- Email: [email protected]
Refined oil import subsidies removal in Ghana: A ‘triple’ win?
Journal of Cleaner Production 139 (2016) 113e121
Contents lists available at ScienceDirect
Journal of Cleaner Production journal homepage: www.elsevier.com/locate/jclepro
Refined oil import subsidies removal in Ghana: A ‘triple’ win? Presley K. Wesseh, Jr. a, Boqiang Lin a, * a
Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Fujian, 361005, PR China
a r t i c l e i n f o
a b s t r a c t
Article history: Received 10 September 2015 Received in revised form 9 July 2016 Accepted 2 August 2016 Available online 4 August 2016
In this study, claims and counterclaims that fossil fuel subsidies removal yields benefits in terms of budget deficits, energy efficiency and mitigation are assessed. In order to do this, a global computable general equilibrium (CGE) model has been estimated to evaluate the impact of subsidies removal on imported refined oil in Ghana on prices, carbon dioxide (CO2) emissions, households' demand, firm's production and real GDP. The simulation experiment points to evidence that subsidy removal raises prices, increases the rate of CO2 emissions, reduces households' demand, reduces aggregate output and affects various sectors differently. The increased rate of CO2 emissions due to the removal of subsidies is indicative of the existence of the so-called ‘green paradox’. These results underscore the fact that a removal of subsidies on fossil fuels may win in some regards but fail in others. A general implication from the applied model, therefore, is one which supports the assertion that removal of subsidies on fossil fuels removal on energy should be implemented along with policies aimed at stimulating economic activities and reducing the level of CO2 emissions, especially where there is evidence of the ‘green paradox’. © 2016 Elsevier Ltd. All rights reserved.
Keywords: Fossil fuel subsidies Climate change mitigation Ghana
1. Introduction Ghana is a net oil importer and relies heavily on petroleum products to meet its energy needs (Lin et al., 2014). Increasing pressure on countries to limit their use of fossil fuels and eradicate poverty has incentivized the pursuit of poverty-alleviating mitigation strategies in developing countries; and Ghana is no exception. Achieving green growth pathways can either take the form of massive deployment of renewable energy technologies or improvement in the level of energy efficiency (Wesseh and Lin, 2015). On the contrary, fossil fuel subsidies tend to undermine green development strategies by limiting the attractiveness of renewable energy investment and the need to improve energy efficiency (Lin and Wesseh, 2013a; Wesseh and Lin, 2016a, 2016b; 2016c, 2016d). IEA (2011) estimates that, with a global removal of all fossil fuel subsidies, energy-related CO2 emissions could be cut by 6.9% by 2020. Moreover, there is a general consensus that these subsidies are inefficient for addressing poverty and their reform creates benefits to develop more effective social policies that seek
* Corresponding author. Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Fujian, 361005, PR China. Tel.: þ 86 5922186076; fax: þ86 5922186075. E-mail addresses: [email protected] (P.K. Wesseh,), [email protected], [email protected] (B. Lin). http://dx.doi.org/10.1016/j.jclepro.2016.08.010 0959-6526/© 2016 Elsevier Ltd. All rights reserved.
the needs of the poor. In Africa for instance, approximately 44.2% of fossil fuel subsidies are enjoyed by the richest 20%. The poorest 20%, on the other hand, benefit only 7.8% of these subsidies (AfDB, 2012). The objective of this study is to investigate the economy-wide effects of fossil fuels pricing reform in Ghana and how that impacts CO2 emissions and economic activities in other Sub-Saharan African countries.1 To the authors’ best knowledge and giving the overview of relevant literature discussed in section 3, the present study brings new insights to the existing body of knowledge both in terms of subsidies reform impacts and methodological aspects: First, this study is one of few academic contributions complementing the literature on fossil fuel subsidies that is currently dominated by institutional studies. Considering the role of fuel subsidies and their implications for economic growth and environmental sustainability, there is no doubt that lasting solutions will require the concerted efforts of both academicians and institutional practitioners. Second, the literature has produced mixed results in terms of the environmental and economic impacts of subsidies removal. Hence, the need for more studies to gauge the existing findings cannot be overemphasized. Third, the existing
1 Such an investigation is also driven by the strong connections existing between the use of energy and economic growth (Wesseh and Zoumara, 2012; Lin and Wesseh, 2014; Ngoran et al, 2016).
114
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
Fig. 1. Ghanaian oil consumption by sectors for 2006. Source: Lin et al. (2014).
studies for African countries are not just few but focus exclusively on how price increases due to subsidies removal affects households’ income. In as much as these studies do present significant policy implications, they ignore impacts on very key variables like sectoral output, terms-of-trade and real GDP. The present study would therefore step into this gap. Fourth, existing studies for Africa tend to lower the scope of policy implications by providing no insights on the effects of fuel subsidies reform on environmental quality despite the fact that mitigation serves as one of the key motivations for fossil fuel subsidies reform. The present study therefore proves valuable in this respect. Fifth, unlike the existing studies for Africa which, in most cases, utilize very basic modeling techniques, the approach in the present study represents a more comprehensive framework that incorporates, into the computable general equilibrium model (CGE), intermediate inputs in production and distinguishes between households, trade, capital creation and government. Finally, unless the existing studies for African countries, which fail to distinguish between countries and their trading partners, the global CGE model applied in this study links the Ghanaian economy to neighboring countries and the rest of the world. This offers opportunities for evaluating how domestics policies in Ghana impact neighboring countries and major trading partners. The remainder of the article is organized as follows. Section 2 provides details surrounding Ghanaian fossil fuel subsidies reform process. Section 3 reviews the relevant literature. Section discusses the methods and data used. Simulation results are documented in section 5. In section 6, results from the simulation experiment are discussed. Section 7 draws the conclusions and provides limitations and directions for further research. 2. Fossil fuel subsidies and Ghanaian reform process This section profiles a closer look at Ghanaian fossil fuel subsidies scale, the country's reform process and social programs implemented to mitigate the impacts of price reform on the poor. 2.1. Scale of refined oil import subsidies in Ghana The period spanning 2000e2012 has witnessed substantial difference between import cost and administered price (before taxes and margins); thus, suggesting a substantial amount in subsidies on petroleum products. In fact, the total amount of subsidies paid by the government in 2004 was approximately 2.2% of GDP; meanwhile, an additional 1% of GDP was required to facilitate running of he state-owned Tema Oil Refinery (TOR). Coady and Newhouse (2006) compared the actual prices of petroleum products to their formula prices and documented the required increase
in prices mitigated due to government subsidies. Accordingly, the total amount of subsidies, relative to the formula price, were 17%, 49%, 67%, 50% and 108% for petrol, kerosene, diesel, fuel oil and liquefied petroleum gas (LPG) respectively. As would be discussed later, since the Ghanaian government has planned to continue its policy of cross-subsidization of LPG and kerosene, only ratios for petrol, diesel and fuel oil are included with the calculation for total subsidies for refined oil imports. Using Fig. 1, and given that kerosene and LPG are mainly consumed by the residential sector, it is possible to estimate the scale of subsidies on imported refined oil (excluding kerosene and LPG) utilizing weighted averages. Hence, the total amount of subsidies on imported refined oil can be approximated as follows: Refined oil subsidies ¼ ð0:17þ0:67þ0:50Þ ð0:93Þz42%. In the 3 modeling exercise, a 42% shock to tax on imports of refined oil would therefore implemented as a means of simulating the removal of subsidies on refined oil imports in Ghana. 2.2. Subsidies removal The reform of Ghana's fossil fuel pricing structure came not without several failed attempts. In 2001, an automatic mechanism linking domestic oil prices to world oil prices was set. This led to a rise in ex-refinery petroleum prices. To mitigate the impact of high prices on poor households, kerosene and liquid petroleum gas (LPG), mainly consumed by tow-income groups were crosssubsidized. By the close of 2002, however, increasing international oil prices and their bearing on domestic prices pressurized the Ghanaian government to abolish the new price mechanism. The resulting upward sparrow in TOR's debt encouraged the government to reintroduce the pricing mechanism at the beginning of 2003. This reform in the pricing structure led to a 90% rise in fuel prices, thus, causing real income to fall by 8.5% on average (Laan et al., 2010). Despite cross-subsidization of kerosene and LPG, low-income households were hardest hit by the hike in fuel prices (IMF, 2006). The approaching of national elections coupled with public dissatisfaction over rising fuel prices caused the government to abandon the reform again in 2004 (see Fig. 2). Given the huge burden on public financial resources, the Ghanaian government was determined that subsidies on fossil fuels had to be removed. However, strong opposition from the public against its removal meant that, if the government would succeed in its effort, then a stronger and more pragmatic case against fossil fuel subsidies was needed to win the support of the public. For this reason, help was requested from the IMF. As was mentioned, a case study examining the implications of subsidies removal on various sectors of the economy was conducted; and
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
115
Fig. 2. Ghanaian fuel subsidy reform and price developments (2000e2012). Source: IMF (2013)
findings from the research characterized a massive government campaign to create general awareness on the opportunities of eliminating fossil fuel subsidies. Subsequently, an independent governing body, the National Petroleum Authority (NPA), was established and in 2005 a price control mechanism bent on keeping domestic prices at pace with world prices was set into motion. The creation of the NPA had two implications. First, politically sensitive price increases would be out of the government's control. Second, it would be difficult for future governments to reintroduce fuel subsidies (IMF, 2006). At this point, it has to be mentioned that the reform itself has suffered severe challenges. For instance, the price mechanism was again abandoned in 2007 and 2008 due to increasing international prices. Similarly, for the last two weeks of May and the first two weeks of June 2009, the Ghanaian government had to pay approximately US$ 1.8 million and US$ 5.6 million directly to the NPA respectively for being unable to pass world market price increases through to the domestic market. Similarly, in the last quarter of 2010 and the whole of 2011, the government expenditure to curtail rise in fuel prices on the domestic market amounted to US$ 70 million and US$ 276 million respectively. Following depreciation of the Ghanaian currency, the Cedi, and pressure from IMF, the NPA confirmed in December 2011 that prices at the pump will follow world crude oil prices as long as they stay in the range of
US$ 107e110 per barrel (AfDB, 2012). Details of performance in Ghanaian macroeconomic indicators over the period 2000e2012 are presented in Table 1. 2.3. Social protection measures In order to compensate low-income households for the rise in energy prices due to removal of fuel subsidies, the Ghanaian government promised to implement a number of social policies. These policies include: (i) elimination of fees for state-owned primary and secondary schools (ii) establishment of a price ceiling on public transportation (iii) increment in the number of public buses (iv) investment in healthcare delivery systems; especially in poor areas (v) increment in daily minimum wage from US$ 1.24 to US$ 1.50 (vi) raise the electrification rate of rural areas and (vii) continue its policy of cross-subsidization of LPG and kerosene (AfDB, 2012). 3. Relevant literature So far, the removal of energy subsidies have been discussed in the previous sections but the term itself, however, hasn't been defined yet. IEA (2010a, 2010b) defines energy subsidy as “any government action that lowers the cost of energy production, raises the revenue of energy producers, or lowers the price paid by energy
Table 1 Performance in key Ghanaian macroeconomic indicators (2000e2011).
GDP per capita (JUS) Real GDP growth (percent) Inflation (percent) Overall fiscal balance, cash (percent of GDP) Public debt (in percent of GDP) Current account balance (percent of GDP) Oil imports (percent of GDP) Oil exports (percent of GDP) Oil consumption per capita (liters) Poverty headcount ratio at $1.25 a day (PPP) (percent of population) Source: IMF (2013)
2000
2003
2008
2010
2011
400 4.2 25.2 6.7 123.3 6.6 7.1 0.0 n.a. 39
563 5.1 26.7 3.3 82.8 0.1 5.0 0.0 91.1 n.a.
