With the recent jump in world oil prices, the issue of petroleum product pricing has become increasingly important in developing countries. Reflecting a reluctance of many governments to pass these price increases onto energy users, energy price subsidies are absorbing an increasing share of scarce public resources. This paper identifies the issues that need to be discussed when analyzing the fiscal and social costs of fuel subsidies. Using examples from analyses recently undertaken for five countries, it also identifies the magnitude of consumer subsidies and their fiscal implications. The results of the analysis show that-in all of these countries-energy subsidies have significant social and fiscal costs and are badly targeted.

With the recent jump in world oil prices, the issue of petroleum product pricing has become increasingly important in developing countries. Reflecting a reluctance of many governments to pass these price increases onto energy users, energy price subsidies are absorbing an increasing share of scarce public resources. This paper identifies the issues that need to be discussed when analyzing the fiscal and social costs of fuel subsidies. Using examples from analyses recently undertaken for five countries, it also identifies the magnitude of consumer subsidies and their fiscal implications. The results of the analysis show that-in all of these countries-energy subsidies have significant social and fiscal costs and are badly targeted.

This paper investigates the response of consumer price inflation to changes in domestic fuel prices, looking at the different categories of the overall consumer price index (CPI). We then combine household survey data with the CPI components to construct a CPI index for the poorest and richest income quintiles with the view to assess the distributional impact of the pass-through. To undertake this analysis, the paper provides an update to the Global Monthly Retail Fuel Price Database, expanding the product coverage to premium and regular fuels, the time dimension to December 2020, and the sample to 190 countries. Three key findings stand out. First, the response of inflation to gasoline price shocks is smaller, but more persistent and broad-based in developing economies than in advanced economies. Second, we show that past studies using crude oil prices instead of retail fuel prices to estimate the pass-through to inflation significantly underestimate it. Third, while the purchasing power of all households declines as fuel prices increase, the distributional impact is progressive. But the progressivity phases out within 6 months after the shock in advanced economies, whereas it persists beyond a year in developing countries.

This paper reviews evidence on the impact of fuel subsidy reform on household welfare in developing countries. On average, the burden of subsidy reform is neutrally distributed across income groups; a $0.25 decrease in the per liter subsidy results in a 6 percent decrease in income for all groups. More than half of this impact arises from the indirect impact on prices of other goods and services consumed by households. Fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups. In absolute terms, the top income quintile captures six times more in subsidies than the bottom. Issues that need to be addressed when undertaking subsidy reform are also discussed, including the need for a new approach to fuel pricing in many countries.

The economic and political aspects of energy subsidies, viewed both theoretically and empirically, with a focus on fossil fuel subsidies in developing nations. Government subsidies to energy are widespread and represent a heavy burden on public budgets in many countries. Both producers and consumers may be subsidized; the most common subsidies are for motor fuel consumption and electricity production and consumption. The subsidies to consumers often prove particularly harmful because they result in increased energy consumption, increased carbon emissions, and distortionary effects on consumer behavior. This book fills a void in the literature by providing a first, broad and diverse, analysis of several aspects of the economic and political economy aspects of government energy subsidies. The contributors take both theoretical and empirical approaches, with most of the focus on subsidies to fuel and electricity in non-OECD countries. The chapters cover such topics as energy pricing, reelection incentives for politicians that may encourage excessive subsidies; political corruption and “bribing equilibria,” the the “resource curse” in developing countries when the gains from natural resource windfalls are largely wasted, the “entitlement” of energy subsidies in autocracies, and distributional issues when subsidies targeted to the poor are removed in high-income countries. One chapter discusses nonharmful subsidies: the potential economic effects of subsidizing the manufacturing and deployment of renewable energy. Contributors Carolyn Fischer, Mads Greaker, Mohammad Habibpour, Michelle Harding, Christina Kolerus, Christos Kotsogiannis, Jim Krane, Alber Touna Mama, Raffaele Miniaci, Marco Pani, Ian Parry, Carlo Perroni, Leonzio Rizzo, Knut Einar Rosendahl, Carlo Scarpa, Neda Seiban, Suphi Sen, Jon Strand, Paola Valbonesi, Herman Vollebergh

This book proposes a simple framework for understanding the political economy of subsidy reform and applies it to four in-depth country studies covering more than 30 distinct episodes of reform. Five key lessons emerge. First, energy subsidies often follow a life cycle, beginning as a way to stabilize prices and reduce exposure to price volatility for low-income consumers. However, as they grow in size and political power, they become entrenched. Second, subsidy reform strategies vary because the underlying political economy problems vary. When benefits are concentrated, satisfying (or isolating) interest groups with alternative policies is an important condition for effective reform. When benefits are diffuse, it can be much harder to identify and manage the political coalition needed for reform. Third, governments vary in their administrative and political capacities to implement difficult energy subsidy reforms. Fourth, improvements in social protection systems are often critical to the success of reforms because they make it possible to target assistance to those most in need. Finally, the most interesting cases involve governments that take a strategic approach to the challenges of political economy. In these settings, fixing energy subsidies is central to the governments’ missions of retaining political power and reorganizing how the government delivers benefits to the population. These cases are examples of “reform engineering,†? where governments actively seek to create the capacity to implement alternative policies, depoliticize tariffs, and build credibility around alternative policies. The most successful reforms involve active efforts by policy leaders to identify the political forces supporting energy subsidies and redirect or inoculate them.

Unsustainable budgetary cost of selling oil, gas, and coal at low prices has propelled energy subsidy reform in developing Asian economies. This report measures the size of associated subsidies on these fossil fuels including direct transfers, tax exemptions, subsidized credit, and losses of state enterprises in India, Indonesia, and Thailand. An analysis of complex interactions between economic, social, energy, and environmental issues shows that the initial rise in energy prices due to a reduction or removal of the subsidies will nudge households and businesses to shift to alternative fuels, make investment in clean energy attractive, increase energy supply, reduce energy shortages, and cut greenhouse gas emissions. Using the money freed up from subsidies to compensate poor households and to increase government budgets will offset the negative effects of the initial price rise, promote sustainable energy use, and help allay the fears of reform.