Fossil fuel subsidies in the Pacific island context: Analysis of the case of Kiribati

Kiribati is highly vulnerable to climate change induced sea level rise. At the same time, the country is also very dependent on fossil fuel imports. Kiribati uses price controls and tax exemptions to make fossil fuels more affordable for low-income households. This study reviews the subsidies on consumption of fossil fuels, specifically gasoline, diesel, and household kerosene in Kiribati and investigates their macroeconomic, fiscal, distributional, and environmental impact. The subsidies are quantified using price gap approach. Over a five year period, the subsidies were on average AUD 4.2 million when using 2011-2015 data with 2015 tax policies. This is equivalent to 2.2 per cent of Kiribati GDP. Over 2011-2014 the average fiscal impact would have been equivalent to 3.7 per cent of government revenues and 29 per cent of government health expenditure. Apart from being a fiscal burden the subsidies increase greenhouse gas emissions and make Kiribati even more dependent on fossil fuel imports and more vulnerable to volatility in international fuel prices. No evidence was found to support the argument for using the subsidies to support low-income households. In fact, there are signs of considerable leakages to high-income households, which is consistent with findings from studies in other countries.