1,266 8.4 16.5 8.5 33.6 11.9 8.3 0.0 91.4 30
1,358 8.0 10.7 7.2 46.3 8.4 6.9 0.0 98.7 n.a.
1,580 14.4 8.7 4.1 43.4 9.2 8.3 7.2 110.7 n.a.
116
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
consumers”. The current literature points to evidence that fossil fuels account for the vast majority of total energy subsidies; with bulk of the world's fossil fuel subsidies going to non-OECD countries (Lin and Ouyang, 2014; OECD, 1998; Burniaux et al., 1992). Since the pioneering work of Larsen and Shah (1992) which evaluates the impacts of world fossil fuel subsidies on global carbon emissions, dozens of studies now exist that estimate the scale of fossil fuel subsidies, impacts on the environmental, the economy and people's welfare. In terms of the magnitude of subsidies, Myers and Kent (2001) not only estimated the size of energy subsidies but as well documented the motivation for providing energy subsidies. In addition, the authors discussed the implications of global subsidies on various sectors including energy, agriculture and transportation. Following similar line of research, De Moor (2001) investigated the scale of global subsidies, their implications and how such subsidies are distributed between developed and developing countries. Other studies which have estimated the size of subsidies include: WB (1997); UNEP and IEA (2002); Riedy and Diesendorf (2003); EEA (2004); Stern (2006); Vedenov and Wetzstein (2008); WB (2009); Lin and Jiang (2011); Lin and Ouyang (2014) In addition to estimating the scale of subsidies, a number of studies have focused exclusively on the impacts that fossil fuel subsidies removal may have on the environment and the economy. These studies have generally produced mixed results; some suggesting that fossil fuel subsidies removal would reduce the level of CO2 emissions and improve economic growth and welfare while others pointing to evidence that fossil fuel subsidies removal may have very little or no effects on the level of CO2 emissions and welfare. These studies include: Burniaux et al. (1992); Anderson and McKibbin (1997); IEA (1999); Saunders and Schneider (2000); IEA (2001); Clements et al. (2007); OECD (2005); IEA (2006); Morgan (2007); IEA (2008); GSI (2009); Burniaux et al. (2009); IEA (2010a, 2010b); Burniaux and Chanteau (2010); Lin and Li (2012). Despite the fact that developing countries account for bulk of the world's total amount of fossil fuel subsidies, the literature has paid less attention to the effects of subsidies removal in African countries in particular. In reality, there are only a few studies for African countries. For instance, Hope and Singh (1995) conducted a cross-country study on energy price reform in six developing countries including Ghana and Zimbabwe. Although the authors made use of some modeling techniques, their study was based solely on actual subsidy reforms of the 1980s. For all the six countries considered including Ghana and Zimbabwe, the results suggested between 1% and 3% losses in income due to subsidy removal with urban poor being the worst hit. Another crosscountry study conducted by Coady and Newhouse (2006) for Bolivia, Ghana, Jordan, Mali and Sri Lanka simulated both the direct and indirect effects of fossil fuel subsidies removal and pointed to mixed distributional impacts of subsidies removal. Foreshadowing the main results, the authors found that the direct impacts of rising fossil fuel prices on aggregate real income ranged from 0.9% for Mali to 2% for Jordan. While the direct effects of subsidies reform were distributed neutrally in some countries, that is, affecting the rich and poor similarly; in Ghana, Jordan and Sri Lanka, however, the impacts were regressive, affecting the poor more than the rich. On the other hand, the indirect effects of the subsidies removal on prices of goods and services were greater, ranging between 1.1% and 6.7% and appeared to be evenly distributed across the different income groups. In general, the total effects of the subsidies reform (both direct and indirect), which were found to be regressive for all countries, ranged between 2% and 8.5% for Mali and Ghana respectively. Similarly, GSI (2010) conducted a cross-country study to investigate the impacts of subsidies reform on Ghana, France and Senegal. The study reached similar conclusions as Coady and
Newhouse (2006). In a more recent publication, Siddig et al. (2014) evaluated the impacts of removing refined oil import subsidies in Nigeria on poverty and found that reducing fuel subsidies in conjunction with a transfer of income to households, especially poor households, would mitigate some of the negative impacts of fuel subsidies reform. In light of the overview presented above, a number of observations can be made. First, one may clearly notice that the literature on fossil fuel subsidies is dominated by institutional studies; with academicians contributing relatively little to the subject. Giving the importance of subsidies, especially fuel subsidies, and their influence on the economy and environment, there is a need for sufficient high quality academic studies to complement and supplement existing institutional studies. Second, the literature does not fully agree on the specific impacts that fuel subsidies removal may have on economic activities and the environment. While some studies have demonstrated that fuels subsidies removal would boast output and improve environmental quality, others have reported the complete opposite. For this reason, the need for more academic contributions in this field of research is most necessary for reaching consensus, where possible, on the implications of fuel subsidies removal. Third, the existing crosscountry studies which include just few African countries focus exclusively on how price increases due to subsidies removal affects households' income. While one may argue that these studies provide attractive policy implications by distinguishing among household types and various oil products, no attention is paid to addressing impacts on state of the general economy, that is, sectoral output, terms-of-trade and real GDP. Since the rate at which the economy is affected due to improvement or worsening of households’ income will depend on the size of the rise or decline in income itself, it is necessary for studies which assess the economic and welfare impacts of fossil fuel subsidies removal to create balance by as well assessing impacts on terms-of-trade and real GDP. Fourth, the few cross-country studies for Africa have been restricted to addressing the economic and welfare impacts of subsidies removal. Despite the fact that mitigation comes as one of the key motivations for fossil fuel subsidies removal, existing studies for Africa have provided no insights on how fuel subsidies removal affect CO2 emissions in African countries. Fifth, bulk of the institutional studies for Africa have utilized very basic modeling techniques which represents the need to trade off modeling sophistication against time resources and data (Coady and Newhouse, 2006). For our approach in the present paper adds considerable value to CGE modeling by including intermediate inputs in production and distinguishing between households, trade, capital creation and government. In fact, one must not forget the two popular approaches in the literature to studying the impacts of subsidies reform namely: partial equilibrium (PE) modeling and general equilibrium (GE) modeling. Applying a PE model would consider changes in energy markets (price, demand and production) due to subsidy reform (Von Moltke et al., 2004). For our purpose, a GE model would be a more accurate tool for measuring the changes in market for inputs and goods across sectors. Finally, the existing studies for African countries fail to distinguish between countries and their trading partners. In our case, the global computable general equilibrium model adopted links the Ghanaian economy to neighboring countries and the rest of the world. This offers opportunities for evaluating how domestics policies in Ghana impact neighboring countries and major trading partners.2 With regards to the issues inherent in the literature and the
2 Although these results are not presented for the sake of conserving space, they are certainly available upon request from the authors.
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
attempts in the present study to help fill these gaps, this study certainly brings enormous contributions to the existing body of knowledge.
4.1. Important features and structure of CGE models The term general equilibrium is used to describe models in which equilibrium is achieved simultaneously in a number of markets and not just one. Computable general equilibrium (CGE) models therefore attempt to convert models of general equilibrium theory, which are usually abstract, into a more practical and useful tool for policy analysis. The major features of CGE models are: first, the conditions for utility maximization surrounding the expenditure function and the conditions for profit maximization surrounding the cost and GNP functions are used to explicitly build optimization behavior into CGE models. Second, conditions underlying the expenditure and GNP functions indicate the enforcement of economy-wide constraints. Finally, the relationships between sectors are explicitly captured by the system. Also, in each market, the demand and supply completely depends on the relative price vector. For a multiregional CGE model, the basic structure is described as follows: Considering a global economy of M regions indexed by r, let Vr of length F represent a vector of factor endowments in each region r, and let Pr of length N represent a vector of prices in each region r. It is then possible to define the GNP function for each region and this can be given by Gr ðP r ; V r Þ ¼ maxfP r :Y r : V r g; the expenditure function can as well be defined as Er ðP r ; U r Þ ¼ minfP r :Dr : U r g. Ur, in the expenditure function, denotes aggregate utility in region r. Consequently, the aggregate budget constraints become:
r ¼ 1; :::; M
(1)
It is possible to obtain sectoral supply functions using Hotelling's lemma from the first-order conditions to the maximization problem in the GNP function. Similarly, the Hicksian demand functions can be obtained by taking derivatives of the expenditure function, thus, Hicksian net exports become:
Sri ðP r ; V r ; U r Þ ¼ Dri ðP r ; U r Þ Yir ðP r ; V r Þ
i ¼ 1; :::; N;
¼ 1; :::; M
r (2)
Where there is trade, only one price vector, denoted by P, is possible. To guarantee international equilibrium, the following condition is then required: M X
Sri ðP; V r ; U r Þ ¼ 0
i ¼ 1; :::; N
(3)
r¼1
As implied by Walras's law, the above equilibrium conditions may not be independent, as any one of them could be violated. Therefore, it is necessary to declare as a numeraire price, any one element of P. In such case, the solution to the system (equations 1e3) would produce three components namely: net exports, aggregate utility levels and relative price vector. Factor prices can subsequently be derived from the GNP function as:
Wjr ¼ Wjr ðP; V r Þ
j ¼ 1; :::; F;
r ¼ 1; :::; M
by:
Xijr ¼ Xijr W r ; Yir
i ¼ 1; :::; N
j ¼ 1; :::; F
r ¼ 1; :::; M
(5)
In the above model, there are M þ MN þ N þ 2MF þ MFN1 variables. Notwithstanding, the model has only M þ MN þ N þ MF þ MFN1 independent equations. The Vr are exogenous in neoclassical models.
