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Fueling Reform

Finance & Development, June 2017, Vol. 54, No. 2

Maria Jovanović

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Energy subsidy reforms are challenging, but many countries are making progress

Energy subsidies are policy measures that aim to lower the cost of energy consumption. In 2015, these subsidies amounted to 6.5 percent of global GDP, or roughly $5.3 trillion. Subsidies have many negative economic and environmental effects, and they primarily benefit the wealthiest households. Despite this, they have proved difficult to reduce or remove. But in recent years a few factors may have shifted the balance to provide incentive for reform: subdued growth since the global financial crisis, lower energy prices since a sharp decline in mid-2014, and pledges to reduce greenhouse gas emissions signed by 190 countries as part of the December 2015 Paris Agreement.

In fact, at least 32 countries have actively reformed their subsidies since mid-2014. More than half of them are oil exporters and have had to make up for declining oil revenues. Most of these oil-exporting countries faced much larger fiscal deficits than oil importers did. Environmental concerns have been another driver in some countries—which have introduced a carbon tax, raised carbon tax prices on top of existing systems, or announced their own emission-trading systems. And recent reforms benefited from lessons of past experiences, which makes them more likely to succeed.

Successful energy subsidy reform has six key ingredients according to IMF research, and many recent reforms have incorporated them in their designs: a comprehensive plan with clear long-term objectives, transparent communication with stakeholders, phased-in price increases, more efficient state-owned enterprises, measures to protect the poor, and depoliticized pricing mechanisms.

In addition, energy subsidy reforms that are driven by long-term considerations, such as addressing environmental concerns or reducing oil dependency, are likely to be more durable than those driven by short-term factors, such as budget deficits resulting from lower oil revenues. 

Based on research by Amyra Asamoah, Emine Hanedar, and Baoping Shang of the IMF’s Fiscal Affairs Department. For more on the IMF’s work on energy subsidy reform, visit imf.org/subsidies.
MARIA JOVANOVIĆ is on the staff of Finance & Development

PHOTO: ISTOCK / LEOPATRIZI; ISTOCK / NYS444
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.