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### EXECUTIVE SUMMARY — scope and purpose
- Provides the most comprehensive estimates of energy subsidies currently available for 176 countries.
- Presents analysis of "how to do" energy subsidy reform based on 22 country case studies (covering 28 reform episodes) undertaken by IMF staff and additional institutional analyses.
- Publication date: January 28, 2013.

### Magnitude and composition of energy subsidies (key statistics for 2011)
- Pre-tax subsidies:
  - Total: $480 billion in 2011.
  - Equivalent to 0.7 percent of global GDP.
  - Equivalent to 2 percent of total government revenues.
  - Oil exporters account for about two-thirds of the total pre-tax subsidies.
  - By product (pre-tax): Petroleum products $212 billion (about 44 percent of the total pre-tax subsidies); Electricity $150 billion (about 31 percent); Natural gas $112 billion; Coal $6½ billion.
- Post-tax subsidies (including negative externalities and revenue forgone):
  - Total: $1.9 trillion in 2011.
  - Equivalent to 2½ percent of global GDP.
  - Equivalent to 8 percent of total government revenues.
  - Advanced economies account for about 40 percent of the global post-tax total.
  - Oil exporters account for about one-third of the global post-tax total.
  - By product (post-tax): Petroleum products $879 billion; Coal $539 billion; Natural gas $299 billion; Electricity $179 billion.
- Environmental impact:
  - Removing tax-inclusive subsidies for petroleum products, natural gas, and coal estimated to reduce CO2 emissions by 4½ billion tons (a 13 percent decline in global energy-related CO2 emissions).
  - SO2 emissions reduced by 10 million tons; other local pollutants reduced by 13 percent.
- Global spillovers:
  - Multilateral removal of pre-tax fuel subsidies in non-OECD countries, under gradual phasing-out, would reduce world prices in 2050 relative to the no-change baseline by: crude oil 8 percent; natural gas 13 percent; coal 1 percent.

### Economic and distributional consequences
- Fiscal and macroeconomic effects:
  - Subsidies aggravate fiscal imbalances and crowd out priority public spending.
  - Subsidies depress private investment, including in the energy sector, and distort resource allocation by encouraging excessive energy consumption and capital-intensive industries.
  - Subsidies reduce incentives for investment in renewable energy and accelerate depletion of natural resources.
  - Higher energy consumption from subsidies pressures balance of payments of net energy importers and promotes smuggling.
- Distributional effects:
  - Most subsidy benefits are captured by higher-income households, reinforcing inequality.
  - Average capture by quintiles in low- and middle-income countries: richest 20 percent capture 43 percent of total fuel product subsidies; poorest 20 percent capture 7 percent.
  - Product-specific quintile shares (bottom to top):
    - Gasoline: 3, 6, 10, 19, 61
    - Kerosene: 19, 20, 21, 20, 21
    - LPG: 4, 8, 13, 21, 54
    - Diesel: 7, 12, 16, 23, 42
  - Natural gas: poorest 20 percent receive 10 percent of subsidies; electricity: poorest 20 percent receive 9 percent.
- Growth and investment:
  - Higher investment in efficient and energy-saving technologies could boost growth by up to 1 percent over the long term.

### Definition and measurement approach
- Energy subsidies include consumer and producer subsidies:
  - Consumer subsidies: when prices paid by consumers (firms and households) are below a benchmark price.
  - Producer subsidies: when prices received by suppliers are above the benchmark.
- Price-gap (benchmarking) approach:
  - Internationally traded products: benchmark = international price adjusted for transport and distribution costs.
  - Non-traded products (electricity): benchmark = cost-recovery price for domestic producer, including normal return and distribution costs.
  - Consumer subsidy component (pre-tax): Pw – Pc (Pw = benchmark price; Pc = price paid by consumers).
  - Post-tax subsidy component: (Pw + t*) – Pc (t* = efficient tax correcting externalities and aligning with revenue needs).
- Measurement caveats:
  - Producer subsidies (e.g., inefficient refineries, SOE losses) are often not fully captured.
  - Estimates exclude some products (e.g., LPG consumer subsidies in many cases) and use snapshot/end-of-period prices or averages of end-of-quarter prices.
  - Electricity, natural gas, and coal estimates use different sources and methods, limiting full comparability.