4. Methods and data
Sr ðP r ; V r ; U r Þ ¼ GðP r ; V r Þ Er ðP r ; U r Þ ¼ 0
117
(4)
Given that each sector is assumed to be price taker in the factor markets, it is possible to derive factor demands from taking firstorder derivatives of sectoral cost minimization, i.e., Cir ðW r ; Yir Þ ¼ minfW r :X r : Yir g. Hence, factor demands can be given
4.2. The applied model In this study, the Global Trade Analysis (GTAP), a multiregional CGE model by Hertel (1997) is applied. On the production side of the model, perfect competition and constant returns to scale technology are assumed. In each region, a nested constant elasticity of substitution (CES) function is used to represent sectoral production. The GTAP model also incorporates imperfect substitution between alternative sources of import as well as between domestic and foreign goods (Armington, 1969 assumption). This implies that, based on the factor endowments (land, skilled and unskilled labor, capital and natural resources), a CES composite of imported intermediate and domestically produced goods is used in fixed proportions with a value-added CES composite. The demand side of the model allows total income to be allocated based on fixed value shares across household, savings expenditure and government. The optimization problem then becomes one in which the representative household tries to maximize a constant differences in elasticities (CDE) objective function. For each region, the model is then calibrated to differing price and income elasticities of demand. In this way, a richer description of final demand is guaranteed and consumption becomes a CES composite of imported and domestically produced goods. Although the specifications described in equations (1)e(5) are retained, the model applied in this study is more sophisticated and adds considerable complexity. For instance, the basic structure of CGE models has been modified to include intermediate inputs in production. Another advantage of our applied model over other CGE models is the fact that final demand in the GTAP model is able to distinguish between households, trade, capital creation and government. In general, the focus of the GTAP model is mainly on the interaction among policy variables like subsidies, taxes or quantity restrictions on economic magnitudes like income, trade and employment, etc. Notwithstanding, the absence of environmental features in GTAP has made the process of environmental impacts assessment very complicated. The motivation for using such a model like GTAP is due primarily to the quality of policy data and the level of industrial details inherent in GTAP. This makes the GTAP model more reliable for estimating impacts of subsidies reform on a wide range of economic magnitudes other than environmental quality. For this reason, using the GTAP model in tandem with other models which incorporate information on damages and abatement would present valuable opportunities. To implement the GTAP model, a closure that fixes government savings is applied in order to prevent the subsidy removal from translating into increased government savings. The rationale for adopting such a closure is to reduce the vulnerability of Ghanaian households to the negative consequences of subsidy removal. 4.3. Data The GTAP version 8 database with base year 2007 for 129 regions and 57 sectors provides the data for analysis in this study. Based on the 2005 social accounting matrix (SAM) for Ghana, we aggregate the database into 9 sectors and 14 regions;
118
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
corresponding to sectors and regions of particular relevance to the Ghanaian economy. The regional aggregation represents countries neighboring Ghana and major trading partners. The GTAP database was also used in Wesseh and Lin (2016e). 5. Simulation results In this section, the economy-wide impacts of imported refined oil subsidies removal in Ghana and bearing on Sub-Saharan African countries are documented. The discussion begins with impacts on prices followed by effects on consumption and output. Finally, the repercussions of subsidies removal on major macroeconomic indicators are discussed. 5.1. Impact on prices The results in Table 2 show that removal of imported refined oil subsidies in Ghana would lead to a 36.8%, 17.2% and 0.78% rise in the market price of refined oil, electricity and other fossil fuels in the country. There is also evidence of marginal spillover effects to neighboring countries like Ivory Coast, Nigeria and the rest of SubSaharan Africa. For instance, the subsidies removal in Ghana would lead to a 0.04% reduction in the prices of refined oil and electricity in Ivory Coast; and increase the price of other fossil fuels by 0.02%. Similarly, the prices of refined oil and electricity would reduce by 0.01% and 0.007% in Nigeria while the price of other fossil fuels would increase by 0.004%. For the rest of Sub-Saharan Africa, removal of imported refined oil subsidies in Ghana would have no impact on the price of refined oil; instead, electricity price would reduce by 0.008% while the price of other fossil fuels would increase by 0.005%. 5.2. Impact on household demand Percentage changes in household demand due to imported refined oil subsidies removal in Ghana are reported for different sectors and regions. As may be observed from Table 3, removal of the subsidies reduces household demand for all sectoral outputs in Ghana. The refined oil sector is the hardest hit by the subsidies removal; which lowers household demand for refined oil products by 14.8% followed by a 10.2% and 8.4% reduction in electricity and other fossil fuels demand respectively. For outputs of other Ghanaian sectors such as food & agriculture, mining, manufacturing, construction, water & utilities and services, household demand is reduced by 2.7%, 6.4%, 4.8%, 5.6%, 6.2% and 5.3% respectively. Similar to the analysis presented in the previous section, the spillover effect on demand in other Sub-Saharan African countries is either zero or close to zero.
Table 3 Percentage changes in household demand due to imported refined oil subsidies removal in Ghana. Sector
Ghana
Ivory coast
Nigeria
Rest-Sub-Saharan Africa
Refined oil Electricity Other fossil fuels Food & Agric. Mining Manufacturing Construction Water & Utilities Services
14.79 10.15 8.372 2.667 6.405 4.804 5.627 6.162 5.294
0.001 0 0.012 0 0.003 0.002 0 0 0.001
0.003 0.002 0.004 0 0.002 0 0 0.002 0.001
0.002 0.002 0.004 0.006 0.004 0.008 0.007 0.005 0
Table 4 Percentage changes in production due to imported refined oil subsidies removal in Ghana. Sector
Ghana
Ivory coast
Nigeria
Rest-Sub-Saharan Africa
Refined oil Electricity Other fossil fuels Food & Agric. Mining Manufacturing Construction Water & Utilities Services
16.35 2.893 5.332 5.626 4.770 12.97 51.30 5.667 4.658
0.021 0.043 0.030 0.006 0.538 0.055 0.047 0.029 0.010
0 0.008 0.007 0.001 0.003 0.049 0.026 0.013 0.007
0.013 0.091 0.012 0.016 0.014 0.033 0.056 0.011 0.004
construction activities. On the other hand, sectors like food & agriculture, mining, manufacturing, water & utilities and services seem to benefit from the subsidies removal, as output of these sectors are boasted. Sectoral outputs in neighboring Ivory Coast, Nigeria and the rest of Sub-Saharan Africa are affected differently, albeit marginally. Notwithstanding, there appears to be a stronger spillover effect on the mining sector of neighboring Ivory Coast; whose production is boasted by 0.54% due to imported refined oil subsidies removal in Ghana. 5.4. Impact on real GDP Clearly, Table 5 shows that removal of subsidies on refined oil imports in Ghana causes the Ghanaian real GDP to fall by 6.5% and 1.3% in terms of price index and quantity index respectively. This fall in the Ghanaian real GDP spills over to economic growth in other African countries. For instance, real GDP (price index) in Ivory Coast, Nigeria and the rest of Sub-Saharan Africa declines by 0.04%, 0.04% and 0.01% respectively. 5.5. Impact on CO2 emissions
5.3. Impact on production As indicated in Table 4, removal of subsidies on imported refined oil in Ghana leads to a decline in Ghanaian output of the refined oil, electricity, other fossil fuels and construction sectors. In fact, Ghanaian construction sector seems to suffer the highest decline due to subsidies removal; registering a little over 51% decline in
Table 2 Percentage changes in prices due to imported refined oil subsidies removal in Ghana.
Since the applied model does not directly shed light on how the level of carbon dioxide (CO2) emissions co-move with the removal of subsidies, the impact of subsidies removal on CO2 emissions in Ghana is assessed qualitatively using the data. As discussed in section 2.2, Fig. 2 summarizes different periods in Ghanaian fuel
Table 5 Percentage changes in real GDP due to imported refined oil subsidies removal in Ghana.
Country/Region
Refined oil
Electricity
Other fossil fuels
Country/Region
GDP price index
GDP quantity index
Ghana Ivory Coast Nigeria Rest of Sub-Saharan Africa
36.81 0.037 0.011 0.000
17.17 0.041 0.007 0.008
0.783 0.019 0.004 0.005
Ghana Ivory Coast Nigeria Rest of Sub-Saharan Africa
6.50 0.04 0.01 0.01
1.30 0.02 0 0
million metric tons
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
119
11
25%
10
20%
9
15%
8
10%
7
5%
6
0%
5
-5%
00 20
01 20
02 20
03 20
04 20
05 20
06 20
07 20
08 20
09 20
10 20
11 20
12 20
Total carbon emissions from energy consumption (million metric tons) % change Fig. 3. Total carbon emissions from the consumption of energy. Source: US Energy Information Administration
subsidy reform. For instance, Fig. 2 shows that the reform was implemented in 2001, 2003, 2005e2008 and then 2009e2010. Therefore, in order to evaluate how the removal of fuel subsidies influences the level of CO2 emissions in Ghana, this paper compares periods and subsequent periods of reform with the total amount of CO2 emissions from energy utilization shown in Fig. 3. A closer observation of Fig. 3 shows that total CO2 emissions from energy in Ghana fell by 2.7% the year before the reform. However, after the removal of imported refined oil subsidies in 2001, total CO2 emissions increased by 5.4% in 2002 and 9% from 2002 to 2003. Similarly, the reimplementation of reform in 2003 witnessed a 9.2% surge in total emissions in 2004 and a 0.7% increase from 2004 to 2005. The periods of reform from 2005 to 2008 and 2009e2010, all saw positive changes in the level of CO2 emissions with the highest happening in 2010 e a 21.3% increase in total emissions. In fact, over the period of reform documented in our sample, CO2 emissions has always increased despite the fall in real GDP pointed out in the previous section. The only exception is in 2012 where CO2 emissions fall by 1.6%. Hence, it is difficult to conclude that removal of fossil fuel subsidies in Ghana achieves the goal of CO2 emissions reduction. 6. Discussion Given context conditions realistic to Ghana, this section discusses how and why subsidies removal on imported refined oil affects prices, demand, supply, real GDP and CO2 emissions. First, the results have shown that removal of subsidies on refined oil imports would drastically increase the price of refine oil, electricity and other energy resources in Ghana. This is reasonable since Ghana is still a net-oil importer and relies on oil to satisfy bulk of its energy needs. In other words, an increase in the price of oil driven by subsidies removal would lead to increased electricity and energy prices. The energy substitution effects documented in Lin and Wesseh (2013b) and Wesseh et al. (2013) can also help to explain the increase in electricity and energy resource prices. Second, the results show also that the increase in refined oil prices due to subsidies removal would not only reduce households' demand for refined oil and energy, but as well reduce their demand for all sectoral products. In a country like Ghana where households' income has remained fairly constant, even with no effective means
of developing substitutes for sectoral goods, any increase in price will reduce households’ purchasing power; thereby lowering their demand. Hence, it is not surprising that removal of the subsidies generates reduced demand. Third, on the supply side, there is evidence that subsidies removal affects different sectors differently. The results reported in this study seem to suggest that while sectors like refined oil, electricity, other fossil resources and construction would suffer from the subsidies removal, other sectors like food & agriculture, mining, manufacturing, water & utilities and services stand to gain as outputs of these sectors increase. One would expect the share of fuel in the cost structure of various sectors to dictate the direction and rate at which these sectors are affected by rising oil prices. However, increasing outputs of oil-intensive sectors like mining, manufacturing and transportation (included with the service sector), in the midst of rising oil prices, is a clear manifestation that oil share is not a factor behind the different effects of subsidies removal on different sectors. Instead, the different impacts on different sectors, for the case of Ghana, can be attributed to the manner in which income from subsidies removal is redistributed by the Ghanaian government. Another reason for the increased outputs of oil-intensive sectors, giving high oil prices, could be the existence of the so-called ‘green paradox’ e a situation in which pollution increases as a result of implementing an environmental regulation policy. The ‘green paradox’ is so because polluting units, with the knowledge that they will soon be facing higher costs, try to maximize their use of available fossil fuels within the shortest possible time; thereby raising output, and as such, pollution tends to increase. Fourth, the analysis in this study also reveals that imposing a distortion on refined oil imports (removal of subsidies) leads to a decline in the value of real GDP. As discussed in the previous paragraph, although the removal of subsidies leads to increased output of a number of sectors, the increase is not large enough to boast aggregate output. This happens despite our choice of closure which assumes that government disposable income would increase given the removal of subsidy and that the additional income would be completely spent by the Ghanaian government in similarly proportions as the base data. Fifth, the removal of subsidies on refined oil imports in Ghana seems to be accompanied by an increased rate of CO2 emissions
120
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
despite the corresponding fall in real GDP. This result is surprising and seems to render support for the so-called ‘green paradox’ discussed earlier. Indeed, removal of subsidies to reduce government financial burden and limit the use of fossil fuels tends to incentivize polluting units to pollute more in the short-run, thereby increasing the level of CO2 emissions. Sixth, the study demonstrates that removal of subsidies on refined oil imports in Ghana also affects economic activities in neighboring countries, but very marginally. This is reflective of the relatively small size of the Ghanaian economy and role in international oil markets. Finally, it is expected that the fall in oil prices should limit the need for these subsidies, and as a result, reduce the adverse effects of their removal thereof. In general, the results of this study align well with the law of supply and demand and demonstrate that any distortion to the market, in terms of government intervention, will affect the price mechanism. 7. Conclusions, policy implications and limitation of the study This section draws the conclusions and discusses the major policy debate implied by the article. Also, the limitation of the study and avenues for further research are discussed. 7.1. Conclusions This paper estimates a global CGE model to evaluate the economy-wide impacts of refined oil subsidies removal in Ghana. A closure which fixes government savings to ensure spending of additional government income from subsidies removal is applied. The results show that removal of subsidies on refined oil imports in Ghana would lead to increase in the prices of refined oil, electricity and other fossil energy resources. This, in turn, would reduce households' demand for all sectoral outputs including refined oil and electricity. On the supply side, removal of refined oil subsidies would affect different sectors differently depending on how the Ghanaian government redistributes income from subsidies removal and which sectors are likely to demonstrate evidence of the ‘green paradox’. In fact, contrary to bulk of the literature, the removal of subsidies on refined oil imports seems to increase the rate of CO2 emissions in Ghana; hence, demonstrating evidence of the ‘green paradox’. Despite the applied closure, economic growth declines in general as a result of the subsidies removal. The decline in economic activities in Ghana also affects neighboring countries, albeit marginally. In general, the present study agrees with the institutional studies for Ghana on the point that subsidies removal raises the general price level. In summary, removal of refined oil subsidies in Ghana is likely to reduce the government's financial burden provided the income from subsidies removal is not entirely redistributed. However, there are many reasons from the present study to doubt that subsidies removal in Ghana would reduce CO2 emissions and ensure the efficient use of energy. 7.2. Policy implications The results reported in this study seem to suggest that removal of subsidy on energy should be implemented along with policies aimed at stimulating economic activities and reducing the level of CO2 emissions, especially where there is evidence of the ‘green paradox’.
