gasoline subsidy phase-out: environmental and human health ... · overview 1 introduction 2...

Gasoline subsidy phase-out: environmental and humanhealth effects

Mariza Montes de Oca Leon

DIW Berlin

April 19, 2018

Mariza Montes de Oca Leon Gasoline subsidy phase-out April 19, 2018 1 / 16

Overview

1 Introduction

2 Objective, empirical strategy, results

3 Energy reform 2013 and the gasoline market

4 Fiscal reform 2013 and the (explicit) carbon tax

5 The carbon market plans


Introduction

The true cost of gasoline consumption: Gasoline demand estimation for an analysis

of health & climate change policies

Gasoline consumption doubled over the last twenty years generatingNegative local + global externalities, fiscal expenditures.

Fuel subsidies (200 billion pesos in 2011) aggravate this situation as theyincentivize consumption beyond the optimal level.


Introduction

The true cost of gasoline consumption: Gasoline demand estimation for an analysis

of health & climate change policies


Objective, empirical strategy, results

Objective

Purpose: Analyze the effects on welfare of the subsidy and proposewelfare-enhancing alternative policies.



Empirical strategy and results

Gasoline demand estimation

ln[Consumption] =

α + β1ln[Price]t + β2ln[Income]t + β3ln[Psubstitute]t + β4ln[Ppubtransp]t + ε

Econometric technique: Cointegration

Estimate a relationship between non-stationary series and avoid theproblem of spurious regression. more

Results: Short- and long-run price and income elasticities

”Draw” a demand and estimate DWL of subsidyLong-run price elasticity of demand (-)1.1Long-run income elasticity of demand (+) 0.82



Empirical strategy and results II

The subsidy generates a deadweight loss (DWL) of 6 percent of the totaltransfer.The local externality generates a loss ranging between 15 percent and 3.5times the transfer.Policy recommendation: Phase-out the subsidy and introduce a moderatetax of $6 pesos.


Energy reform 2013 and the gasoline market

From (implicit) subsidies to (implicit) carbon taxes

Prices hikes since Dec 2009Subsidy: eliminated starting in mid-2014; 2015 first complete year for whichpositive revenues were created.



Energy reform 2013 and gasoline price liberalization

Energy reform provided an opportunity to formalize a trend of eliminatingsubsidies



Gasoline price liberalization

Energy reform provided an opportunity to formalize a trend of eliminatingsubsidies



Energy reform challenges

Challenges to market competition: ownership of facilities for fueltransportation and storage.

Newcomers: risk of investing in infrastructure while are still manyuncertainties about using Pemex’s facilities in the interim.

Communication challenges: no transparent communication of newimplicit tax

Public opinion: not clear who is getting that gap income (privatesector, government) or where revenues go


Fiscal reform 2013 and the (explicit) carbon tax

Fiscal reform and the (explicit) carbon tax I

Tax on fossil fuel production & imports, not on emissions

Equivalent? In principle yes, but only emissions from combustion,process emissions are left out (e.g. manufacturing cement)

Introduced as one element of a comprehensive tax reform package:significant opposition, but public attention fixated on other taxes.smallskip

Downside: lower salience (Chetty et al.)

Applicable to: manufacturers, producers and importers.

Pemex, CFE & manufacturers (approx. 30 entities) ? liberalization ofenergy market will increase the number of liable entities.



Fiscal reform and the (explicit) carbon tax II

Good direction, but low price (first set at $5.7/tCO2, approved byCongress at US $3.7 /tCO2)

Inefficient signal: initially designed to charge depending on carboncontent of fuels, but discussions in Congress let to different shadowprices for different fuels.

Implicitly capped at 3% of the fuel price (not explicitly in the law)

Yearly adjusted by inflation, not beyond.

Not revenue neutral (but created to avoid raising other taxes), nosimultaneous announcement for climate protection investment.

Liable companies may choose to pay the tax with credits from CDMprojects developed in Mexico.These would be accepted in an amount equivalent to the value ofcredits at the time of paying the tax



CO2 Tax : President’s proposal

Proposed tax MX$ 70.68 /tCO2 (US$ 5.7 dollars)



CO2 Tax: Approved by Congress

US $3.7 /tCO2, introduced exemptions, capped price-change at 3%



What is the carbon tax doing?: Emissions reductions

Current emissions are compared to counterfactual (what would havehappened without carbon tax):

Price elasticities

Income elasticities

Approximately 1.8 million tCO2 per year


The carbon market plans

Third (also explicit) carbon price: the M-ETS

Climate Change Act:

Pilot (2018/9-2020):

Coverage: initially electricity and industrial sectorsNo penalties for non-compliance: ETS cannot damage competitivenessAllocation: potentially large free allocation (benchmarking) for theindustrial sector, small or no for electricity sectorCarbon tax as price floor?

First phase (2021-onwards):

Probably expanding to transportation (strong will to link withCalifornia)?



Present research questions/Future research agenda

Understand demand elasticities under different price change patterns:are small but constant changes having different Qd response thanlarge one-off price changes?

Political economy of fossil fuel subsidy phase-out: Presidentialapproval changes under small but constant Vs presidential approvalchanges under large one-off price changes

Chetty inspiration: are more salient taxes having a larger effect?



Thank you for your time!Mariza Montes de Oca

[email protected]



Cointegration technique

1 Why is it used?

OLS shows R2 high and significant coefficients, but may result in aspurious regression if time series are non-stationary.

Non stationary: have means, variances and covariances that changeover time (depend on t).

has a variance an mean that do not remain near or return to a long-runmean over time

Stationarity: the probability distributions of the stochastic process areequal overtime.

The econometric problem: the G.M. hypothesis of zero serialautocorrelation does not hold anymore

Back to slide


http://www.tylervigen.com/spurious-correlations



1 Cointegration bivariate case

If if two economic variables (yt , xt) are non-stationary or I (1), thelinear combination of them, zt , will be generally I (1).It is possible that certain combinations of those non-stationary seriesare stationary.If a combination of those series is stationary, I(0), then it is said thatthe pair (yt , xt) is cointegrated.Engel-Granger approach:

1) OLS regression2) After estimation the Dickey-Fuller t test aplied to the OLS residuals(MackKinnon table for the critical values, according to the number ofvariables)3) If you can reject the null hypothesis of non-stationarity of the errorterm, you can conclude that the cointegration existsA long-term stable relationship between the variables exist

Error Correction model (ECM)

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1 Cointegration multivariate case

Johansen’s procedureNumerous cointegrating relationships (matrix of cointegrating vectors)Vector Error Correction Model (VECM)

Estimate VARTest for cointegration using Johansen test (if the variables arecointegrated the rank of the matrix is different from zero)Form and analyse VECM

Back to slide



References

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Regressiveness of the subsidy


gasoline subsidy phase-out: environmental and human health ... · overview 1 introduction 2...

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