© 2014 International Monetary Fund
Cataloging-in-Publication Data Joint Bank-Fund Library
Getting energy prices right : from principle to practice / Ian Parry, Dirk Heine, Eliza Lis, and Shanjun Li. – Washington, D.C. : International Monetary Fund, c2014.
pages ; cm
Includes bibliographical references.
ISBN: 978-1-48438-857-0
1. Power resources—Prices. I. Parry, Ian. II. Heine, Dirk. III. Lis, Elisa. IV. Li, Shanjun. V. International Monetary Fund.
HD9502.A2 G48 2014
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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Dedication
This book is dedicated to Gary Becker, in appreciation of his inspiring teaching and long-time support of my work on environmental taxes; as my thesis chairman in the early 1990s, he encouraged me to model carbon taxes. Gary had agreed to write an endorsement for this book before his untimely death, his main reservation being the risk that environmental tax revenues might be overused for low-value spending.
Ian Parry
Contents
Foreword
Acknowledgments
Abbreviations
1 Summary for Policymakers
2 Energy Systems, Environmental Problems, and Current Fiscal Policy: A Quick Look
Overview of Energy Systems
Environmental Side Effects
Fiscal Policies Currently Affecting Energy and Transportation
3 Rationale for, and Design of, Fiscal Policy to “Get Energy Prices Right”
Policy Instrument Choice for Environmental Protection
Further Design Issues
Summary
4 Measuring Pollution Damage from Fuel Use
CO2 Damage
Local Air Pollution Damage
Summary
5 Measuring Nonpollution Externalities from Motor Vehicles
Congestion Costs
Accident Costs
Road Damage Costs
Summary
6 The Right Energy Taxes and Their Impacts
Corrective Tax Estimates
Impacts
Summary
7 Concluding Thoughts
Glossary
Index
Tables
4.1. Examples of Mortality Risk Valuations Used in Previous Government Studies
5.1. City-Level Travel Delays and Other Characteristics, Region Average, 1995
5.2. Country-Level Travel Delays and Other Characteristics, Region Average, 2007
5.3. Reviews of Empirical Literature on the Value of Travel Time (VOT)
Figures
1.1. Corrective Fuel Taxes to Reflect Environmental Costs, Selected Countries, 2010
1.2. Impacts of Fuel Tax Reform, Selected Countries, 2010
2.1. Primary Energy Consumption per Capita, Selected Countries, 2010
2.2. Electricity Consumption per Capita, Selected Countries, 2010
2.3. Motor Vehicle Ownership Rates, Selected Countries, 2010
2.4. Share of Final Energy Use by Fuel Type, Selected Countries, 2010
2.5. Carbon Dioxide (CO2) Emissions per Capita, Selected Countries, 2010
2.6. Urban Population, Selected Countries, 2010
2.7. Projected Global Energy-Related CO2 Emissions
2.8. Projected Long-Term Warming above Pre-Industrial Temperatures from Stabilization at Different Greenhouse Gas Concentrations
2.9. Air Pollution Concentrations, Selected Countries, 2010
2.10. Air Pollution Deaths by Region, 2010
2.11. Vehicles and Road Capacity, Selected Countries, 2007
2.12. Road Deaths, Selected Countries, 2010
2.13. Revenue from Environment-Related Taxes as Percent of Total Revenue in OECD Countries, 2010
2.14. Excise Tax Rates on Motor Fuels, 2010
2.15. Subsidies for Fossil Fuel Energy by Region and Fuel Type, 2011
3.1. Illustrated Sources of Fossil Fuel CO2 Reductions under Different Policies
3.3.1. Shape of the Air Pollution Damage Function
3.2. Price Experience in the European Union Emissions Trading System
3.3. Distributional Incidence of Energy Subsidies
4.1. Baseline Mortality Rates for Illnesses Whose Prevalence Is Aggravated by Pollution, Selected Regions, 2010
4.2. Value of Mortality Risk, Selected Countries, 2010
4.3. Damage from Coal Plant Sulfur Dioxide (SO2) Emissions, Selected Countries, 2010
4.4. Damage from Coal Plant Sulfur Dioxide (SO2) Emissions, All Countries, 2010