7.3. Limitation and avenues for future research Despite the contribution of this paper, there are few shortcomings that must be pointed out. In the first place, the study has failed to distinguish between household and refined oil types. For policy purposes, it would be necessary to split households and treat different refined oil products separately. Finally, the present study simulates only one scenario. Hence, the splitting of households and fuel types while simulating a number of policy options with the use of a more recent dataset for Ghana would make a valuable avenue for future research and model improvement. In addition, using the GTAP model in tandem with other models which incorporate information on damages and abatement would present valuable opportunities for future work. Acknowledgements The paper is supported by Newhuadu Business School Research Fund, the Grant for Collaborative Innovation Center for Energy Economics and Energy Policy (No: 1260-Z0210011), Xiamen University Flourish Plan Special Funding (No: 1260-Y07200). References AfDB, 2012. African Development Report. Towards Green Growth in Africa. Anderson, K., McKibbin, W.J., 1997. Reducing Coal Subsidies and Trade Barriers: Their Contribution to Greenhouse Gas Abatement. University of Adelaide, Center for International Economic Studies (CIES). Seminar paper 97-07. Armington, Paul S., 1969. A theory of demand for products distinguished by place of production. Staff Papers (International Monetary Fund) 16 (1), 159e178. Burniaux, J.M., Martin, J.P., Oliveira-Martins, J., 1992. The effects of existing distortions in energy markets on the costs of policies to reduce CO2 emissions: evidence from GREEN. OECD Econ. Stud. 19, 142e164. Burniaux, J.M., Chanteau, J., Dellink, R., Duval, R., Jamet, S., 2009. The Economics of Climate Change Mitigation: How to Build the Necessary Global Action in a Costeffective Manner. Economics Department. Working Papers No. 701. Burniaux, J.M., Chanteau, J., 2010. Mitigation Potential of Removing Fossil Fuel Subsidies: A General Equilibrium Assessment. Organisation for Economic Cooperation and Development. Clements, B., Jung, H.-S., Gupta, S., 2007. Real and distributive effects of petroleum price liberalization: the case of Indonesia. Dev. Econ. 45, 220e237. Coady, D., Newhouse, D., 2006. Evaluating the fiscal and social costs of increases in domestic fuel prices. In: Coudouel, A., Dani, A., Paternostro, S. (Eds.), Poverty and Social Analysis of Reforms: Lessons and Examples from Implementation. World Bank, Washington, DC. De Moor, A., 2001. Towards a grand deal on subsidies and climate change. Nat. Resour. Forum 25, 167e176. EEA (Environment Agency), 2004. Energy Subsidies in the European Union: a Brief Overview. EEA, Copenhagen. GSI (Global Subsidies Initiative), 2009. Achieving the G-20 Call to Phase Out Subsidies to Fossil Fuels. International Institute for Sustainable Development, Geneva. GSI (Global Subsidies Initiative), 2010. Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France, and Senegalk (Geneva). Hertel, T., 1997. Global Trade Analysis: Modeling and Applications. Cambridge University Press. Hope, E., Singh, B., 1995. Energy Price Increases in Developing Countries, World Bank Policy Research Paper. No. 1442. World Bank, Washington D. C. IEA (International Energy Agency), 1999. World Energy Outlook Insights, Looking at Energy Subsidies: Getting the Prices Right (Paris). IEA (International Energy Agency), 2001. Coal Information. Paris. IEA (International Energy Agency), 2006. World Energy Outlook. Paris. IEA (International Energy Agency), 2008. World Energy Outlook 2008. Paris. IEA (International Energy Agency), 2010a. World Energy Outlook, Paris. IEA (International Energy Agency), 2010b. World Energy Outlook. OECD, Paris. IEA (International Energy Agency), 2011. CO2 Emissions from Fuel Combustion Highlights. IEA, Paris. IMF (International Monetary Fund), 2006. The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka. IMF, Washington, DC. IMF (International Monetary Fund), 2013. Case Studies on Energy Subsidies Reform: Lessons and Implications. Laan, T., Beaton, C., Presta, B., 2010. Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France and Senegal. The Global Subsidy Initiative (GSI) of the International Institute for Sustainable Development (IISD), Geneva, Switzerland. Larsen, B., Shah, A., 1992. World Fossil Fuel Subsidies and Global Carbon Emissions.
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121 Working Papers, WPS 1002, World Development Report. The World Bank, pp. 1e27. http://info.worldbank.org/etools/docs/library/206933/. Lin, B., Jiang, Z., 2011. Estimates of energy subsidies in China and impact of energy subsidy reform. Energy Econ. 33, 273e283. Lin, B., Li, A., 2012. Impacts of removing fossil fuel subsidies on China: how large and how to mitigate? Energy 44, 741e749. Lin, B., Wesseh Jr., P.K., 2013a. Valuing Chinese feed-in tariffs for solar power generation: a real options analysis. Renew. Sustain. Energy Rev. 28, 474e482. Lin, B., Wesseh Jr., P.K., 2013b. Estimates of inter-fuel substitution possibilities in Chinese chemical industry. Energy Econ. 40, 560e568. Lin, B., Wesseh Jr., P.K., 2014. Energy consumption and economic growth in South Africa reexamined: a nonparametric testing approach. Renew. Sustain. Energy Rev. 40, 840e850. Lin, B., Wesseh Jr., P.K., Owusu Appiah, M., 2014. Oil price fluctuation, volatility spillover and the Ghanaian equity market: implication for portfolio management and hedging effectiveness. Energy Econ. 42, 172e182. Lin, B., Ouyang, X., 2014. A revisit of fossil-fuel subsidies in China: challenges and opportunities for energy price reform. Energy Convers. Manag. 82, 124e134. Morgan, T., 2007. Energy Subsidies: Their Magnitude, How They Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform (UNFCCC Secretariat Financial and Technical Support Programme). Myers, N., Kent, J., 2001. Perverse subsidies: how tax dollars can undercut the environment and the economy. Island Press, International Institute for Sustainable Development. Ngoran, S.D., Xue, X.Z., Wesseh Jr., P.K., 2016. Signatures of water resources consumption on sustainable economic growth in Sub-Saharan African countries. Int. J. Sustain. Built Environ 5, 114e122. OECD, 1998. Improving the Environment through Reducing Subsidies. OECD, Paris. OECD, 2005. Environmentally Harmful Subsidies. challenges for reform, Paris. Riedy, C., Diesendorf, M.O., 2003. Financial subsidies to the Australian fossil fuel industry. Energy Policy 31, 125e137. Saunders, M., Schneider, K., 2000. Removing energy subsidies in developing and transition economics. In: ABARE Conference Paper, 23rd Annual IAEE International Conference. International Association of Energy Economics, Sydney. Siddig, K., Aguira, A., Grethe, H., Minor, P., Walmsley, T., 2014. Impacts of removing refined oil import subsidies in Nigeria on poverty. Energy Policy 69, 165e178. Stern, N., 2006. The Economics of Climate Change: the Stern Review. Report to the Cabinet Office, HM Treasury. Cambridge University Press, Cambridge.
121
Available at. http://mudancasclimaticas.cptec.inpe.brwrmclima/pdfs/destaques/ sternreview_report_complete.pdf. UNEP, IEA, 2002. Reforming Energy Subsidy, an Explanatory Summary of the Issues and Challenges in Removing or Modifying Subsidies on Energy that Undermine the Pursuit of Sustainable Development. Paris. Vedenov, D., Wetzstein, M., 2008. Toward an optimal U.S. ethanol fuel subsidy. Energy Econ. 30, 2073e2090. Von Moltke, A., McKee, C., Morgan, T., 2004. Energy Subsidies: Lessons Learned in Assessing Their Impact and Designing Policy Reforms. Greenleaf Publishing, Sheffield. WB (World Bank), 1997. Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development (Washington, DC). WB (World Bank), 2009. World Development Report. Washington, DC. Available at. http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/ EXTWDRS/0,contentMDK:23080183wpagePK:478093wpiPK:wtheSitePK: 477624,00.html. Wesseh Jr., P.K., Zoumara, B., 2012. Causal independence between energy consumption and economic growth in Liberia: evidence from a non-parametric bootstrapped causality test. Energy Policy 50, 518e527. Wesseh Jr., P.K., Lin, B., Owusu Appiah, M., 2013. Delving into Liberia's energy economy: technical change, inter-factor and inter-fuel substitution. Renew. Sust. Energ. Rev. 24, 122e130. Wesseh Jr., P.K., Lin, B., 2015. Renewable energy technologies as beacon of cleaner production: a real options valuation analysis for Liberia. J. Clean. Prod. 90, 300e310. Wesseh Jr., P.K., Lin, B., 2016a. A real options valuation of Chinese wind energy technologies for power generation: do benefits from the feed-in tariffs outweigh costs? J. Clean. Prod. 112, 1591e1599. Wesseh Jr., P.K., Lin, B., 2016b. Can African countries efficiently build their economies on renewable energy? Renew. Sust. Energ. Rev. 54, 161e173. Wesseh Jr., P.K., Lin, B., 2016c. Output and substitution elasticities of energy and implications for renewable energy expansion in the ECOWAS region. Energy Policy 89, 125e137. Wesseh Jr., P.K., Lin, B., 2016d. Factor demand, technical change and inter-fuel substitution in Africa. Renew. Sust. Energ. Rev. 59, 979e991. Wesseh Jr., P.K., Lin, B., 2016e. Modeling environmental policy with and without abatement substitution: a tradeoff between economics and environment? Appl. Energy 167, 34e43.
