Fossil fuel subsidies need to be phased out

18 Jun 2014

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Ha Noi, 18 June 2014 – “Fossil fuel subsidies should be phased out and a price set on carbon,” the UN Development Programme (UNDP) in Viet Nam has recommended in a discussion paper launched today.

The paper, “Green Growth and Fossil Fuel Fiscal Policies in Viet Nam - Recommendations for a Roadmap for Policy Reform” argues that despite the Government’s commitment towards green growth and restructuring the energy sector including price reform, there are still substantial indirect subsidies on fossil fuels in the country.

According to the paper, Viet Nam’s energy prices are low compared to other countries in the region. Although there have been significant price increases, average retail prices remained the same during 2008-2013, and are in fact lower than the previous five-year period, when measured against 2002 prices taking into account inflation.

The paper analyzes the significant impacts of fossil fuel subsidies on the economy, environment and health of Vietnamese citizens. “Subsidies result in foregone revenue for the Government and increasing debt of energy State-owned enterprises (SOEs), which will ultimately need to be borne by taxpayers,” says the paper. Indirect subsidies fluctuated between US$1.2 billion and US$4.49 billion annually from 2007 to 2012. It argues that subsidies benefit the rich more than the poor and concludes that subsidies are very costly for Vietnamese citizens.

UN Resident Coordinator in Viet Nam, Dr Pratibha Mehta, underlined the need for current energy reform efforts to be significantly accelerated if Viet Nam was to move towards a more inclusive and sustainable growth trajectory.

The paper highlights several benefits of subsidy reforms and introduction of carbon taxes, including enhanced energy efficiency and supplies, national energy security and higher GDP growth in the medium term. There will also be benefits for citizens’ health, and greenhouse gas emissions that cause climate change will reduce.

The paper emphasizes that fossil fuel fiscal reform requires a lot more than price increases. Liberalizing prices under monopolistic conditions in the absence of strong and independent regulators would further increase inefficiencies without addressing the core obstacles to private and foreign investments into the energy sector.

“Fossil fuel fiscal policy reform requires comprehensive energy sector reform, including enhancing competition in energy markets, improving the efficiency of energy SOEs and introducing cost-reflective and transparent pricing,” Dr Mehta said. “Measures will also be required to protect the poor and vulnerable and the most affected businesses from the short-term adverse effects of energy price increases”.

A key feature of the paper is its concrete options for effective fossil fuel fiscal policy reform. Cash transfers to the poor have recently been reformed by the Government but should be strengthened further as well as integrated into the broader social protection framework. Similarly businesses, in particular small and medium enterprises, will need support to shift towards more energy efficient production, for which existing business support mechanisms in Viet Nam can be boosted.

The paper is based on international findings and extensive research in Viet Nam during the past 3 years. Researchers from the Central Institute for Economic Management (CIEM); the Centre for Analysis and Forecasting under the Viet Nam Academy of Social Sciences (CAF/VASS); the Institute of Energy; the Institute of Finance; the Energy Alliance; the Global Subsidy Initiative/ International Institute for Sustainable Development informed the discussion paper and their research reports were also shared.

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