.                     Trade Representative warned
                                                                                                     that “the commitment of
   The panel, however, determined that Brazil could retaliate within the consumer goods
   sector to the amount of US$409.7 million without “incurring significant costs to its              launch aid or any other form
   economy.” This amount, which is subject to change, is much higher than the estimated              of preferential financing, by
   annual amount of retaliation Brazil will be entitled to (US$294.7 million).
                                                                                                     any of the EU member states
   However, Brazil points out that the US$294.7 million is based on 2006 data. Using the             would be a major step in the
   latest data, Brazil estimates that its first annual countermeasures will amount to some
   US$800 million, which would allow for cross-sector retaliation.                                   wrong direction.”

   Brazil must now submit a specific request outlining its planned countermeasures in            While the ruling remains confidential, U.S.
   accordance to the ruling to the Dispute Settlement Body (DSB).                                Senators from states where Boeing has a
                                                                                                 large presence have been briefed on the
   In recent months several prominent critics of U.S. cotton subsidies have emerged,             decision by the Office of the United States
   including U.S. Chamber of Commerce Executive Vice President of Government Affairs             Trade Representative (USTR) and have
   Bruce Josten who wrote an open letter to the U.S. Congress on 30 July 2009 in which he        commented publicly on the outcome.
   urged the U.S. to comply with previous WTO rulings in the cotton dispute.
                                                                                                 The Associated Press news agency
   “The United States has no credibility calling on other countries to meet their trade          quoted Washington Senator Patty Murray,
   obligations if we refuse to meet our own,” argued Josten.                                     who initially urged the Bush administration
                                                                                                 to initiate the dispute, as saying that the
   Also in July, members of the Cotton 4 (C4), which include Benin, Burkina Faso, Chad           ruling “confirms that Boeing has been
   and Mali, descended on Washington to publicize the negative impacts that the cotton                                   continued on page 6


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SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                                                      ISSUE 32, SEptEmbEr 2009

   Green auto subsidies...                                                                                                                                continued from page 4


   In Mexico consumers are eligible for          important.
   15,000 pesos (approximately US$1,150)
   in vouchers for scrapping cars that are at    The program will fail to remove the biggest polluters from the road because these cars
   least 10 years old. There are no fuel-        often lack the required ownership documentation. Moreover, poor people that own
   economy requirements placed on the            these cars would not be able to afford new vehicles with the mere 15,000 pesos subsidy,
   new vehicles, meaning that theoretically      explained Mr. Vázquez.
   the program could fund the acquisition of
   more polluting cars.                          In Europe, Germany’s plan has garnered the most attention as it is being credited with a
                                                 40% increase in auto sales in that country in March. Under the plan consumers receive
   Héctor Vázquez Tercero, a Mexican             €2,500 for replacing cars that are at least 9 years old with cars the meet the Euro IV
   political analyst and founding partner        emission standards established in 2005.
   at Mexico City-based Vázquez Tercero
   and Associates, says the Mexican plan         *Editor’s note: Translating a change in miles per gallon (MPG) to the standard international metric, litres per 100 kilometres, is not

   is an auto industry stimulus bill in which    straightforward, and depends on one’s starting point. But assuming an average of 22 mpg (11 litres per 100 kilometres) of the vehicle

   the environmental component is not            being traded in, a 4 mpg improvement would correspond to a 1.6 L/100km reduction in the rate of fuel consumption.




   WTO Subsidy Dispute Roundup...                                                                                                                         continued from page 5


   competing on an uneven playing field for      States Trade Representative warned that “the commitment of launch aid or any other
   decades.”                                     form of preferential financing, by any of the EU member states would be a major step in
                                                 the wrong direction.”
   However, the Financial Times newspaper
   quoted a European source as saying:           The U.S. follows Europe’s lead and re-starts milk export subsidies
   “The draft report has dismissed 70 per
   cent of US claims about alleged EU            Another dispute brewing this summer concerns U.S. export subsidies to milk which
   subsidies to Airbus. It has also confirmed    were reintroduced in May 2009, following a similar move by the European Union in
   that repayable launch aid is a permissible    January. The United States and the EU have argued that they will not exceed their WTO
   way to partner with governments.”             commitments on export subsidies; nonetheless, the subsidies have drawn criticism from
                                                 the Cairns group of agriculture exporting countries.
   The ruling is expected to remain
   confidential for months while both sides      The Cairns Group, a coalition of 19 agricultural exporting countries, issued a statement
   analyze the 1,000 page document.              in June arguing that while the U.S. and EU milk subsidies might be legal under the
                                                 WTO rules, if other economies follow suit and raise their “domestic support and export
    A related EU counterclaim alleging illegal   subsidies towards their maximum WTO commitment levels, it would undermine the
   subsidies to Airbus-competitor Boeing in      effectiveness and credibility of the WTO system.”
   the form of research and development
   assistance is expected in 6 months to a       “Subsidy wars only drive prices even lower, thereby delaying economic recovery further,”
   year from now.                                warned the Group.