Contents lists available at ScienceDirect
Journal of Cleaner Production journal homepage: www.elsevier.com/locate/jclepro
Refined oil import subsidies removal in Ghana: A ‘triple’ win? Presley K. Wesseh, Jr. a, Boqiang Lin a, * a
Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Fujian, 361005, PR China
a r t i c l e i n f o
a b s t r a c t
Article history: Received 10 September 2015 Received in revised form 9 July 2016 Accepted 2 August 2016 Available online 4 August 2016
In this study, claims and counterclaims that fossil fuel subsidies removal yields benefits in terms of budget deficits, energy efficiency and mitigation are assessed. In order to do this, a global computable general equilibrium (CGE) model has been estimated to evaluate the impact of subsidies removal on imported refined oil in Ghana on prices, carbon dioxide (CO2) emissions, households' demand, firm's production and real GDP. The simulation experiment points to evidence that subsidy removal raises prices, increases the rate of CO2 emissions, reduces households' demand, reduces aggregate output and affects various sectors differently. The increased rate of CO2 emissions due to the removal of subsidies is indicative of the existence of the so-called ‘green paradox’. These results underscore the fact that a removal of subsidies on fossil fuels may win in some regards but fail in others. A general implication from the applied model, therefore, is one which supports the assertion that removal of subsidies on fossil fuels removal on energy should be implemented along with policies aimed at stimulating economic activities and reducing the level of CO2 emissions, especially where there is evidence of the ‘green paradox’. © 2016 Elsevier Ltd. All rights reserved.
Keywords: Fossil fuel subsidies Climate change mitigation Ghana
1. Introduction Ghana is a net oil importer and relies heavily on petroleum products to meet its energy needs (Lin et al., 2014). Increasing pressure on countries to limit their use of fossil fuels and eradicate poverty has incentivized the pursuit of poverty-alleviating mitigation strategies in developing countries; and Ghana is no exception. Achieving green growth pathways can either take the form of massive deployment of renewable energy technologies or improvement in the level of energy efficiency (Wesseh and Lin, 2015). On the contrary, fossil fuel subsidies tend to undermine green development strategies by limiting the attractiveness of renewable energy investment and the need to improve energy efficiency (Lin and Wesseh, 2013a; Wesseh and Lin, 2016a, 2016b; 2016c, 2016d). IEA (2011) estimates that, with a global removal of all fossil fuel subsidies, energy-related CO2 emissions could be cut by 6.9% by 2020. Moreover, there is a general consensus that these subsidies are inefficient for addressing poverty and their reform creates benefits to develop more effective social policies that seek
* Corresponding author. Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Fujian, 361005, PR China. Tel.: þ 86 5922186076; fax: þ86 5922186075. E-mail addresses: [email protected] (P.K. Wesseh,), [email protected], [email protected] (B. Lin). http://dx.doi.org/10.1016/j.jclepro.2016.08.010 0959-6526/© 2016 Elsevier Ltd. All rights reserved.
the needs of the poor. In Africa for instance, approximately 44.2% of fossil fuel subsidies are enjoyed by the richest 20%. The poorest 20%, on the other hand, benefit only 7.8% of these subsidies (AfDB, 2012). The objective of this study is to investigate the economy-wide effects of fossil fuels pricing reform in Ghana and how that impacts CO2 emissions and economic activities in other Sub-Saharan African countries.1 To the authors’ best knowledge and giving the overview of relevant literature discussed in section 3, the present study brings new insights to the existing body of knowledge both in terms of subsidies reform impacts and methodological aspects: First, this study is one of few academic contributions complementing the literature on fossil fuel subsidies that is currently dominated by institutional studies. Considering the role of fuel subsidies and their implications for economic growth and environmental sustainability, there is no doubt that lasting solutions will require the concerted efforts of both academicians and institutional practitioners. Second, the literature has produced mixed results in terms of the environmental and economic impacts of subsidies removal. Hence, the need for more studies to gauge the existing findings cannot be overemphasized. Third, the existing
1 Such an investigation is also driven by the strong connections existing between the use of energy and economic growth (Wesseh and Zoumara, 2012; Lin and Wesseh, 2014; Ngoran et al, 2016).
114
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
Fig. 1. Ghanaian oil consumption by sectors for 2006. Source: Lin et al. (2014).
studies for African countries are not just few but focus exclusively on how price increases due to subsidies removal affects households’ income. In as much as these studies do present significant policy implications, they ignore impacts on very key variables like sectoral output, terms-of-trade and real GDP. The present study would therefore step into this gap. Fourth, existing studies for Africa tend to lower the scope of policy implications by providing no insights on the effects of fuel subsidies reform on environmental quality despite the fact that mitigation serves as one of the key motivations for fossil fuel subsidies reform. The present study therefore proves valuable in this respect. Fifth, unlike the existing studies for Africa which, in most cases, utilize very basic modeling techniques, the approach in the present study represents a more comprehensive framework that incorporates, into the computable general equilibrium model (CGE), intermediate inputs in production and distinguishes between households, trade, capital creation and government. Finally, unless the existing studies for African countries, which fail to distinguish between countries and their trading partners, the global CGE model applied in this study links the Ghanaian economy to neighboring countries and the rest of the world. This offers opportunities for evaluating how domestics policies in Ghana impact neighboring countries and major trading partners. The remainder of the article is organized as follows. Section 2 provides details surrounding Ghanaian fossil fuel subsidies reform process. Section 3 reviews the relevant literature. Section discusses the methods and data used. Simulation results are documented in section 5. In section 6, results from the simulation experiment are discussed. Section 7 draws the conclusions and provides limitations and directions for further research. 2. Fossil fuel subsidies and Ghanaian reform process This section profiles a closer look at Ghanaian fossil fuel subsidies scale, the country's reform process and social programs implemented to mitigate the impacts of price reform on the poor. 2.1. Scale of refined oil import subsidies in Ghana The period spanning 2000e2012 has witnessed substantial difference between import cost and administered price (before taxes and margins); thus, suggesting a substantial amount in subsidies on petroleum products. In fact, the total amount of subsidies paid by the government in 2004 was approximately 2.2% of GDP; meanwhile, an additional 1% of GDP was required to facilitate running of he state-owned Tema Oil Refinery (TOR). Coady and Newhouse (2006) compared the actual prices of petroleum products to their formula prices and documented the required increase
in prices mitigated due to government subsidies. Accordingly, the total amount of subsidies, relative to the formula price, were 17%, 49%, 67%, 50% and 108% for petrol, kerosene, diesel, fuel oil and liquefied petroleum gas (LPG) respectively. As would be discussed later, since the Ghanaian government has planned to continue its policy of cross-subsidization of LPG and kerosene, only ratios for petrol, diesel and fuel oil are included with the calculation for total subsidies for refined oil imports. Using Fig. 1, and given that kerosene and LPG are mainly consumed by the residential sector, it is possible to estimate the scale of subsidies on imported refined oil (excluding kerosene and LPG) utilizing weighted averages. Hence, the total amount of subsidies on imported refined oil can be approximated as follows: Refined oil subsidies ¼ ð0:17þ0:67þ0:50Þ ð0:93Þz42%. In the 3 modeling exercise, a 42% shock to tax on imports of refined oil would therefore implemented as a means of simulating the removal of subsidies on refined oil imports in Ghana. 2.2. Subsidies removal The reform of Ghana's fossil fuel pricing structure came not without several failed attempts. In 2001, an automatic mechanism linking domestic oil prices to world oil prices was set. This led to a rise in ex-refinery petroleum prices. To mitigate the impact of high prices on poor households, kerosene and liquid petroleum gas (LPG), mainly consumed by tow-income groups were crosssubsidized. By the close of 2002, however, increasing international oil prices and their bearing on domestic prices pressurized the Ghanaian government to abolish the new price mechanism. The resulting upward sparrow in TOR's debt encouraged the government to reintroduce the pricing mechanism at the beginning of 2003. This reform in the pricing structure led to a 90% rise in fuel prices, thus, causing real income to fall by 8.5% on average (Laan et al., 2010). Despite cross-subsidization of kerosene and LPG, low-income households were hardest hit by the hike in fuel prices (IMF, 2006). The approaching of national elections coupled with public dissatisfaction over rising fuel prices caused the government to abandon the reform again in 2004 (see Fig. 2). Given the huge burden on public financial resources, the Ghanaian government was determined that subsidies on fossil fuels had to be removed. However, strong opposition from the public against its removal meant that, if the government would succeed in its effort, then a stronger and more pragmatic case against fossil fuel subsidies was needed to win the support of the public. For this reason, help was requested from the IMF. As was mentioned, a case study examining the implications of subsidies removal on various sectors of the economy was conducted; and
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
115
Fig. 2. Ghanaian fuel subsidy reform and price developments (2000e2012). Source: IMF (2013)
findings from the research characterized a massive government campaign to create general awareness on the opportunities of eliminating fossil fuel subsidies. Subsequently, an independent governing body, the National Petroleum Authority (NPA), was established and in 2005 a price control mechanism bent on keeping domestic prices at pace with world prices was set into motion. The creation of the NPA had two implications. First, politically sensitive price increases would be out of the government's control. Second, it would be difficult for future governments to reintroduce fuel subsidies (IMF, 2006). At this point, it has to be mentioned that the reform itself has suffered severe challenges. For instance, the price mechanism was again abandoned in 2007 and 2008 due to increasing international prices. Similarly, for the last two weeks of May and the first two weeks of June 2009, the Ghanaian government had to pay approximately US$ 1.8 million and US$ 5.6 million directly to the NPA respectively for being unable to pass world market price increases through to the domestic market. Similarly, in the last quarter of 2010 and the whole of 2011, the government expenditure to curtail rise in fuel prices on the domestic market amounted to US$ 70 million and US$ 276 million respectively. Following depreciation of the Ghanaian currency, the Cedi, and pressure from IMF, the NPA confirmed in December 2011 that prices at the pump will follow world crude oil prices as long as they stay in the range of
US$ 107e110 per barrel (AfDB, 2012). Details of performance in Ghanaian macroeconomic indicators over the period 2000e2012 are presented in Table 1. 2.3. Social protection measures In order to compensate low-income households for the rise in energy prices due to removal of fuel subsidies, the Ghanaian government promised to implement a number of social policies. These policies include: (i) elimination of fees for state-owned primary and secondary schools (ii) establishment of a price ceiling on public transportation (iii) increment in the number of public buses (iv) investment in healthcare delivery systems; especially in poor areas (v) increment in daily minimum wage from US$ 1.24 to US$ 1.50 (vi) raise the electrification rate of rural areas and (vii) continue its policy of cross-subsidization of LPG and kerosene (AfDB, 2012). 3. Relevant literature So far, the removal of energy subsidies have been discussed in the previous sections but the term itself, however, hasn't been defined yet. IEA (2010a, 2010b) defines energy subsidy as “any government action that lowers the cost of energy production, raises the revenue of energy producers, or lowers the price paid by energy
Table 1 Performance in key Ghanaian macroeconomic indicators (2000e2011).
GDP per capita (JUS) Real GDP growth (percent) Inflation (percent) Overall fiscal balance, cash (percent of GDP) Public debt (in percent of GDP) Current account balance (percent of GDP) Oil imports (percent of GDP) Oil exports (percent of GDP) Oil consumption per capita (liters) Poverty headcount ratio at $1.25 a day (PPP) (percent of population) Source: IMF (2013)
2000
2003
2008
2010
2011
400 4.2 25.2 6.7 123.3 6.6 7.1 0.0 n.a. 39
563 5.1 26.7 3.3 82.8 0.1 5.0 0.0 91.1 n.a.