4.5. Damage from Ground-Level Nitrogen Oxide (NOx) Emissions, Selected Countries, 2010
4.6. Estimated SO2 Damage Relative to China Using the Intake Fraction Approach, 2010
4.7. Estimated SO2 Damage Relative to China Using the TM5-FASST Model, 2010
4.8. SO2 Emissions Rates at Coal Plants, 2010
5.1. Value of Travel Time, Selected Countries, 2010
5.2. Congestion Costs Imposed on Others per Car-Kilometer, Selected Countries, 2010
5.3. Congestion Costs Imposed on Others per Car-Kilometer, All Countries, 2010
5.4. External Accident Costs per Vehicle-Kilometer, Selected Countries, 2010
5.5. External Accident Costs per Kilometer Driven, All Countries, 2010
6.1. Corrective Coal Tax Estimates, Selected Countries, 2010
6.2 Corrective Taxes for Air Pollution at Coal Plants with and without Control Technologies, Selected Countries, 2010
6.3. Breakdown of Air Pollution Damages from Coal by Emissions Type, Selected Countries, 2010
6.4. Corrective Coal Tax Estimates, All Countries, 2010
6.5. Corrective Coal Tax Estimates with Uniform Mortality Values, Selected Countries, 2010
6.6. Corrective Natural Gas Tax Estimates for Power Plants, Selected Countries, 2010
6.7. Corrective Natural Gas Tax Estimates for Power Plants, All Countries, 2010
6.8. Corrective Gasoline Tax Estimates, Selected Countries, 2010
6.9. Corrective Gasoline Tax Estimates, All Countries, 2010
6.10. Corrective Diesel Tax Estimates, Selected Countries, 2010
6.11. Potential Revenue from Corrective Fuel Taxes, Selected Countries, 2010
6.12. Reduction in Pollution-Related Deaths from Corrective Fuel Taxes, Selected Countries, 2010
6.13. Reduction in Energy-Related CO2 Emissions from Corrective Fuel Taxes, Selected Countries, 2010
Boxes
2.1. Broader Environmental Effects beyond the Study Scope
3.1. Environmental Effectiveness of Alternative Instruments: Further Examples
3.2. Defining Economic Costs
3.3. Shape of the Air Pollution Damage Function
3.4. Coverage of Energy Products under the Value-Added Tax (VAT)
3.5. Environmental Tax Shifting in Practice
3.6. Unintended Consequences and Market Price Distortions
3.7. Examples of Distance-Based Charging for Vehicles
3.8. Reconciling Fiscal and Environmental Objectives in Vehicle Taxation
3.9. Pay-as-You-Drive Auto Insurance
3.10. The Energy Paradox Controversy
4.1. Intake Fractions: Some Technicalities
4.2. The Human Capital Approach
4.3. Determinants Other than Income of Mortality Risk Valuation
4.4. Emissions Factors from the GAINS Model
5.1. Broader Costs of Congestion
Appendix Tables
4.1.1. Country Classifications for Baseline, Pollution-Related Mortality Rates
4.2.1. Damage from Local Air Pollution, All Countries, $/ton of Emissions, 2010
5.2.1. Cities in the City-Level Database (Used to Extrapolate Congestion Costs)
5.3.1. Regression Results for City-Level Average Delay
5.3.2. Regression Results for Kilometers Driven per Car
5.4.1. Ratio of Congestion Cost with Multiple Vehicles Relative to Costs when Cars are the Only Vehicle
6.2.1. Corrective Fuel Tax Estimates, All Countries, 2010
6.2.2. Fiscal Impacts of Tax Reform, All Countries, 2010
6.2.3. Health and Environmental Impacts of Tax Reform, All Countries, 2010
6.2.4. Estimates of Current Fuel Excise Taxes, All Countries, 2010
Foreword
The enormous improvement in global living standards over the past 100 years could not have happened without the energy derived from the world’s vast deposits of fossil fuels. Yet, the intense use of energy derived from such sources has brought side effects that pose major social, political, and economic challenges. The imperative is now to find ways to diversify and reduce the use of energy while continuing to eliminate poverty and promote inclusive growth. Within its mandate, the Fund is playing a part in this discussion.
