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When President Trump announced his decision to pull the US out of the Paris Agreement recently, CGD senior fellow Jonah Busch described the move in a CGD blogpost as a "shameful act of self-harm." Given the chorus of good intentions from other world leaders, as well as governors and mayors in the US, Busch offers advice for how they can step up on climate action, in this edition of the CGD podcast as well as in a follow-up, more forward-looking blogpost How Leaders Condemning Trump’s Paris Pullout Can Match Words with Deeds on Climate.
"It’s great that these many political leaders have signed on,” says Busch, “and I hope that they start turning these into climate action. If they do, they will go a long way toward filling the gap."
Senior Fellow, Director of the US Development Policy Initiative
My other podcast guest, Scott Morris, senior fellow and director of CGD's US Development Policy Initiative, agrees with Busch’s characterization of the president’s decision as harming the US, which, he says, has traditionally shared a sense of common purpose with other countries.
“In my mind, the politics of this globally have very, very wide ramifications beyond climate—and that’s certainly not to sell climate short,” he says. “It’s a hugely consequential issue, but it really implicates a much wider issue where the modus operandi, particularly as a leader among nations, has been to work in this community of nations. And what we are seeing from this administration in the very justification for the withdrawal is a flat out rejection of that approach. And that really is deeply concerning for a wider range of issues.”
Fuel subsidies are bad for the planet, expensive, and often regressive. With new, high-frequency price data researchers explore why they’re also so hard to kill.
Economists rarely reach the kind of consensus that we see on the topic of fuel subsidies. Bottom line: they’re a really bad idea. On the one hand, they encourage us to burn more fossil fuels and kill the planet, and on the other hand, they’re a massive drain of fiscal resources—equivalent to 6.5 percent of global GDP according to the most eye-popping IMF estimates—that are very poorly targeted at the poor.
Yet attempts to roll back subsidies often provoke strong political backlash. Movements from the Arab Spring in Jordan to Occupy Nigeria have marshalled popular resistance to raising fuel prices, and generally won.
So in the wake of the Paris accord, are countries doing anything to unravel these inefficient subsidies? At a CGD event this week organized by my colleague Todd Moss, Michael Ross of UCLA presented his multi-year project with Paasha Mahdavi of Georgetown and others to gather high-frequency gasoline prices from 157 countries around the world since 2003.
Global fuel subsidies are falling—but mostly due to a falling market price in the face of fixed price ceilings, not politically difficult reform
Two things jump out from the visualizations of their data that Ross, coauthor Chad Hazlett, and Mahdavi present in their recent paper in the journal Nature Energy.
First, the price you pay at the pump in most countries is higher than the global benchmark price of fuel, i.e., most countries are net taxers—not subsidizers of fuel. As it turns out, 95 percent of global fuel subsidies are concentrated in just 22 countries, all of which are also oil exporters. (Note the definition of a subsidy here is more restrictive than the expansive definition that IMF researchers use to get to 6.5 percent of GDP.)
Figure 1: Gasoline prices by country and benchmark price trends over time – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Individual country price trends are shown in grey, and the global benchmark price is plotted in red. Countries fall into two groups: those with prices above the benchmark (who tax gasoline) and those below it (who subsidize it). The overall shape of many trend lines is driven by changes in benchmark price. In general, countries that tax gasoline also allow the price to fluctuate in tandem with global prices, while those that subsidize gasoline keep their prices fixed for long periods. All prices are in constant 2015 USD per litre.”
Second, the lower lines are much less squiggly. That means that countries which subsidize fuel, by charging a retail price below the world price, tend not to let the price move with market fluctuations—whereas taxes are more often defined in proportional terms.
Fixing the retail price has an interesting side-effect: when the world price of fuel drops, the subsidy—defined as the gap between the world price and the retail price—automatically falls. Cheaper gas masquerades as subsidy reform! Mahdavi et al note that most reductions in fuel subsidies since 2014 have come from this phenomenon—which is fine from a fiscal perspective, but isn't going to save the planet or our lungs from air pollution.
Figure 2: Net taxes and subsidies by country in 2003 versus 2015 – Ross et al (2017)
Source: reproduced from Ross et al (2017): “Eighty-three countries increased their net taxes or reduced their net subsidies between the first six months of 2015 and the first six months of 2003; they are shown in blue and lie above the 45◦ dashed line. By contrast, 46 countries reduced net taxes or increased net subsidies over the same period, and are shown in dark orange below the 45◦ line. While most countries had net taxes in both periods (placing them in the upper-right quadrant), 14 countries had subsidies in both periods (placing them in the lower-left quadrant). Just two countries changed from net taxers to net subsidizers (lower-right quadrant) while two others changed from net subsidizers to net taxers (upper-left quadrant). Text size is proportional to average gasoline consumption.”
Overall, are things getting better or not? The short answer is yes, but slowly. From 2003 to 2015, most countries started and ended as net taxers. And countries gradually raised gas taxes, shown by the cloud of names above the diagonal line in the upper-right quadrant. But most countries who started off with net subsidies kept those subsidies, as see in the population of the bottom left quadrant relative to the upper left.
