Authors: Afef JAAFAR, Tunisia PMR Focal Point , National Agency for Energy conservation - in collaboration with ALCOR, PMR-PMU, UNDP and OFCE
As a coastal country experiencing vulnerability from climate change with environmental degradation due to an increase in average temperatures, a reduction in precipitation, a rise in sea level, water scarcity and desertification, Tunisia is no stranger to the threat that climate change can, and already poses to its people and economy. Indeed, the national constitution, passed in 2014, recognizes the threat of climate change, promising its citizens the right to a healthy and balanced environment.
Aware of climate issues, Tunisia has always been actively committed to a low-carbon development policy, mainly through the submission of its Nationally Determined Contributions (NDC), which aims to reduce the carbon intensity of its economy by 41% in 2030 compared to 2010. The energy sector is the main contributor to achieving the NDC objectives, through a decrease of 30% in primary energy demand and an increase of 30% in the share of renewable energies in the production of electricity.
Establishing a carbon pricing instrument is, for Tunisia, both a new public policy lever to strengthen its climate ambition (NDC revision and National Low Carbon Strategy preparation) and a potential source of financing to accelerate the energy transition, implement the Paris Agreement and contribute to Tunisia’s economic growth. As announced in its first NDC, the use of carbon pricing is an instrument for Tunisia to reorient investments towards low GHG emissions technologies and to achieve mitigation objectives in priority sectors such as electricity generation and cement production. In addition to reducing GHG emissions, carbon pricing is likely to accelerate the energy transition, reduce the trade deficit related to fossil fuel dependence, stimulate economic growth and create new jobs. To support these goals, introducing a carbon price and phasing out fossil fuel subsidies constitute a crucial step and a significant tool that Tunisia is working on within the framework of the World Bank’s Partnership for Market Readiness (PMR).Under this initiative, which helps developing countries assess, design and implement carbon pricing instruments, the National Agency for Energy Conservation (ANME), with the support of the United Nations Development Programme (UNDP), is assessing the socioeconomic impacts of introducing a carbon price and phasing out fossil fuel subsidies on the Tunisian economy.
2. Aligning incentives and financing the clean energy transition
As part of a broader policy package for the power sector, carbon pricing and fossil fuel subsidy reform can help send a price signal to businesses and consumers to use cleaner sources of energy. The revenue generated by a carbon pricing instrument, as well as the saved expenditure from reducing fossil fuel subsidies, can also help the country mobilise new resources for the energy transition.
a. Putting a price on carbon A carbon price requires polluters to pay for their greenhouse gas emissions. Whether this is done through a tax or a carbon market, a carbon price encourages companies and consumers to shift to low-carbon alternatives. Alongside the mitigation benefits, a carbon price may also bring other development benefits, most notably a reduction in air pollution, which would generate substantial health outcomes. The revenue generated from a carbon price can also be channeled to other development goals like health, education, inclusive employment etc.
b. Phasing out fossil fuel subsidies Fossil fuel subsidies have the opposite effect of a carbon price as they incentivise the use of carbon-intensive fuels. Such subsidies were initially implemented to ensure energy affordability. However, particularly with the drastic drop in the cost of renewables, affordable energy can be generated from renewable sources. In addition, these subsidies exacerbate inequalities, worsen air pollution and climate change – and are economically inefficient. Current low oil and gas prices, due to COVID-19 crisis, among others, may make it an opportune time to implement fossil fuel subsidy reform as consumers will not be as heavily affected. In 2018, Tunisia spent around USD 100 per capita on fossil fuel subsidies, almost 2.91% of its national GDP (IMF). c. Assessing a carbon tax and fossil fuel subsidy reform Any new policy or policy reform will create winners and losers, as such, stakeholder engagement and modelling the potential impacts can help the Tunisian government identify how policies can be designed to not only minimise any negative effects but also amplify the benefits of climate action on socioeconomic aggregates (economic growth, jobs, household purchasing power, fuel poverty, etc.).
