By / April 4, 2013

IMF: energy subsidies are not the right answer!

A new IMF paper urges governments the world over to reform subsidies affecting products ranging from coal to gasoline. Energy…

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A new IMF paper urges governments the world over to reform subsidies affecting products ranging from coal to gasoline. Energy subsidies in 2011 amounted to $1.9 trillion, the equivalent of about 2½ percent of world GDP, or 8 percent of all government revenues.

What are energy subsidies?

Energy subsidies are made up of both producer and consumer subsidies. Producer subsidies arise when prices received by suppliers are above a benchmark price or when producers make losses at the benchmark price. Consumer subsidies arise when the prices paid by consumers are below a benchmark price.

The rationale behind

Subsidies are intended to protect consumers by keeping prices low. But many argue subsidies are inefficient and could be replaced with better means of protecting consumers in need. This, according to the IMF, is possible if governments undertake the right reform path, and will in the process also help alleviate budgetary pressures being faced by governments.

Who pays in the end?

veezzle ©  flaivoloka (customs license)
veezzle © flaivoloka (customs license)

Subsidies are expensive and ultimately must be paid by someone. This is of course true for any spending but there are several problems that are specific to energy subsidies. First, they are a very inefficient way of supporting the poor, as the rich consume more energy than the poor and therefore receive most of the benefits of the subsidies. Governments could stimulate programs that more directly help the poor.

External costs of subsidies

Subsidies, are also a major impediment to growth. Subsidies crowd out public spending that can boost growth, including on infrastructure, education, and health care. Cheap energy can also lead to overconsumption of energy, which aggravates environmental problems, such as pollution and climate change.This overconsumption reduce also the (few) resources left for future generations.

Six is the key for success

The IMF found that there are six key elements for success. The first is to implement a comprehensive reform plan, which should involve establishing clear long-term objectives, such as achieving full price liberalization and improving the quality of service. The second is a far-reaching communications strategy and consultation with stakeholders. The third is appropriately phased and sequenced price increases, which allows time for households and governments to adjust their energy consumption. The fourth is to implement measures to protect the poor. The fifth is improvements in the efficiency of state-owned enterprises to help reduce their fiscal burden. And the final ingredient is to depoliticize the setting of energy prices, which is needed to make durable reforms.

More information:

IMF Country case studies

IMF on energy subsidies

Coady, David, Robert Gillingham, Rolando Ossowski, John Piotrowski, Shamsuddin Tareq, and Justin Tyson, 2010, ―Petroleum Product Subsidies: Costly, Inequitable, and Rising, IMF Staff Position Note No. 10/05 (Washington: International Monetary Fund).


Phasing out fossil-fuel subsidies in the G20: a progress update / Doug Koplow ; Earth Track

Fossil fuel subsidies and government support in 24 OECD countries: summary for decision-makers /Buckle, Elise;  Cochet, Yves. 2012. English

Increasing the momentum of fossil-fuel subsidy reform: a roadmap for international cooperation / Kerryn Lang ; International Institute for Sustainable Development (IISD)

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