1,266 8.4 16.5 8.5 33.6 11.9 8.3 0.0 91.4 30
1,358 8.0 10.7 7.2 46.3 8.4 6.9 0.0 98.7 n.a.
1,580 14.4 8.7 4.1 43.4 9.2 8.3 7.2 110.7 n.a.
116
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
consumers”. The current literature points to evidence that fossil fuels account for the vast majority of total energy subsidies; with bulk of the world's fossil fuel subsidies going to non-OECD countries (Lin and Ouyang, 2014; OECD, 1998; Burniaux et al., 1992). Since the pioneering work of Larsen and Shah (1992) which evaluates the impacts of world fossil fuel subsidies on global carbon emissions, dozens of studies now exist that estimate the scale of fossil fuel subsidies, impacts on the environmental, the economy and people's welfare. In terms of the magnitude of subsidies, Myers and Kent (2001) not only estimated the size of energy subsidies but as well documented the motivation for providing energy subsidies. In addition, the authors discussed the implications of global subsidies on various sectors including energy, agriculture and transportation. Following similar line of research, De Moor (2001) investigated the scale of global subsidies, their implications and how such subsidies are distributed between developed and developing countries. Other studies which have estimated the size of subsidies include: WB (1997); UNEP and IEA (2002); Riedy and Diesendorf (2003); EEA (2004); Stern (2006); Vedenov and Wetzstein (2008); WB (2009); Lin and Jiang (2011); Lin and Ouyang (2014) In addition to estimating the scale of subsidies, a number of studies have focused exclusively on the impacts that fossil fuel subsidies removal may have on the environment and the economy. These studies have generally produced mixed results; some suggesting that fossil fuel subsidies removal would reduce the level of CO2 emissions and improve economic growth and welfare while others pointing to evidence that fossil fuel subsidies removal may have very little or no effects on the level of CO2 emissions and welfare. These studies include: Burniaux et al. (1992); Anderson and McKibbin (1997); IEA (1999); Saunders and Schneider (2000); IEA (2001); Clements et al. (2007); OECD (2005); IEA (2006); Morgan (2007); IEA (2008); GSI (2009); Burniaux et al. (2009); IEA (2010a, 2010b); Burniaux and Chanteau (2010); Lin and Li (2012). Despite the fact that developing countries account for bulk of the world's total amount of fossil fuel subsidies, the literature has paid less attention to the effects of subsidies removal in African countries in particular. In reality, there are only a few studies for African countries. For instance, Hope and Singh (1995) conducted a cross-country study on energy price reform in six developing countries including Ghana and Zimbabwe. Although the authors made use of some modeling techniques, their study was based solely on actual subsidy reforms of the 1980s. For all the six countries considered including Ghana and Zimbabwe, the results suggested between 1% and 3% losses in income due to subsidy removal with urban poor being the worst hit. Another crosscountry study conducted by Coady and Newhouse (2006) for Bolivia, Ghana, Jordan, Mali and Sri Lanka simulated both the direct and indirect effects of fossil fuel subsidies removal and pointed to mixed distributional impacts of subsidies removal. Foreshadowing the main results, the authors found that the direct impacts of rising fossil fuel prices on aggregate real income ranged from 0.9% for Mali to 2% for Jordan. While the direct effects of subsidies reform were distributed neutrally in some countries, that is, affecting the rich and poor similarly; in Ghana, Jordan and Sri Lanka, however, the impacts were regressive, affecting the poor more than the rich. On the other hand, the indirect effects of the subsidies removal on prices of goods and services were greater, ranging between 1.1% and 6.7% and appeared to be evenly distributed across the different income groups. In general, the total effects of the subsidies reform (both direct and indirect), which were found to be regressive for all countries, ranged between 2% and 8.5% for Mali and Ghana respectively. Similarly, GSI (2010) conducted a cross-country study to investigate the impacts of subsidies reform on Ghana, France and Senegal. The study reached similar conclusions as Coady and
Newhouse (2006). In a more recent publication, Siddig et al. (2014) evaluated the impacts of removing refined oil import subsidies in Nigeria on poverty and found that reducing fuel subsidies in conjunction with a transfer of income to households, especially poor households, would mitigate some of the negative impacts of fuel subsidies reform. In light of the overview presented above, a number of observations can be made. First, one may clearly notice that the literature on fossil fuel subsidies is dominated by institutional studies; with academicians contributing relatively little to the subject. Giving the importance of subsidies, especially fuel subsidies, and their influence on the economy and environment, there is a need for sufficient high quality academic studies to complement and supplement existing institutional studies. Second, the literature does not fully agree on the specific impacts that fuel subsidies removal may have on economic activities and the environment. While some studies have demonstrated that fuels subsidies removal would boast output and improve environmental quality, others have reported the complete opposite. For this reason, the need for more academic contributions in this field of research is most necessary for reaching consensus, where possible, on the implications of fuel subsidies removal. Third, the existing crosscountry studies which include just few African countries focus exclusively on how price increases due to subsidies removal affects households' income. While one may argue that these studies provide attractive policy implications by distinguishing among household types and various oil products, no attention is paid to addressing impacts on state of the general economy, that is, sectoral output, terms-of-trade and real GDP. Since the rate at which the economy is affected due to improvement or worsening of households’ income will depend on the size of the rise or decline in income itself, it is necessary for studies which assess the economic and welfare impacts of fossil fuel subsidies removal to create balance by as well assessing impacts on terms-of-trade and real GDP. Fourth, the few cross-country studies for Africa have been restricted to addressing the economic and welfare impacts of subsidies removal. Despite the fact that mitigation comes as one of the key motivations for fossil fuel subsidies removal, existing studies for Africa have provided no insights on how fuel subsidies removal affect CO2 emissions in African countries. Fifth, bulk of the institutional studies for Africa have utilized very basic modeling techniques which represents the need to trade off modeling sophistication against time resources and data (Coady and Newhouse, 2006). For our approach in the present paper adds considerable value to CGE modeling by including intermediate inputs in production and distinguishing between households, trade, capital creation and government. In fact, one must not forget the two popular approaches in the literature to studying the impacts of subsidies reform namely: partial equilibrium (PE) modeling and general equilibrium (GE) modeling. Applying a PE model would consider changes in energy markets (price, demand and production) due to subsidy reform (Von Moltke et al., 2004). For our purpose, a GE model would be a more accurate tool for measuring the changes in market for inputs and goods across sectors. Finally, the existing studies for African countries fail to distinguish between countries and their trading partners. In our case, the global computable general equilibrium model adopted links the Ghanaian economy to neighboring countries and the rest of the world. This offers opportunities for evaluating how domestics policies in Ghana impact neighboring countries and major trading partners.2 With regards to the issues inherent in the literature and the
2 Although these results are not presented for the sake of conserving space, they are certainly available upon request from the authors.
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
attempts in the present study to help fill these gaps, this study certainly brings enormous contributions to the existing body of knowledge.
4.1. Important features and structure of CGE models The term general equilibrium is used to describe models in which equilibrium is achieved simultaneously in a number of markets and not just one. Computable general equilibrium (CGE) models therefore attempt to convert models of general equilibrium theory, which are usually abstract, into a more practical and useful tool for policy analysis. The major features of CGE models are: first, the conditions for utility maximization surrounding the expenditure function and the conditions for profit maximization surrounding the cost and GNP functions are used to explicitly build optimization behavior into CGE models. Second, conditions underlying the expenditure and GNP functions indicate the enforcement of economy-wide constraints. Finally, the relationships between sectors are explicitly captured by the system. Also, in each market, the demand and supply completely depends on the relative price vector. For a multiregional CGE model, the basic structure is described as follows: Considering a global economy of M regions indexed by r, let Vr of length F represent a vector of factor endowments in each region r, and let Pr of length N represent a vector of prices in each region r. It is then possible to define the GNP function for each region and this can be given by Gr ðP r ; V r Þ ¼ maxfP r :Y r : V r g; the expenditure function can as well be defined as Er ðP r ; U r Þ ¼ minfP r :Dr : U r g. Ur, in the expenditure function, denotes aggregate utility in region r. Consequently, the aggregate budget constraints become:
r ¼ 1; :::; M
(1)
It is possible to obtain sectoral supply functions using Hotelling's lemma from the first-order conditions to the maximization problem in the GNP function. Similarly, the Hicksian demand functions can be obtained by taking derivatives of the expenditure function, thus, Hicksian net exports become:
Sri ðP r ; V r ; U r Þ ¼ Dri ðP r ; U r Þ Yir ðP r ; V r Þ
i ¼ 1; :::; N;
¼ 1; :::; M
r (2)
Where there is trade, only one price vector, denoted by P, is possible. To guarantee international equilibrium, the following condition is then required: M X
Sri ðP; V r ; U r Þ ¼ 0
i ¼ 1; :::; N
(3)
r¼1
As implied by Walras's law, the above equilibrium conditions may not be independent, as any one of them could be violated. Therefore, it is necessary to declare as a numeraire price, any one element of P. In such case, the solution to the system (equations 1e3) would produce three components namely: net exports, aggregate utility levels and relative price vector. Factor prices can subsequently be derived from the GNP function as:
Wjr ¼ Wjr ðP; V r Þ
j ¼ 1; :::; F;
r ¼ 1; :::; M
by:
Xijr ¼ Xijr W r ; Yir
i ¼ 1; :::; N
j ¼ 1; :::; F
r ¼ 1; :::; M
(5)
In the above model, there are M þ MN þ N þ 2MF þ MFN1 variables. Notwithstanding, the model has only M þ MN þ N þ MF þ MFN1 independent equations. The Vr are exogenous in neoclassical models.