So why do governments subsidize fuel? And why are climate-killing, anti-poor subsidies considered vaguely left-of-center and populist?
The proximate cause is obvious: attempts to remove subsidies are often met with angry protests. Subsidies are politically popular. But at a deeper level, why?
Trust in government appears to be one factor. In a forthcoming paper in Comparative Political Studies, Jordan Kyle looks at public support for replacing fuel subsidies in Indonesia with a targeted transfer program—in which, crucially, monies would have to pass through local government. Kyle documents large variation in corruption in existing programs and finds that this corruption is highly predictive of support for fuel subsidy reform. In villages where transfers tend to go missing, poor households in particular would prefer to keep inefficient fuel subsidies than move to a transfer system.
In a separate project in Tanzania with colleagues Nancy Birdsall, Jim Fishkin from Stanford, and Mujobu Moyo, we found hints of a similar dynamic: citizens who have more trust in the current government were more supportive of exporting Tanzania’s recently discovered natural gas reserves and using the money for other purposes—whereas those with low trust were somewhat more inclined toward using the gas on shore or subsidizing fuel.
The technocratic hope, embodied in India’s Aadhaar system of biometric identification, is that new technology will make it possible to replace inefficient subsidies with reliable electronic transfers that don’t leak and are beyond the reach of local corruption and rent-seeking. My colleagues Neeraj Mittal, Anit Mukherjee, and Alan Gelb have documented in detail how the Indian government has pursued this goal with the reform of cooking fuel subsidies. The politics of Aadhaar remain contentious to say the least.
Using their price data, Ross and Mahdavi have now turned to exploring the determinants of successful (i.e. lasting) reform, asking who raises the retail price of gas and when? That work is still in process, but preliminary results suggest a few factors. Reform is more likely when prices are low (so a price hike is less painful), countries face sovereign risk (so the expense of subsidies bites), and elections are far off.
At the end of the seminar, Ross noted that so far their model has very little explanatory power. A slew of political and economic factors can't seem to predict when fuel subsidy reform will happen. And that seems to be a good metaphor for experts’ understanding of this topic more broadly. Fuel subsidies are bad economics. They cost gobs of money, increase carbon emissions, and fail to reach the poor. But they remain popular, often with the people we think benefit the least.
Of course, the world hasn’t stood still since we hit “send” on our manuscript in October 2016. The scientific and economic literature on the importance of forests for climate and development continues to grow. More noticeably, near-term politics have shifted in decidedly unhelpful ways, dominated by the new American presidential administration. However, the fundamental messages of our book remain as important and urgent as ever: tropical forests are an undervalued asset for fighting climate change and promoting development, and payment-for-performance finance holds promise as a way for rich countries to partner with developing countries to reduce deforestation.
If we were to write a second edition to Why Forests? Why Now? today we’d have plenty of new material to add. Chapter by chapter, here’s a roundup of a few of the most significant developments of 2017:
New evidence confirms that tropical deforestation is a big part of the climate problem—and tropical forests are an even bigger part of the solution.
In Chapter 2 we described how carbon dioxide emissions from tropical deforestation are a large share of the climate problem and keeping tropical forests standing can be an even larger share of the potential solution. New research is showing how deforestation warms the planet in more ways than just by releasing carbon dioxide: Natalie Mahawold and her colleagues quantified how tropical deforestation affects the climate through methane and nitrous oxide emissions, while Natalie Schultz and her colleagues quantified the effect of deforestation on local temperatures, with daytime heating exceeding nighttime cooling, especially in the tropics. New studies have affirmed the critical role of forest protection in meeting the goals of the Paris climate agreement: avoiding deforestation and other land-based climate solutions can contribute more than one-third of the abatement needed to meet a 2 ˚C climate goal, according to Bronson Griscom and his colleagues, and one-quarter of the abatement needed to meet a 1.5 ˚C target, according to Stephanie Roe and her colleagues.
Even more links have emerged between tropical forests and development.
Forests are still the best option for carbon capture and storage.
In Chapter 5 we showed how reducing deforestation can make the global response to climate change cheaper, cooler, and faster. We illustrated how forest protection is far more ready than other carbon-capture-and-storage prospects with a comparison to the ill-fated Kemper “clean coal” plant in Mississippi. After years of delays, cost overruns, and corruption allegations, the Kemper CCS project was finally shuttered in June 2017. The pan-tropical modeling by Jonah Busch and Jens Engelmann that underpinned the book’s estimates of how much deforestation could be reduced where and at what cost was published in Environmental Research Letters in December.
A field trial shows that paying to keep trees standing pays off.
In Chapter 6 we recounted the history of decades of initiatives intended to “make forests worth more alive than dead”—non-timber forest products, bioprospecting, ecotourism, and the like. A new paper by Seema Jayachandran and her colleagues was the first to evaluate the cost-effectiveness of payments for ecosystem services using the gold-standard randomized controlled trial method, finding that emissions could be avoided for $2.60 per ton of carbon dioxide by paying landowners in Uganda to keep trees standing on their property. This adds another strand to a rope of evidence finding that forest protection offers plentiful emission reductions for less than $10/ton.