   The dispute heated up in August when          The Mexican Frente Nacional de Productores y Consumidores de Leche (National Front
   UK business secretary Lord Mandelson          of Producers and Consumers of Milk), a group representing Mexican milk producers,
   announced that the British government         has also lashed out at the U.S. support for its dairy producers. According to the group
   was to provide Airbus £340 million            a combination of U.S. subsidies and removal of tariffs under the North American Free
   (US$556 million) in repayable launch          Trade Agreement provisions has resulted in U.S. milk being sold in Mexico at below cost,
   aid to help the company develop its new       in violation of WTO rules on dumping.
   A350 long-distance jet.
                                                 According to Mexican news agency Notimex, the National Front is currently discussing
   In response, the Office of the United         with members of the Mexican Senate launching a WTO complaint against the United
                                                 States.

                                                                                6
SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                   ISSUE 32, SEptEmbEr 2009

   NEWS:
   Indonesia poised to increase energy subsidies
   On 3 September 2009, the Jakarta             Between 2001 and 2008, World Bank figures show that subsidies expenditure
   Post newspaper announced the latest          made up between 10% and 28% of the national budget. The two biggest items on
   development in Indonesia’s long              this ticket are fuel and electricity subsidies, making up 90% of the transfers.1
   struggle with energy subsidization:
   spending will increase, again.               Needless to say, this spending is at the opportunity cost of investments in health,
                                                education, infrastructure and other social goods. Its supposed purpose, being to
   Two decisions seem to have been              help the poor, does not stand up to examination. Research conducted by the Co-
   made in close succession.                    ordinating Ministry of Economic Affairs of Indonesia shows that the top 40% of high-
                                                income families—those more likely own cars and be connected to the electricity
   First, the ICP—the Indonesian                grid—receives 70% of the subsidies.2
   Crude Price, an index based on
   five internationally traded crude            According to a review of energy subsidies by the United Nations Environment
   oils—changed its estimates for 2010          Program (UNEP), the distortions are many and far-reaching. Large amounts of
   prices from US$60 to US$65 per               Indonesia’s wealth are foregone through over-consumption of domestic crude-oil
   barrel. Because the government               supplies and this in turn has implications for investment in the industry and even
   has established a fixed price for            public health.
   the domestic sale of crude oil, this
   effectively means an increase in             The biggest opposition to reform is the general population. Energy prices are now
   projected spending of Rp 9.75 trillion       considered an entitlement by Indonesians, many of whom live on under US$2 a
   (US$984 million). The Jakarta Post           day. Price increases in the past have been met with public riots, despite policy
   reports that this will take total spending   mechanisms which have been designed to channel alternative forms of welfare
   on fuel subsidies in 2010 to Rp 68.73        payments to the poor. The IEA notes, however, that there were relatively low
   trillion (US$6.94 billion), equal to 7.2%    levels of opposition to reforms in October 2005 and May 2008—a sign that public
   of the state budget.                         awareness may be growing.

                                                Earlier this year, energy-subsidy reform appeared to be on the horizon, following
                                                the landslide re-election of incumbent president Susilo Bambang Yudhoyono and
       Energy prices are now                    a return to low world oil prices. In July 2009, the Reuters news agency reported
       considered an entitlement by             Agus Purnamo, head of Indonesia’s National Council on Climate Change, stating
                                                publically that he expected fossil fuel subsidies to drop within the year “below the
       Indonesians, many of whom                distortion level that discourages renewable energy.” The Council warned that the
       live on under $2 a day.                  country is currently in danger of failing to achieve its target of a 10% renewable
                                                energy shares by 2025.

   Second, Indonesia’s state electricity        The Council also suggested that President Yudhoyono might introduce a new feed-
   company PT Perusahaan Listrik                in tariff policy, where PLN would be required to buy a percentage of its electricity
   Negara (PLN) has won an appeal               from renewable energy sources at a guaranteed price.
   to the House of Representatives to
   increase by 5% the rate at which             1
                                                 Spending for Development: Making the Most of the Indonesia’s New Opportunities,
   electricity is subsidized. This Rp 4.38      The World Bank.
   trillion (US$442 million) subsidy will
   compensate PLN for losses they have          2
                                                    Energy Policy Review of Indonesia, The International Energy Agency. p 24.
   incurred this fiscal year. Total subsidies
   to PLN this year are reported to be Rp
   37.8 trillion (US$3.8 billion).

   Indonesia has long struggled with high
   energy subsidies that drain a significant
   portion of the country’s public budget.