4. Methods and data
Sr ðP r ; V r ; U r Þ ¼ GðP r ; V r Þ Er ðP r ; U r Þ ¼ 0
117
(4)
Given that each sector is assumed to be price taker in the factor markets, it is possible to derive factor demands from taking firstorder derivatives of sectoral cost minimization, i.e., Cir ðW r ; Yir Þ ¼ minfW r :X r : Yir g. Hence, factor demands can be given
4.2. The applied model In this study, the Global Trade Analysis (GTAP), a multiregional CGE model by Hertel (1997) is applied. On the production side of the model, perfect competition and constant returns to scale technology are assumed. In each region, a nested constant elasticity of substitution (CES) function is used to represent sectoral production. The GTAP model also incorporates imperfect substitution between alternative sources of import as well as between domestic and foreign goods (Armington, 1969 assumption). This implies that, based on the factor endowments (land, skilled and unskilled labor, capital and natural resources), a CES composite of imported intermediate and domestically produced goods is used in fixed proportions with a value-added CES composite. The demand side of the model allows total income to be allocated based on fixed value shares across household, savings expenditure and government. The optimization problem then becomes one in which the representative household tries to maximize a constant differences in elasticities (CDE) objective function. For each region, the model is then calibrated to differing price and income elasticities of demand. In this way, a richer description of final demand is guaranteed and consumption becomes a CES composite of imported and domestically produced goods. Although the specifications described in equations (1)e(5) are retained, the model applied in this study is more sophisticated and adds considerable complexity. For instance, the basic structure of CGE models has been modified to include intermediate inputs in production. Another advantage of our applied model over other CGE models is the fact that final demand in the GTAP model is able to distinguish between households, trade, capital creation and government. In general, the focus of the GTAP model is mainly on the interaction among policy variables like subsidies, taxes or quantity restrictions on economic magnitudes like income, trade and employment, etc. Notwithstanding, the absence of environmental features in GTAP has made the process of environmental impacts assessment very complicated. The motivation for using such a model like GTAP is due primarily to the quality of policy data and the level of industrial details inherent in GTAP. This makes the GTAP model more reliable for estimating impacts of subsidies reform on a wide range of economic magnitudes other than environmental quality. For this reason, using the GTAP model in tandem with other models which incorporate information on damages and abatement would present valuable opportunities. To implement the GTAP model, a closure that fixes government savings is applied in order to prevent the subsidy removal from translating into increased government savings. The rationale for adopting such a closure is to reduce the vulnerability of Ghanaian households to the negative consequences of subsidy removal. 4.3. Data The GTAP version 8 database with base year 2007 for 129 regions and 57 sectors provides the data for analysis in this study. Based on the 2005 social accounting matrix (SAM) for Ghana, we aggregate the database into 9 sectors and 14 regions;
118
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
corresponding to sectors and regions of particular relevance to the Ghanaian economy. The regional aggregation represents countries neighboring Ghana and major trading partners. The GTAP database was also used in Wesseh and Lin (2016e). 5. Simulation results In this section, the economy-wide impacts of imported refined oil subsidies removal in Ghana and bearing on Sub-Saharan African countries are documented. The discussion begins with impacts on prices followed by effects on consumption and output. Finally, the repercussions of subsidies removal on major macroeconomic indicators are discussed. 5.1. Impact on prices The results in Table 2 show that removal of imported refined oil subsidies in Ghana would lead to a 36.8%, 17.2% and 0.78% rise in the market price of refined oil, electricity and other fossil fuels in the country. There is also evidence of marginal spillover effects to neighboring countries like Ivory Coast, Nigeria and the rest of SubSaharan Africa. For instance, the subsidies removal in Ghana would lead to a 0.04% reduction in the prices of refined oil and electricity in Ivory Coast; and increase the price of other fossil fuels by 0.02%. Similarly, the prices of refined oil and electricity would reduce by 0.01% and 0.007% in Nigeria while the price of other fossil fuels would increase by 0.004%. For the rest of Sub-Saharan Africa, removal of imported refined oil subsidies in Ghana would have no impact on the price of refined oil; instead, electricity price would reduce by 0.008% while the price of other fossil fuels would increase by 0.005%. 5.2. Impact on household demand Percentage changes in household demand due to imported refined oil subsidies removal in Ghana are reported for different sectors and regions. As may be observed from Table 3, removal of the subsidies reduces household demand for all sectoral outputs in Ghana. The refined oil sector is the hardest hit by the subsidies removal; which lowers household demand for refined oil products by 14.8% followed by a 10.2% and 8.4% reduction in electricity and other fossil fuels demand respectively. For outputs of other Ghanaian sectors such as food & agriculture, mining, manufacturing, construction, water & utilities and services, household demand is reduced by 2.7%, 6.4%, 4.8%, 5.6%, 6.2% and 5.3% respectively. Similar to the analysis presented in the previous section, the spillover effect on demand in other Sub-Saharan African countries is either zero or close to zero.
Table 3 Percentage changes in household demand due to imported refined oil subsidies removal in Ghana. Sector
Ghana
Ivory coast
Nigeria
Rest-Sub-Saharan Africa
Refined oil Electricity Other fossil fuels Food & Agric. Mining Manufacturing Construction Water & Utilities Services
14.79 10.15 8.372 2.667 6.405 4.804 5.627 6.162 5.294
0.001 0 0.012 0 0.003 0.002 0 0 0.001
0.003 0.002 0.004 0 0.002 0 0 0.002 0.001
0.002 0.002 0.004 0.006 0.004 0.008 0.007 0.005 0
Table 4 Percentage changes in production due to imported refined oil subsidies removal in Ghana. Sector
Ghana
Ivory coast
Nigeria
Rest-Sub-Saharan Africa
Refined oil Electricity Other fossil fuels Food & Agric. Mining Manufacturing Construction Water & Utilities Services
16.35 2.893 5.332 5.626 4.770 12.97 51.30 5.667 4.658
0.021 0.043 0.030 0.006 0.538 0.055 0.047 0.029 0.010
0 0.008 0.007 0.001 0.003 0.049 0.026 0.013 0.007
0.013 0.091 0.012 0.016 0.014 0.033 0.056 0.011 0.004
construction activities. On the other hand, sectors like food & agriculture, mining, manufacturing, water & utilities and services seem to benefit from the subsidies removal, as output of these sectors are boasted. Sectoral outputs in neighboring Ivory Coast, Nigeria and the rest of Sub-Saharan Africa are affected differently, albeit marginally. Notwithstanding, there appears to be a stronger spillover effect on the mining sector of neighboring Ivory Coast; whose production is boasted by 0.54% due to imported refined oil subsidies removal in Ghana. 5.4. Impact on real GDP Clearly, Table 5 shows that removal of subsidies on refined oil imports in Ghana causes the Ghanaian real GDP to fall by 6.5% and 1.3% in terms of price index and quantity index respectively. This fall in the Ghanaian real GDP spills over to economic growth in other African countries. For instance, real GDP (price index) in Ivory Coast, Nigeria and the rest of Sub-Saharan Africa declines by 0.04%, 0.04% and 0.01% respectively. 5.5. Impact on CO2 emissions
5.3. Impact on production As indicated in Table 4, removal of subsidies on imported refined oil in Ghana leads to a decline in Ghanaian output of the refined oil, electricity, other fossil fuels and construction sectors. In fact, Ghanaian construction sector seems to suffer the highest decline due to subsidies removal; registering a little over 51% decline in
Table 2 Percentage changes in prices due to imported refined oil subsidies removal in Ghana.
Since the applied model does not directly shed light on how the level of carbon dioxide (CO2) emissions co-move with the removal of subsidies, the impact of subsidies removal on CO2 emissions in Ghana is assessed qualitatively using the data. As discussed in section 2.2, Fig. 2 summarizes different periods in Ghanaian fuel
Table 5 Percentage changes in real GDP due to imported refined oil subsidies removal in Ghana.
Country/Region
Refined oil
Electricity
Other fossil fuels
Country/Region
GDP price index
GDP quantity index
Ghana Ivory Coast Nigeria Rest of Sub-Saharan Africa
36.81 0.037 0.011 0.000
17.17 0.041 0.007 0.008
0.783 0.019 0.004 0.005
Ghana Ivory Coast Nigeria Rest of Sub-Saharan Africa
6.50 0.04 0.01 0.01
1.30 0.02 0 0
million metric tons
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
119
11
25%
10
20%
9
15%
8
10%
7
5%
6
0%
5
-5%
00 20
01 20
02 20
03 20
04 20
05 20
06 20
07 20
08 20
09 20
10 20
11 20
12 20
Total carbon emissions from energy consumption (million metric tons) % change Fig. 3. Total carbon emissions from the consumption of energy. Source: US Energy Information Administration
subsidy reform. For instance, Fig. 2 shows that the reform was implemented in 2001, 2003, 2005e2008 and then 2009e2010. Therefore, in order to evaluate how the removal of fuel subsidies influences the level of CO2 emissions in Ghana, this paper compares periods and subsequent periods of reform with the total amount of CO2 emissions from energy utilization shown in Fig. 3. A closer observation of Fig. 3 shows that total CO2 emissions from energy in Ghana fell by 2.7% the year before the reform. However, after the removal of imported refined oil subsidies in 2001, total CO2 emissions increased by 5.4% in 2002 and 9% from 2002 to 2003. Similarly, the reimplementation of reform in 2003 witnessed a 9.2% surge in total emissions in 2004 and a 0.7% increase from 2004 to 2005. The periods of reform from 2005 to 2008 and 2009e2010, all saw positive changes in the level of CO2 emissions with the highest happening in 2010 e a 21.3% increase in total emissions. In fact, over the period of reform documented in our sample, CO2 emissions has always increased despite the fall in real GDP pointed out in the previous section. The only exception is in 2012 where CO2 emissions fall by 1.6%. Hence, it is difficult to conclude that removal of fossil fuel subsidies in Ghana achieves the goal of CO2 emissions reduction. 6. Discussion Given context conditions realistic to Ghana, this section discusses how and why subsidies removal on imported refined oil affects prices, demand, supply, real GDP and CO2 emissions. First, the results have shown that removal of subsidies on refined oil imports would drastically increase the price of refine oil, electricity and other energy resources in Ghana. This is reasonable since Ghana is still a net-oil importer and relies on oil to satisfy bulk of its energy needs. In other words, an increase in the price of oil driven by subsidies removal would lead to increased electricity and energy prices. The energy substitution effects documented in Lin and Wesseh (2013b) and Wesseh et al. (2013) can also help to explain the increase in electricity and energy resource prices. Second, the results show also that the increase in refined oil prices due to subsidies removal would not only reduce households' demand for refined oil and energy, but as well reduce their demand for all sectoral products. In a country like Ghana where households' income has remained fairly constant, even with no effective means
of developing substitutes for sectoral goods, any increase in price will reduce households’ purchasing power; thereby lowering their demand. Hence, it is not surprising that removal of the subsidies generates reduced demand. Third, on the supply side, there is evidence that subsidies removal affects different sectors differently. The results reported in this study seem to suggest that while sectors like refined oil, electricity, other fossil resources and construction would suffer from the subsidies removal, other sectors like food & agriculture, mining, manufacturing, water & utilities and services stand to gain as outputs of these sectors increase. One would expect the share of fuel in the cost structure of various sectors to dictate the direction and rate at which these sectors are affected by rising oil prices. However, increasing outputs of oil-intensive sectors like mining, manufacturing and transportation (included with the service sector), in the midst of rising oil prices, is a clear manifestation that oil share is not a factor behind the different effects of subsidies removal on different sectors. Instead, the different impacts on different sectors, for the case of Ghana, can be attributed to the manner in which income from subsidies removal is redistributed by the Ghanaian government. Another reason for the increased outputs of oil-intensive sectors, giving high oil prices, could be the existence of the so-called ‘green paradox’ e a situation in which pollution increases as a result of implementing an environmental regulation policy. The ‘green paradox’ is so because polluting units, with the knowledge that they will soon be facing higher costs, try to maximize their use of available fossil fuels within the shortest possible time; thereby raising output, and as such, pollution tends to increase. Fourth, the analysis in this study also reveals that imposing a distortion on refined oil imports (removal of subsidies) leads to a decline in the value of real GDP. As discussed in the previous paragraph, although the removal of subsidies leads to increased output of a number of sectors, the increase is not large enough to boast aggregate output. This happens despite our choice of closure which assumes that government disposable income would increase given the removal of subsidy and that the additional income would be completely spent by the Ghanaian government in similarly proportions as the base data. Fifth, the removal of subsidies on refined oil imports in Ghana seems to be accompanied by an increased rate of CO2 emissions
120
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121
despite the corresponding fall in real GDP. This result is surprising and seems to render support for the so-called ‘green paradox’ discussed earlier. Indeed, removal of subsidies to reduce government financial burden and limit the use of fossil fuels tends to incentivize polluting units to pollute more in the short-run, thereby increasing the level of CO2 emissions. Sixth, the study demonstrates that removal of subsidies on refined oil imports in Ghana also affects economic activities in neighboring countries, but very marginally. This is reflective of the relatively small size of the Ghanaian economy and role in international oil markets. Finally, it is expected that the fall in oil prices should limit the need for these subsidies, and as a result, reduce the adverse effects of their removal thereof. In general, the results of this study align well with the law of supply and demand and demonstrate that any distortion to the market, in terms of government intervention, will affect the price mechanism. 7. Conclusions, policy implications and limitation of the study This section draws the conclusions and discusses the major policy debate implied by the article. Also, the limitation of the study and avenues for further research are discussed. 7.1. Conclusions This paper estimates a global CGE model to evaluate the economy-wide impacts of refined oil subsidies removal in Ghana. A closure which fixes government savings to ensure spending of additional government income from subsidies removal is applied. The results show that removal of subsidies on refined oil imports in Ghana would lead to increase in the prices of refined oil, electricity and other fossil energy resources. This, in turn, would reduce households' demand for all sectoral outputs including refined oil and electricity. On the supply side, removal of refined oil subsidies would affect different sectors differently depending on how the Ghanaian government redistributes income from subsidies removal and which sectors are likely to demonstrate evidence of the ‘green paradox’. In fact, contrary to bulk of the literature, the removal of subsidies on refined oil imports seems to increase the rate of CO2 emissions in Ghana; hence, demonstrating evidence of the ‘green paradox’. Despite the applied closure, economic growth declines in general as a result of the subsidies removal. The decline in economic activities in Ghana also affects neighboring countries, albeit marginally. In general, the present study agrees with the institutional studies for Ghana on the point that subsidies removal raises the general price level. In summary, removal of refined oil subsidies in Ghana is likely to reduce the government's financial burden provided the income from subsidies removal is not entirely redistributed. However, there are many reasons from the present study to doubt that subsidies removal in Ghana would reduce CO2 emissions and ensure the efficient use of energy. 7.2. Policy implications The results reported in this study seem to suggest that removal of subsidy on energy should be implemented along with policies aimed at stimulating economic activities and reducing the level of CO2 emissions, especially where there is evidence of the ‘green paradox’.
