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UNDP urges carbon pricing and end to fossil fuel subsidies

Update: June, 19/2014 - 09:10
Fossil fuel subsidies in Viet Nam mainly apply to coal and other fuels used for electricity generation. — Photo vinacomin

HA NOI — "Fossil fuel subsidies should be phased out and a price set on carbon," the United Nations Development Programme (UNDP) in Viet Nam recommended in a discussion paper launched yesterday.

The paper, "Green Growth and Fossil Fuel Fiscal Policies in Viet Nam- Recommendations for a Roadmap for Policy Reform" argues that despite the Government's commitment towards green growth and restructuring the energy sector to include price reform, substantial indirect subsidies on fossil fuels remain in place.

According to the International Agency, subsidies on fossil fuel in Viet Nam fluctuated between US$1.2 billion and $4.49 billion annually during the period 2007-12.

The figure was calculated based on differences between energy price levels in Viet Nam and international prices and follows the commonly accepted international definition of subsidies – any government intervention that reduces the cost of fossil fuels below what it would be without that intervention.

Fossil fuel subsidies in Viet Nam mainly apply to coal and other fuels used for electricity generation.

Most of the subsidies are indirect, through various provisions afforded to energy producers and distributors, mainly State-owned enterprises (SOEs), including low interest credit for investments and low cost inputs such as land and coal.

According to the paper, Viet Nam's energy prices are low compared to other countries in the region. Each kWh costs about 7 US cents in Viet Nam, compared with 7.5-10.7 cents in China, 8.75 cents in Indonesia, 7.09-14.76 cents in Malaysia.

Although there have been significant price increases, average retail prices remained the same during 2008-13, and are in fact lower than the previous five-year period, when measured against 2002 prices and accounting for inflation.

"Subsidies result in foregone revenue for the Government and increasing debt of energy State-owned enterprises (SOEs), which will ultimately need to be borne by taxpayers," says the paper.

The paper also argues that subsidies benefit richer socioeconomic groups more than the poor and concludes that subsidies are very costly for Vietnamese citizens.

The paper highlights several benefits of subsidy reforms and of introducing carbon taxes, including enhanced energy efficiency and supplies, national energy security and higher GDP growth in the medium term.

Health benefits and lower greenhouse gas emissions are also key benefits of the reforms.

UN Resident Coordinator in Viet Nam, Dr Pratibha Mehta, underlined the need to accelerate current energy reform efforts in Viet Nam to move towards a more inclusive and sustainable growth trajectory.

"Fossil fuel fiscal policy reform requires comprehensive energy sector reform, including enhancing competition in energy markets, improving the efficiency of energy SOEs and introducing cost-reflective and transparent pricing," Mehta said.

"Measures will also be required to protect the poor and vulnerable and the most affected businesses from the short-term adverse effects of energy price increases", she added.

Vice President of Viet Nam Academy of Social Sciences, Nguyen Quang Thuan, said that Viet Nam was making efforts to change its growth model, focus on sustainable development and protect the environment.

The restructuring of the economy in general and energy sector in particular could affect enterprises and citizens, he said, emphasizing the need for a clear roadmap to mitigate impacts to vulnerable groups.

Deputy head of Central Institute for Economic Management Vu Xuan Nguyet Hong said that the Government had already initiated some components of fossil fuel fiscal reform.

The Green Growth Strategy and Green Growth Action Plan both committed to a road map for phasing out subsidies for fossil fuels. The gradual creation of an electricity market has also served to break-up the monopoly of Electricity of Viet Nam. The Electricity Regulatory Authority of Viet Nam was also created to supervise electricity pricing, monitor supply and demand balances and energy efficiency.

Hong said that the Government had also committed to restructure SOEs, including key energy corporations, and make them more accountable and efficient.

"Fossil fuel fiscal reform would hardly implement without SOEs reform," Hong said.

However, she warned that the restructuring faced difficulties as most of the approved restructuring plans focused narrowly on scaling down business rather than management reform, with little attention being given to technical improvements and financial reforms.

The lack of information transparency was also hindering the restructuring process in energy SOEs, she said. — VNS

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