3) Macroeconomic modelling
a) ThreeME-Tunisia model The macroeconomic impact of introducing a carbon tax and phasing out fossil fuel subsidies in Tunisia was assessed using the ThreeMETunisia model. It is a Neo-Keynesian macroeconomic model developed by ADEME (French Environment and Energy Management Agency) and OFCE (French Observatory for Economic Contexts) in 2008 to support policymakers in the evaluation of short, medium and long-term impact of low carbon and energy policies at the macroeconomic and sectoral levels. It is a multi-sector general equilibrium model that has been developed and adapted to the Tunisian context and used for the first time to assess the macroeconomic impacts of:
i. The energy transition and the National Low Carbon Strategy by 2050;
ii. The consequences of phasing out energy subsidies and their recycling, as well as carbon tax introduction on the Tunisian economy;
iii. The ambitious renewable electricity target in 2050. The Tunisian version of ThreeME considers 22 economic sectors, of which nine are energy sectors, and four, production factors (capital, work, intermediate consumption and energy).
b) Proposed scenarios for simulation
• Fossil fuel subsidy reform scenarios: A baseline scenario (trendbased scenario based on the current pricing policy without any change) and two energy subsidies phase out scenarios respectively in 2023 and 2025 are proposed. They take into consideration the impact of lifting subsidies on the vulnerable population (LPG is excluded from the subsidies phaseout): According to the scenario “lifting of the subsidies in 2023”, the budget saved by the State over the period 2020-2030, represents approximately 92% of the subsidies level (46.7 billion TND) related to the BAU scenario (no lifting of the subsidies). Over the same period, 7.5% of the budget saved will be allocated to this vulnerable population.
• Carbon tax introduction scenario: carried out on the basis of the adoption of a BAU scenario and two carbon tax introduction scenarios that supply the Energy Transition Fund (ETF) resources. The ETF is a key instrument in the implementation of the energy transition and of the low carbon development in the energy sector in Tunisia) :
i) a carbon tax to fill the gap between resources and uses of the ETF over the period 2021- 2030 and
ii) 100% of the ETF resources will be covered by a carbon tax. The carbon tax recycling should be used based on emissions reduction results instead of investments in energy conservation.
c) Modelling results
The macroeconomic effects of the subsidies reform combined with the introduction of a carbon tax are presented under two assumptions: without and with redistribution of the revenue generated by a carbon pricing instrument, as well as the saved expenditure from reducing fossil fuel subsidies.
Without redistribution, GDP drops by 2.5% in 2030 mainly because of the decrease in household consumption (-3.9%) and investment (-3.8%). The loss of 107,000 jobs corresponds to 1.5 points increase in the unemployment rate. The government's primary balance increases by 3.3% and debt decreases by 25% as the removal of energy subsidies reduces the burden on the government budget. This scenario is favourable to around 24% reduction in CO2 emissions in 2030 but with a significant economic cost.
With redistribution, a slightly positive effect of 0.31% on GDP is observed compared to the baseline scenario, in addition to a 22% decrease in CO2 emissions, which is similar to the result of the scenario without redistribution (24%). This means that the rebound effect generated by the extra revenue redistribution is small compared to the substitution effects generated by a higher fossil fuel price: economic agents reduce their consumption of energyintensive goods and invest in energy efficiency. Looking at the evolution of prices, the redistribution leads to a lower price increase than the nonredistribution case. This comes from the fact that the redistribution to firms limits the increase in production costs making the reform more acceptable in terms of competitiveness.
4) Conclusion and next steps As shown by the preliminary results of ThreeME Model, this policy pricing reform, consisting of phasing out subsidies and introducing carbon tax with revenues redistribution, could lead to nearly 15,000 additional jobs by 2030, as well as a marginal improvement in the trade balance (2.7%) and household disposable income (0.3%). If policies are designed correctly, reducing emissions does not have to come at the cost of households or industrial activity.
Strong communication, overall transparency and carbon tax revenues redistribution are key elements to build momentum for such a reform.
Moreover, it is crucial to establish and implement a roadmap whether for subsidy reform or introduction of carbon tax which should involve:
• establishing clear and time-bound objectives;
• a far-reaching communications strategy and consultation with stakeholders;
• appropriately phased and sequenced price increases;
• mitigating measures to protect the vulnerable population, etc.
Finally, it is noteworthy to mention that this preliminary ThreeME-Tunisia modelling can be considered as a pilot preparatory step for the emergence of a larger carbon pricing policy, specifically the introduction of a carbon tax, where the impacts are more significant.
This will lead to a more comprehensive simulation regarding the macroeconomic assessment of the NDC updating and the Low Carbon Development Strategy on Tunisia’s population and its economy, in which subsidy reform and carbon pricing are the main levers, and which will play a key role in the mid and longer term to a greener socioeconomic COVID-19 recovery.