7.3. Limitation and avenues for future research Despite the contribution of this paper, there are few shortcomings that must be pointed out. In the first place, the study has failed to distinguish between household and refined oil types. For policy purposes, it would be necessary to split households and treat different refined oil products separately. Finally, the present study simulates only one scenario. Hence, the splitting of households and fuel types while simulating a number of policy options with the use of a more recent dataset for Ghana would make a valuable avenue for future research and model improvement. In addition, using the GTAP model in tandem with other models which incorporate information on damages and abatement would present valuable opportunities for future work. Acknowledgements The paper is supported by Newhuadu Business School Research Fund, the Grant for Collaborative Innovation Center for Energy Economics and Energy Policy (No: 1260-Z0210011), Xiamen University Flourish Plan Special Funding (No: 1260-Y07200). References AfDB, 2012. African Development Report. Towards Green Growth in Africa. Anderson, K., McKibbin, W.J., 1997. Reducing Coal Subsidies and Trade Barriers: Their Contribution to Greenhouse Gas Abatement. University of Adelaide, Center for International Economic Studies (CIES). Seminar paper 97-07. Armington, Paul S., 1969. A theory of demand for products distinguished by place of production. Staff Papers (International Monetary Fund) 16 (1), 159e178. Burniaux, J.M., Martin, J.P., Oliveira-Martins, J., 1992. The effects of existing distortions in energy markets on the costs of policies to reduce CO2 emissions: evidence from GREEN. OECD Econ. Stud. 19, 142e164. Burniaux, J.M., Chanteau, J., Dellink, R., Duval, R., Jamet, S., 2009. The Economics of Climate Change Mitigation: How to Build the Necessary Global Action in a Costeffective Manner. Economics Department. Working Papers No. 701. Burniaux, J.M., Chanteau, J., 2010. Mitigation Potential of Removing Fossil Fuel Subsidies: A General Equilibrium Assessment. Organisation for Economic Cooperation and Development. Clements, B., Jung, H.-S., Gupta, S., 2007. Real and distributive effects of petroleum price liberalization: the case of Indonesia. Dev. Econ. 45, 220e237. Coady, D., Newhouse, D., 2006. Evaluating the fiscal and social costs of increases in domestic fuel prices. In: Coudouel, A., Dani, A., Paternostro, S. (Eds.), Poverty and Social Analysis of Reforms: Lessons and Examples from Implementation. World Bank, Washington, DC. De Moor, A., 2001. Towards a grand deal on subsidies and climate change. Nat. Resour. Forum 25, 167e176. EEA (Environment Agency), 2004. Energy Subsidies in the European Union: a Brief Overview. EEA, Copenhagen. GSI (Global Subsidies Initiative), 2009. Achieving the G-20 Call to Phase Out Subsidies to Fossil Fuels. International Institute for Sustainable Development, Geneva. GSI (Global Subsidies Initiative), 2010. Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France, and Senegalk (Geneva). Hertel, T., 1997. Global Trade Analysis: Modeling and Applications. Cambridge University Press. Hope, E., Singh, B., 1995. Energy Price Increases in Developing Countries, World Bank Policy Research Paper. No. 1442. World Bank, Washington D. C. IEA (International Energy Agency), 1999. World Energy Outlook Insights, Looking at Energy Subsidies: Getting the Prices Right (Paris). IEA (International Energy Agency), 2001. Coal Information. Paris. IEA (International Energy Agency), 2006. World Energy Outlook. Paris. IEA (International Energy Agency), 2008. World Energy Outlook 2008. Paris. IEA (International Energy Agency), 2010a. World Energy Outlook, Paris. IEA (International Energy Agency), 2010b. World Energy Outlook. OECD, Paris. IEA (International Energy Agency), 2011. CO2 Emissions from Fuel Combustion Highlights. IEA, Paris. IMF (International Monetary Fund), 2006. The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka. IMF, Washington, DC. IMF (International Monetary Fund), 2013. Case Studies on Energy Subsidies Reform: Lessons and Implications. Laan, T., Beaton, C., Presta, B., 2010. Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France and Senegal. The Global Subsidy Initiative (GSI) of the International Institute for Sustainable Development (IISD), Geneva, Switzerland. Larsen, B., Shah, A., 1992. World Fossil Fuel Subsidies and Global Carbon Emissions.
P.K. Wesseh, Jr., B. Lin / Journal of Cleaner Production 139 (2016) 113e121 Working Papers, WPS 1002, World Development Report. The World Bank, pp. 1e27. http://info.worldbank.org/etools/docs/library/206933/. Lin, B., Jiang, Z., 2011. Estimates of energy subsidies in China and impact of energy subsidy reform. Energy Econ. 33, 273e283. Lin, B., Li, A., 2012. Impacts of removing fossil fuel subsidies on China: how large and how to mitigate? Energy 44, 741e749. Lin, B., Wesseh Jr., P.K., 2013a. Valuing Chinese feed-in tariffs for solar power generation: a real options analysis. Renew. Sustain. Energy Rev. 28, 474e482. Lin, B., Wesseh Jr., P.K., 2013b. Estimates of inter-fuel substitution possibilities in Chinese chemical industry. Energy Econ. 40, 560e568. Lin, B., Wesseh Jr., P.K., 2014. Energy consumption and economic growth in South Africa reexamined: a nonparametric testing approach. Renew. Sustain. Energy Rev. 40, 840e850. Lin, B., Wesseh Jr., P.K., Owusu Appiah, M., 2014. Oil price fluctuation, volatility spillover and the Ghanaian equity market: implication for portfolio management and hedging effectiveness. Energy Econ. 42, 172e182. Lin, B., Ouyang, X., 2014. A revisit of fossil-fuel subsidies in China: challenges and opportunities for energy price reform. Energy Convers. Manag. 82, 124e134. Morgan, T., 2007. Energy Subsidies: Their Magnitude, How They Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform (UNFCCC Secretariat Financial and Technical Support Programme). Myers, N., Kent, J., 2001. Perverse subsidies: how tax dollars can undercut the environment and the economy. Island Press, International Institute for Sustainable Development. Ngoran, S.D., Xue, X.Z., Wesseh Jr., P.K., 2016. Signatures of water resources consumption on sustainable economic growth in Sub-Saharan African countries. Int. J. Sustain. Built Environ 5, 114e122. OECD, 1998. Improving the Environment through Reducing Subsidies. OECD, Paris. OECD, 2005. Environmentally Harmful Subsidies. challenges for reform, Paris. Riedy, C., Diesendorf, M.O., 2003. Financial subsidies to the Australian fossil fuel industry. Energy Policy 31, 125e137. Saunders, M., Schneider, K., 2000. Removing energy subsidies in developing and transition economics. In: ABARE Conference Paper, 23rd Annual IAEE International Conference. International Association of Energy Economics, Sydney. Siddig, K., Aguira, A., Grethe, H., Minor, P., Walmsley, T., 2014. Impacts of removing refined oil import subsidies in Nigeria on poverty. Energy Policy 69, 165e178. Stern, N., 2006. The Economics of Climate Change: the Stern Review. Report to the Cabinet Office, HM Treasury. Cambridge University Press, Cambridge.
121
Available at. http://mudancasclimaticas.cptec.inpe.brwrmclima/pdfs/destaques/ sternreview_report_complete.pdf. UNEP, IEA, 2002. Reforming Energy Subsidy, an Explanatory Summary of the Issues and Challenges in Removing or Modifying Subsidies on Energy that Undermine the Pursuit of Sustainable Development. Paris. Vedenov, D., Wetzstein, M., 2008. Toward an optimal U.S. ethanol fuel subsidy. Energy Econ. 30, 2073e2090. Von Moltke, A., McKee, C., Morgan, T., 2004. Energy Subsidies: Lessons Learned in Assessing Their Impact and Designing Policy Reforms. Greenleaf Publishing, Sheffield. WB (World Bank), 1997. Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development (Washington, DC). WB (World Bank), 2009. World Development Report. Washington, DC. Available at. http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/ EXTWDRS/0,contentMDK:23080183wpagePK:478093wpiPK:wtheSitePK: 477624,00.html. Wesseh Jr., P.K., Zoumara, B., 2012. Causal independence between energy consumption and economic growth in Liberia: evidence from a non-parametric bootstrapped causality test. Energy Policy 50, 518e527. Wesseh Jr., P.K., Lin, B., Owusu Appiah, M., 2013. Delving into Liberia's energy economy: technical change, inter-factor and inter-fuel substitution. Renew. Sust. Energ. Rev. 24, 122e130. Wesseh Jr., P.K., Lin, B., 2015. Renewable energy technologies as beacon of cleaner production: a real options valuation analysis for Liberia. J. Clean. Prod. 90, 300e310. Wesseh Jr., P.K., Lin, B., 2016a. A real options valuation of Chinese wind energy technologies for power generation: do benefits from the feed-in tariffs outweigh costs? J. Clean. Prod. 112, 1591e1599. Wesseh Jr., P.K., Lin, B., 2016b. Can African countries efficiently build their economies on renewable energy? Renew. Sust. Energ. Rev. 54, 161e173. Wesseh Jr., P.K., Lin, B., 2016c. Output and substitution elasticities of energy and implications for renewable energy expansion in the ECOWAS region. Energy Policy 89, 125e137. Wesseh Jr., P.K., Lin, B., 2016d. Factor demand, technical change and inter-fuel substitution in Africa. Renew. Sust. Energ. Rev. 59, 979e991. Wesseh Jr., P.K., Lin, B., 2016e. Modeling environmental policy with and without abatement substitution: a tradeoff between economics and environment? Appl. Energy 167, 34e43.