New research indicates that formalizing indigenous land rights can make a difference in reducing deforestation.
In Chapter 7 we presented approaches that have been shown to stop deforestation, both in Brazil and beyond. These include designating protected areas, recognizing the territories of indigenous peoples, enforcing forest laws, and paying land owners for their forests’ ecosystem services, as well as limiting the destructive potential of roads and clearing for the production of agricultural commodities. Empirical evidence on the effect of formalizing greater land rights for indigenous people is nascent, but that’s starting to change. Allan Blackman and his colleagues showed that awarding land title to indigenous people reduced deforestation in Peru.
Progress toward deforestation-free commodity supply chains is moving slowly.
In Chapter 8 we described how global demand for commodities produced in the tropics is a key driver of deforestation, and how perverse policies in consumer countries such as biofuel subsidies exacerbate the problem. We also identified “demand-side” policies that could be part of the solution by providing incentives for legal and sustainable production. A 2016 assessment documented slow progress toward achieving corporate targets to get deforestation out of commodity supply chains, and multi-stakeholder coalitions are now focusing their attention on implementation at the scale of subnational jurisdictions.
The action on REDD+ is now at the country level.
In Chapter 9 we recounted the fraught history of international negotiations on forests, and how the link to climate change shifted a confrontational dynamic to one of cooperation on Reducing Emissions from Deforestation and forest Degradation (REDD+). With endorsement of REDD+ in the Paris Agreement, the center of gravity has shifted to country-level implementation in the context of Nationally Determined Contributions toward the goals of the Agreement. More than two dozen countries have now submitted reference levels to the UNFCCC as a step towards eligibility for results-based payments under REDD+, although many are incomplete.
Forest politics remain volatile in Brazil and Indonesia.
In Chapter 10 we analyzed the political economy of forest resource management in developing countries, with a particular focus on Brazil and Indonesia. In both countries, domestic constituencies for forest conservation have continued to struggle against the forces of deforestation-as-usual, while international actors have applied a mixture of carrots and sticks to incentivize reform. In Brazil, an uptick in deforestation in 2016, attributed in part to law enforcement leniency in the midst of a broader political and economic crisis, led to a decrease in performance-based REDD+ payments in accordance with the provisions of its agreement with Norway. In 2016, Indonesia became the first country in the world to obtain the right to issue licenses for the export of legally certified timber to the European Union, reflecting progress in addressing illegal logging. In 2017, government efforts to protect carbon-rich peatlands were dealt a setback when, in the face of industry pressure, the Supreme Court struck down a 2017 ministerial regulation imposing new obligations on holders of fast-growing timber concessions.
In the US, hopes for action on forests and climate have shifted to non-federal leadership.
In Chapter 11 we focused on the politics of REDD+ finance in rich countries, describing how recognition of reduced tropical deforestation as a cost-effective climate mitigation option layered on top of existing rationales for international cooperation to protect forests, such as conservation of biodiversity. In 2017, support for international cooperation on forests weathered national elections in Norway, Germany, and the United Kingdom. In contrast, the unexpected results of the US 2016 presidential election, and the subsequent announcement of the Trump administration’s intention to withdraw from the Paris Agreement, dashed any hopes of stepping up US finance for forests and climate change. However, the abdication of climate leadership at the federal level has injected new energy into non-federal initiatives such as the State of California’s cap-and-trade program, which is now linked to the Canadian provinces of Quebec and Ontario, and retains the possibility of including international forest offsets in the future.
The missing piece? It’s still finance.
In Chapter 12 we described how the availability of international finance has fallen far short of the amount needed to constitute meaningful incentives for change in tropical forest countries, and how disbursement of pledged REDD+ funds has been slowed by a process of “aidification” by donor agencies. In 2017, the board of the Green Climate Fund approved a $500 million pilot program for results-based payments for REDD+, while a handful of countries inched their way toward concluding the first Emission Reduction Performance Agreements under the Forest Carbon Partnership Facility’s Carbon Fund. And a report assessing progress toward Goals 8 and 9 of the New York Declaration on Forests revealed the continuing large gap between forest mitigation potential and available funding. So finance remains the missing piece.
2018 will no doubt be another exciting year for tropical forests, climate, and development. We invite you to start it off right by downloading a free copy of Why Forests? Why Now?
What will you remember about 2017? The growing crisis of displacement? The US pulling out of the Paris agreement and reinstating the global gag rule on family planning? Or that other countries reaffirmed their commitment to the Paris agreement, that Canada launched a feminist international assistance policy, that Saudi Arabia finally let women drive?
CGD experts have offered analysis and ideas all year, but now it's time to look forward.
What's going to happen in the world of development in 2018? Will we finally understand how to deal equitably with refugees and migrants? Or how technological progress can work for developing countries? Or what the impact of year two of the Trump Administration will be?
Today’s podcast, our final episode of 2017, raises these questions and many more as a multitude of CGD scholars share their insights and hopes for the year ahead. You can preview their responses in the video below.
Thanks for listening. Join us again next year for more episodes of the CGD Podcast.