                                                                      7
SUBSIDY WATCH
A bi-monthly roundup of news, views and ideas on subsidies and sustainable development




                                                                                                                     ISSUE 32, SEptEmbEr 2009

   RECENTlY PubliShEd:

   Slipping through the net: How                   construction sectors and explores how         identification, let along measurement, of
   EU countries evade new budget-                  governments can support restructuring.        undesirable subsidies,” he writes. In light
   transparency rules                              Both the automotive and construction          of the challenges in effectively disciplining
                                                   sectors have experienced a particularly       subsidies, Professor Sykes suggests
   Not all European Union countries are            steep decline in demand in the wake of        that the more laissez-faire approach in
   complying with regulations that mandate         the economic crisis. The responding           the U.S. may be preferable to the more
   disclosure of fish subsidies, according         measures by governments, however,             restrictive approach taken to state aid
   to a report by Fishsubsidy.org. Under           may not benefit these industries in the       in Europe. He also proposes that an
   the European Transparency Initiative,           long term. “Introducing or increasing         approach focused on preventing changes
   EU member states are obligated to               government support measures to                in government policy that undermine
   publish data on the recipients on fisheries     producers in difficulty will do little to     negotiated market access agreements
   subsidies on dedicated websites,                encourage the industry restructuring          would be preferable to the current WTO
   including the names of beneficiaries            and renewal that is needed to move            system. Such an approach “avoids many
   and the amounts of public funding               towards more viable and sustainable           of the conceptual problems associated
   allocated. In a number of cases, these          business models. It will also not help        with efforts to define subsidies in the
   data is presented in a non-user friendly        address existing overcapacity in the          abstract by offering a natural baseline
   format. In other cases, data is simply          industry,” warns the OECD. But the            against which to measure the existence
   missing. “The publication of names of           OECD offers that the crisis provides          and magnitude of policies that become
   beneficiaries represents real progress in       opportunities for restructuring which will    problematic.”
   budget transparency but this has been           lead to more sustainable construction
   accompanied by a reduction in the quality       and automotive industries, through            The paper, “The Questionable Case for
   and detail of data and its fragmentation        policies that foster entrepreneurship,        Subsidies Regulation: A Comparative
   into dozens of often inaccessible sources.      training, and investments in research and     Perspective”, is available from the SSRN:
   With the responsibility for publication         development.                                  http://papers.ssrn.com/sol3/papers.
   of data - including the choice of data                                                        cfm?abstract_id=1444605
   format - left to member states, European        The report, “Responding to the Economic
   citizens are cast into a maze of different      Crisis - Fostering Industrial Restructuring   Swamped by Subsidies: Averting a
   languages, formats, places and modes            and Renewal”, is available from the           US-EU Trade War after the Great
   of publication,” said the author of the         website of the OECD: http://www.oecd.         Crisis
   report, Brigitte Alfter. Fishsubsidy.org is a   org/document/26/0,3343,en_2649_34173
   project coordinated by EU Transparency,         _43387482_1_1_1_1,00.html                     A Policy Note circulated this summer,
   a non-profit organisation in the UK and                                                       titled “Swamped by Subsidies: Averting
   the Pew Charitable Trusts, a charitable                                                       a US-EU Trade War after the Great
   foundation based in the United States,          The Questionable Case for Subsidies           Crisis”, warns that industrial subsidies,
   which seeks to obtain detailed data             Regulation: A Comparative                     and possibly some financial bailouts,
   relating to payments and recipients of          Perspective                                   could lead to wide-spread litigation at
   fisheries subsidies in Europe make this                                                       the WTO. The authors, Gary Hufbauer,
   data available in a way that are useful to      A paper by Alan O. Sykes, a professor         Luca Rubini and Yee Wong argue that a
   European citizens.                              at Stanford University, argues that the       “cease fire” arrangement is necessary,
                                                   regimes governing subsidies under United      “to forestall trans-Atlantic trade wars that
   For more information, see www.                  States, European and WTO law rely on          could otherwise chill relations over the
   fishsubsidy.org                                 arbitrary guidelines that fail to identify    next decade.” Specifically, the authors
                                                   market-distorting subsidies accurately.       advocate for the United States and
   Responding to the Economic Crisis -             Moreover, Professor Sykes suggests            Europe to pledge not to launch WTO
   Fostering Industrial Restructuring and          that the problem is largely intractable.      cases related to subsidies committed
   Renewal                                         “Due to the complexity of the modern          between January 2008 and December
                                                   economy and the wide panoply of               2009. While difficult to negotiate, the
   A recent report by the OECD                     government activity that both encourages      authors maintain that such an agreement
   examines the impact of the global               and discourages the activities of business    would be preferable years of acrimonious
   economic downturn on the long-term              enterprise, it is arguably impossible         trade relations, marked by disputes such
   competitiveness of the automotive and           to fashion general principles for the         as the Boeing-Airbus cases.



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