Energy Subsidy Reform The Design of Subsidy Rules

Transcription

1 Energy Subsidy Reform The Design of Subsidy Rules This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for Capacity Development courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of the course staff and do not necessarily represent those of the IMF or IMF policy.

2 Overview: 1. Automatic fuel pricing mechanism (AFPM) 1.1. Motivation and objectives of an AFPM 1.2. Design and challenges of an AFPM 2. Smoothing rules 2.1. Smoothing mechanisms: price bands and moving averages 2.2. In practice, how automatic pricing with smoothing rules works? Other smoothing mechanisms 3. Case study 3.1. Pump price volatility, tax volatility and tax level l under different fuel pricing i mechanisms 3.2. Trade-off between tax and price volatility 4. Transition strategy 2

3 1.1 Motivation & Objectives: International oil prices are highly hl volatile International Oil Prices (January 2000=100) Crude oil

4 1.1 Motivation & Objectives:

5 1.2 Design & Challenges: Step 1: specify the pricing formula Table 1. Fuel Price Structure LCU per liter Gasoline Kerosene Diesel CIF import price (1) FOB price Freight, insurance and fees Taxes (2) Custom duty Excise VAT Other fee and charges Domestic margins and transport (3) Margins (distribution and retail) Transport charges and fees = Pump price (LCU per liter) [(1)+(2)+(3)]

6 1.2 Design & Challenges: Where a pricing formula exists, simplify and clean up the formula to show explicitly the subsidy component Table 2. Fuel Price Structure LCU per liter Gasoline Kerosene Diesel Import cost may not reflect supplier price The taxable base and tax level may be underestimated Margins may be too low to ensure profitability and encourage investment in the sector CIF import price (1) FOB price Freight, insurance and fees Taxes (2) Custom duty Excise VAT Other fee and charges Domestic margins and transport (3) Margins (distribution and retail) Transport charges and fees Subsidy y( (4) ## ## ## Pump price (LCU per liter) [(1)+(2)+(3)+(4)]

7 1.2 Design & Challenges: Step 2: adopt a timeline for updating the components of the pricing formula Step 3: establish a rule determining i when and by how much retail prices are changed Consider a price smoothing mechanism to reduce shortterm price volatility Step 4: Create an autonomous body in charge of the application of the pricing mechanism

8 2.1 Types of SMs: Price bands The smoothing rule is applied to the domestic pump prices Can be for instance 3, 5, or 10 percent Excise tax/subsidy component is the adjustor Moving averages The smoothing rule is applied to the import prices Can be for instance 2, 4, or 6 month moving averages Excise tax/subsidy component is the adjustor

9 2.2 Smoothing Rules in Practice: Table 3. Diesel Price Structure LCU per liter Month th1 Month th2 Full passthrough Full passthrough 5 % price band 3 % price band 2 month moving average Price formula CIF import price (1) monthly change (percent) Taxes (2) Domestic margins and transport (3) Pump price (LCU per liter) [(1)+(2)+(3)] monthly change (percent)

10 3. Case Study: Pump price volatility, tax volatility and tax level under different fuel pricing mechanisms 100 Retail Prices Under Alternative Pricing Mechanisms 90 Full pass-through MA6 Historical retail prices PB Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08 Oct-07 Jul-07 Apr-07 Jan-07 Oct-06 Jul-06 Apr-06 Jan-06 Oct-05 Jul-05 Apr-05 Jan-05 Oct-04 Jul-04 Apr-04 Jan-04

11 3. Case Study: Pump price volatility, tax volatility and tax level under different fuel pricing mechanisms Table 5. Price volatility FPT HIST MA2 MA4 MA6 PB3 PB5 PB10 Std. deviation of monthly prices Avg monthly price change (sq) Largest single monthly price increase Avg of 2 largest monthly price inceases Avg of 3 largest monthly price increases Sum of price volatility rank ings Rank order Tax volatility FPT HIST MA2 MA4 MA6 PB3 PB5 PB10 Std. deviation of taxes Avg monthly tax change (sq) Largest single monthly tax decrease Avg of 2 largest monthly tax decreases Avg of 3 largest monthly tax decreases Sum of tax volatility rank ings Rank order Sum of all rankings Overall ranking

12 3. Case Study: Pump price volatility, tax volatility and tax level under different fuel pricing mechanisms Three-month moving average tax levels FPT HIST MA2 MA4 MA6 PB3 PB5 PB10 Lowest 3-month MA tax level Rank Avg of 2 lowest 3-month MA tax levels Rank Avg of 3 lowest 3-month MA tax levels Rank Sum of average tax rankings Sum of all rankings (Table 5) Sum of all rankings Overall ranking