Indeed, energy policies are not new territory for the Fund. We have been emphasizing the large fiscal benefits from removing harmful fuel subsidies for many years, primarily with an eye to saving money for the taxpayer. However, as the external effects of energy use have reached a macrocritical level—whether from environmental degradation, higher food prices, or the threat of climate change—the Fund’s advice has also evolved.
Policymakers face a wide array of options for meeting energy challenges. Given the powerful incentive effect that prices have on economic behavior, the application of basic tax principles is critical. “Getting prices right” means that taxes on fossil fuels should be set at a level such that energy prices reflect their associated environmental side effects.
This economic principle is widely accepted; however, putting it into practice is by itself an intellectual challenge. Here lies the unique contribution of this book. After attempting to quantify the environmental impact of energy use, the authors calibrate, on a country-by-country basis, a system of fuel taxes that balances environmental benefits against economic costs. Where data allow, and with proper caveats, the book estimates appropriate fuel taxes for over 150 countries, and provides a framework for refining these estimates further.
The results confirm that many countries—advanced, emerging, and developing—are only at base camp with regard to getting energy prices right. Importantly, the results also show local air pollution damages, congestion costs, and revenue potential (e.g., in lieu of other taxes) are mostly large enough to warrant higher fuel taxes, even leaving climate concerns aside.
The tools and insights provided here should help us rise to the challenge that the pursuit of more effective energy pricing poses—and to recognize too the opportunities for more sustained, robust, and responsible growth that it presents.
Christine Lagarde
Managing Director International Monetary Fund
Acknowledgments
We are indebted to many people for their help in the preparation of this report.
Paul Johnson and Michael Toman provided many thoughtful comments on the case for, and design of, environmental fiscal instruments in Chapter 3.
Maureen Cropper was especially helpful in suggesting and developing the intake fraction approach in Chapter 4. Nicholas Muller provided valuable feedback, ran the simulations using the TM5-FASST tool, and calibrated various relationships between pollution exposure and mortality risks. Fabian Wagner put great effort into compiling emissions factors for different fuels and different countries using the IIASA model. Ronnie Burnett provided valuable information about findings from the Global Burden of Disease Project on baseline rates of pollution-related mortality by region and evidence on how these rates respond to pollution exposure. Alan Krupnick and Neal Fann also provided many useful comments on the methodology and data sources.
Robin Lindsay and Erik Verhoef also offered many useful suggestions for improving the assessment and discussion of side effects from motor vehicles in Chapter 5. Jianwei Xing provided first-rate research assistance for the estimation of traffic congestion costs.
Saad Alshahrani helped with the estimation of the impacts of fuel tax reform. Martin Petri and Nidhi Kalra provided thoughtful perspectives on the presentation of the results and how they might be made useful for policymakers.
Kelsey Moser helped to produce many of the figures in the report, Louis Sears helped with baseline energy data, and Sherrie Barnes, Maria Delariarte, Maura Ehmer, Mary Fisk, and Madina Thiam assisted in the final preparation of the manuscript.
Participants at an IMF workshop at which an interim version of the report was presented also provided very helpful comments. The workshop participants (aside from those acknowledged above) included Dallas Burtraw, Martina Bosi, Ben Clements, David Coady, David Evans, Marianne Fay, Elizabeth Kopits, Richard Morgenstern, Adele Morris, John Norregaard, Wallace Oates, Jon Strand, Suphachol Suphachalasai, and Ann Wolverton. Maura Ehmer and Pierre Albert helped to organize the workshop.
Glenn Gottselig, Michael Keen, Ruud de Mooij, and Vicki Perry provided especially valuable guidance and suggestions on numerous occasions during the preparation of the report.
Abbreviations
| °C | degrees centigrade |
| CO2 | carbon dioxide |
| ETS | emissions trading system |
| EU | European Union |
| FASST | Fast Scenario Screening Tool |
| GHG | greenhouse gas |
| GJ | gigajoule |
| IPCC | Intergovernmental Panel on Climate Change |
| NOx | nitrogen oxide |
| PAYD | pay as you drive |
| PM | particulate matter |
| PM2.5 | particulate matter with diameter up to 2.5 micrometers |
| ppm | parts per million |
| R&D | research and development |
| SCC | social cost of carbon |
| SO2 | sulfur dioxide |
| U.K. | United Kingdom |
| U.S. | United States |
| VOT | value of travel time |