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Implementing energy subsidy reforms : an overview of the key issues

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  • Vagliasindi, Maria
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    Abstract

    Poorly implemented energy subsidies are economically costly to taxpayers and damage the environment. This report describes the emerging lessons that could help policy makers to address implementation challenges, including overcoming political economy and affordability constraints. The analysis provides strong evidence of the success of reforms in reducing the associated fiscal burden. For the selected sample of 20 developing countries, the average energy subsidy recorded in the budget was reduced from 1.8 percent in 2004 to 1.3 percent of gross domestic product in 2010. The reduction of subsidies is particularly remarkable for net energy importers. In spite of the relatively price inelastic demand for gasoline and diesel, fossil fuel consumption in the road sector (per unit of gross domestic product) declined in the 20 countries examined from 53 (44) in 2002 to about 23 kilotonnes oil equivalent per million of gross domestic product in 2008 in the case of gasoline (diesel). The most notable decline in consumption was recorded in the low-income and lower-middle-income countries. This reflects the much higher rate of growth in gross domestic product in this group of countries. And it underlines the opportunities to influence future consumption behavior rather than modifying the existing consumption patterns, overcoming inertia and vested interests. Similar trends are recorded for power consumption. While there is no one-size-fits-all model for subsidy reform, implementation of compensatory social policies and an effective communication strategy, before the changes were introduced, made a difference in securing the successful implementation of reforms.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6122.

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    Date of creation: 01 Jul 2012
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    Handle: RePEc:wbk:wbrwps:6122

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    Keywords: Energy Production and Transportation; Transport Economics Policy&Planning; Economic Theory&Research; Environment and Energy Efficiency; Energy and Environment;

    This paper has been announced in the following NEP Reports:

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    1. Julian A. Lampietti & Sudeshna Ghosh Banerjee & Amelia Branczik, 2007. "People and Power : Electricity Sector Reforms and the Poor in Europe and Central Asia," World Bank Publications, The World Bank, number 7175, October.
    2. Kristin Komives & Jon Halpern & Vivien Foster & Quentin Wodon & Roohi Abdullah, 2007. "Utility Subsidies as Social Transfers: An Empirical Evaluation of Targeting Performance," Development Policy Review, Overseas Development Institute, vol. 25(6), pages 659-679, November.
    3. Diego Angel-Urdinola & Quentin Wodon, 2007. "Do Utility Subsidies Reach the Poor? Framework and Evidence for Cape Verde, Sao Tome, and Rwanda," Economics Bulletin, AccessEcon, vol. 9(4), pages 1-7.
    4. Dahl, Carol A., 2012. "Measuring global gasoline and diesel price and income elasticities," Energy Policy, Elsevier, vol. 41(C), pages 2-13.
    5. Arze del Granado, Francisco Javier & Coady, David & Gillingham, Robert, 2012. "The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries," World Development, Elsevier, vol. 40(11), pages 2234-2248.
    6. repec:ebl:ecbull:v:9:y:2007:i:4:p:1-7 is not listed on IDEAS
    7. Robert Gillingham & David Locke Newhouse & David Coady & Kangni Kpodar & Moataz El-Said & Paulo A. Medas, 2006. "The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka," IMF Working Papers 06/247, International Monetary Fund.
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