Removal of energy subsidies and its effects on the CO2 emissions in Venezuela

Venezuela is among the top 10 countries in the world with high rates of subsidies. Taking as reference the database of the IEA (2011), subsidies in Venezuela reach 20 billion US dollars, equivalent to 7% of GDP, or in per capita terms $690 per person. 86 percent of these subsidies are allocated to the fossil oil sector, and 14 percent to the electricity sector. With regard to CO2 emissions, Venezuela is among the 30 countries with high emissions, 165 million tons. It should be noted that among the 30 countries with high emissions of CO2, half of them are currently subsidizing energy consumption. This paper investigates the economic impacts of the elimination of energy subsidies, as well as its impact on CO2 emissions. The paper uses a dynamic general equilibrium model incorporating six sectors: oil and gas, oil refining, electricity, manufacturing, other goods, and services. The effects of the removal of the subsidies are assessed in terms of the implementation of a tax on sales of energy products. An important aspect of the model is that it is formulated in a way that allows evaluating scenarios of policies where subsidies are kept the same across energy sectors (oil, gas, refining, and electricity). Another relevant aspect of the model is that it allows evaluating alternative uses of collected additional tax revenue. Among the options that are evaluated are: increase in public consumption, increase in the transfers to the households, increase in the investments. Preliminary results show that the removal of subsidies effectively contributes to limiting the growth of CO2 emissions. However, the effects on the economy and on the consumers’ welfare would be considerable.