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Jeremy warford and Zeinab Partow

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Alexander F. Tieman
This paper describes the current state of the Macedonian electricity sector. It looks at ongoing structural changes, driven by the gradual adoption of the EU acquis on energy, and comes up with estimates for electricity subsidies. It concludes by discussing the longer term outlook and sketching policy options.
Philip Daniel, Alan Krupnick, Ms. Thornton Matheson, Peter Mullins, Ian Parry, and Artur Swistak
This paper suggests that the environmental and commercial features of shale gas extraction do not warrant a significantly different fiscal regime than recommended for conventional gas. Fiscal policies may have a role in addressing some environmental risks (e.g., greenhouse gases, scarce water, local air pollution) though in some cases their net benefits may be modest. Simulation analyses suggest, moreover, that special fiscal regimes are generally less important than other factors in determining shale gas investments (hence there appears little need for them), yet they forego significant revenues.
Mr. Manmohan S. Kumar and Kent Osband
Energy exports, which are already the primary source of Soviet convertible currency earnings and an important contributor to the budget, could bring in much more revenue if the Soviet Union were to reduce its extremely high levels of energy consumption. To encourage this process, energy prices need to be raised substantially. Under plausible assumptions, it is shown that an increase in prices could yield sizable foreign exchange earnings. Large increases in energy prices could, however, threaten the solvency of industrial enterprises, precipitate major economic and social dislocation, and severely strain interrepublican economic relationships.
Ian Parry
The United States has pledged to become carbon neutral by 2050, meet sectoral objectives (e.g., for carbon free power, electric vehicles) and encourage greater mitigation among large emitting countries and of international transportation emissions. Fiscal policies at the national, sectoral, and international level could play a critical role in implementing these objectives, along with investment, regulatory, and technology policies. Fiscal instruments are cost-effective, can enhance political acceptability, and do not worsen, or could help alleviate, budgetary pressures. Domestically, a fiscal policy package could contain a mix of economy-wide carbon pricing and revenue-neutral feebates (i.e., tax-subsidy schemes) with the latter reinforcing mitigation in the transport, power, industrial, building, forestry, and agricultural sectors. Internationally, a carbon price floor among large emitters (with flexibility to implement equivalent measures) could effectively scale up global mitigation, while levies/feebates offer a practical approach for reducing maritime and aviation emissions.
Mr. David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang
This paper updates estimates of fossil fuel subsidies, defined as fuel consumption times the gap between existing and efficient prices (i.e., prices warranted by supply costs, environmental costs, and revenue considerations), for 191 countries. Globally, subsidies remained large at $4.7 trillion (6.3 percent of global GDP) in 2015 and are projected at $5.2 trillion (6.5 percent of GDP) in 2017. The largest subsidizers in 2015 were China ($1.4 trillion), United States ($649 billion), Russia ($551 billion), European Union ($289 billion), and India ($209 billion). About three quarters of global subsidies are due to domestic factors—energy pricing reform thus remains largely in countries’ own national interest—while coal and petroleum together account for 85 percent of global subsidies. Efficient fossil fuel pricing in 2015 would have lowered global carbon emissions by 28 percent and fossil fuel air pollution deaths by 46 percent, and increased government revenue by 3.8 percent of GDP.
Davide Furceri and Bin Grace Li
This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.
Ian W.H. Parry, Mr. Chandara Veung, and Mr. Dirk Heine
This paper calculates, for the top twenty emitting countries, how much pricing of carbon dioxide (CO2) emissions is in their own national interests due to domestic co-benefits (leaving aside the global climate benefits). On average, nationally efficient prices are substantial, $57.5 per ton of CO2 (for year 2010), reflecting primarily health co-benefits from reduced air pollution at coal plants and, in some cases, reductions in automobile externalities (net of fuel taxes/subsidies). Pricing co-benefits reduces CO2 emissions from the top twenty emitters by 13.5 percent (a 10.8 percent reduction in global emissions). However, co-benefits vary dramatically across countries (e.g., with population exposure to pollution) and differentiated pricing of CO2 emissions therefore yields higher net benefits (by 23 percent) than uniform pricing. Importantly, the efficiency case for pricing carbon’s co-benefits hinges critically on (i) weak prospects for internalizing other externalities through other pricing instruments and (ii) productive use of carbon pricing revenues.
Mr. Benedict F. W. Bingham, Mr. James Daniel, and Mr. Giulio Federico
This paper examines the case for government-led smoothing of domestic petroleum prices in the face of volatile international prices. Governments in most developing and transition countries engage in petroleum price smoothing, as the survey of country practice carried out for this paper shows. This paper reviews the potential welfare implications of petroleum price volatility, and assesses different price smoothing rules on the basis of historical oil prices. These simulations reveal the presence of a sharp trade-off between price smoothing and fiscal stability, suggesting that developing and transition country governments should engage in limited price smoothing and, if possible, rely on hedging instruments to do so.
Mr. James Daniel
Many governments are heavily exposed to oil price risk, especially those dependent on revenue derived from oil production. For these governments, dealing with large price movements is difficult and costly. Traditional approaches, such as stabilization funds, are inherently flawed. Oil risk markets could be a solution. These markets have matured greatly in the last decade, and their range and depth could allow even substantial producers, and consumers, to hedge their oil price risk. Yet governments have held back from using these markets, mainly for fear of the political cost and lack of know how. This suggests that the IMF, together with other development agencies, should consider encouraging governments to explore the scope for hedging their oil price risk.