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The Political Economy of Energy Subsidy Reform

Author

Listed:
  • Gabriela Inchauste
  • David G. Victor

Abstract

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.

Suggested Citation

  • Gabriela Inchauste & David G. Victor, 2017. "The Political Economy of Energy Subsidy Reform," World Bank Publications - Books, The World Bank Group, number 26216, December.
  • Handle: RePEc:wbk:wbpubs:26216
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    References listed on IDEAS

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    1. McCulloch, Neil & Natalini, Davide & Hossain, Naomi & Justino, Patricia, 2022. "An exploration of the association between fuel subsidies and fuel riots," World Development, Elsevier, vol. 157(C).
    2. Schaffitzel, Filip & Jakob, Michael & Soria, Rafael & Vogt-Schilb, Adrien & Ward, Hauke, 2020. "Can government transfers make energy subsidy reform socially acceptable? A case study on Ecuador," Energy Policy, Elsevier, vol. 137(C).
    3. Nils Ohlendorf & Michael Jakob & Jan Christoph Minx & Carsten Schröder & Jan Christoph Steckel, 2021. "Distributional Impacts of Carbon Pricing: A Meta-Analysis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(1), pages 1-42, January.
    4. Nils Ohlendorf & Michael Jakob & Jan Christoph Minx & Carsten Schröder & Jan Christoph Steckel, 2018. "Distributional Impacts of Climate Mitigation Policies - a Meta-Analysis," Discussion Papers of DIW Berlin 1776, DIW Berlin, German Institute for Economic Research.
    5. Mathieu Blondeel & Jeff Colgan & Thijs Van deGraaf, 2019. "What Drives Norm Success? Evidence from Anti–Fossil FuelCampaigns," Global Environmental Politics, MIT Press, vol. 19(4), pages 63-84, November.
    6. Christian Elliott & Steven Bernstein & Matthew Hoffmann, 2022. "Credibility dilemmas under the Paris agreement: explaining fossil fuel subsidy reform references in INDCs," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 22(4), pages 735-759, December.
    7. Matthew O. Gidigbi & Kehinde M. Bello & Gbenga F. Babarinde, 2019. "Petroleum subsidy and its impact on tax revenue volatility," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 11(1), pages 24-36, June.
    8. Fekete, Hanna & Kuramochi, Takeshi & Roelfsema, Mark & Elzen, Michel den & Forsell, Nicklas & Höhne, Niklas & Luna, Lisa & Hans, Frederic & Sterl, Sebastian & Olivier, Jos & van Soest, Heleen & Frank,, 2021. "A review of successful climate change mitigation policies in major emitting economies and the potential of global replication," Renewable and Sustainable Energy Reviews, Elsevier, vol. 137(C).
    9. Neil McCulloch, 2017. "Energy subsidies, international aid, and the politics of reform," WIDER Working Paper Series wp-2017-174, World Institute for Development Economic Research (UNU-WIDER).
    10. Rentschler, Jun & Kornejew, Martin, 2017. "Energy price variation and competitiveness: Firm level evidence from Indonesia," Energy Economics, Elsevier, vol. 67(C), pages 242-254.
    11. Neil McCulloch, 2017. "Energy subsidies, international aid, and the politics of reform," WIDER Working Paper Series 174, World Institute for Development Economic Research (UNU-WIDER).
    12. Auktor, Georgeta Vidican & Loewe, Markus, 2021. "Subsidy reforms in the Middle East and North Africa: Strategic options and their consequences for the social contract," IDOS Discussion Papers 12/2021, German Institute of Development and Sustainability (IDOS).
    13. Calì, Massimiliano & Cantore, Nicola & Iacovone, Leonardo & Pereira-López, Mariana & Presidente, Giorgio, 2022. "Too much energy The perverse effect of low fuel prices on firms," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    14. Georgeta Vidican Auktor & Markus Loewe, 2022. "Subsidy Reform and the Transformation of Social Contracts: The Cases of Egypt, Iran and Morocco," Social Sciences, MDPI, vol. 11(2), pages 1-22, February.
    15. Thomas Sterner & Richard T. Carson & E. Somanathan & Dale Whittington & Jorge Bonilla & Haileselassie et al. Medhin, 2020. "Funding Inclusive Green Transition through Greenhouse Gas Pricing," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(01), pages 03-08, April.
    16. Breisinger, Clemens & Mukashov, Askar & Raouf, Mariam & Wiebelt, Manfred, 2019. "Energy subsidy reform for growth and equity in Egypt: The approach matters," Energy Policy, Elsevier, vol. 129(C), pages 661-671.
    17. McCulloch, Neil & Moerenhout, Tom & Yang, Joonseok, 2021. "Fuel subsidy reform and the social contract in Nigeria: A micro-economic analysis," Energy Policy, Elsevier, vol. 156(C).
    18. Ahmadi Murjani, 2020. "Assessing the Energy Subsidy Reform in Indonesia through Different Scenarios," International Journal of Energy Economics and Policy, Econjournals, vol. 10(4), pages 122-134.
    19. Joana Silva & Victoria Levin & Matteo Morgandi, 2013. "Inclusion and Resilience : The Way Forward for Social Safety Nets in the Middle East and North Africa," World Bank Publications - Books, The World Bank Group, number 14064, December.
    20. Wheeler,Collette Mari & Baffes,John & Kabundi,Alain Ntumba & Kindberg-Hanlon,Gene & Nagle,Peter Stephen Oliver & Ohnsorge,Franziska Lieselotte, 2020. "Adding Fuel to the Fire : Cheap Oil during the COVID-19 Pandemic," Policy Research Working Paper Series 9320, The World Bank.

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