### Key barriers and political economy considerations
- Information and transparency:
  - Full fiscal costs often implicit and not recorded in budget documents; lack of public knowledge on subsidy magnitude and distribution.
  - Out of 28 reform episodes, 17 indicate lack of information was a barrier.
- Government credibility and administrative capacity:
  - Public skepticism about use of savings and weak capacity to implement targeted programs undermine reform.
  - Lack of credibility contributed to less successful reforms (e.g., Indonesia 2003; Nigeria 2011).
- Concerns about poverty, inflation, and competitiveness:
  - Price increases can lower poor households' real incomes and raise inflationary pressures.
  - Governments worry about impacts on energy-intensive sectors and international competitiveness.
- Opposition from vested interests:
  - Urban middle class, industry, SOEs, and unions often resist reforms.
- Weak macroeconomic conditions:
  - Lower likelihood of successful reforms when high inflation and weak growth prevail.

### Six key elements for successful subsidy reform (lessons from country experiences)
- (i) Comprehensive energy sector reform plan:
  - Clear long-term objectives and embedding subsidy reform within broader structural reforms.
  - Assess fiscal and distributional impacts; consult stakeholders.
  - Examples: Iran (2010), Namibia, Philippines, Ghana.
- (ii) Extensive communications strategy and transparency improvements:
  - Explain magnitude of subsidies, budget implications, distributional incidence, and alternative uses of savings.
  - Disseminate subsidy data and price-formulation methods.
  - Examples: Ghana, Iran, Namibia, Philippines, Uganda, Armenia.
- (iii) Appropriately phased price increases:
  - Phasing reduces shock, allows time for safety nets, and can be sequenced by product to protect the poor.
  - Successful/partially successful reforms averaged about five years.
  - 17 of 23 successful/partially successful episodes used phased reductions.
- (iv) Improving efficiency of state-owned enterprises (SOEs):
  - Strengthen SOE governance, reporting, performance targets, competition, metering, and revenue collection.
  - Encourage regional electricity trade and demand management (e.g., peak pricing, CFL distribution).
- (v) Targeted measures to protect the poor:
  - Preferred mechanisms: targeted cash transfers or near-cash vouchers; expand existing social programs where cash transfers not feasible.
  - Out of 28 episodes, 18 relied on targeted mitigating measures; 9 used targeted cash transfers.
  - Examples: Indonesia's unconditional cash transfer covering 35 percent of population; Armenia electricity transfers.
- (vi) Institutional reforms to depoliticize pricing:
  - Automatic pricing formulas and independent implementation agencies can distance governments from price decisions and enhance sustainability.
  - Examples: South Africa (automatic fuel pricing for over five decades); Philippines, Turkey.
  - Limitations: mechanisms have been suspended when governments resist passing through sharp international price increases (examples: Gabon, Ghana, Gambia, Sierra Leone, Togo).

### Challenges of gradual reform (risks and mitigation)
- Slower pace reduces short-term fiscal savings and can distort consumption patterns (e.g., conversion to subsidized LPG in Turkey).
- Gradual reform risks accumulation of opposition; requires government commitment over successive administrations.
- Smoothing rules can limit monthly price changes (example design: limit to maximum 5 percent of current consumer price per month).
- Stabilization funds have mixed record; some funds exhausted reserves or generated contingent liabilities (examples: Chile, Namibia, Peru, Philippines, Thailand).

### Box 2 — Financing Fuel Subsidies in India (selected findings)
- Subsidies peaked at over 2 percent of GDP in FY 2008/09; fell to just under 0.9 of a percent of GDP in FY2009/10; reached nearly 2 percent of GDP in FY 2011/12.
- Financing mechanisms:
  - FY 2007/08: just less than one-half of financing recorded on budget; remaining off-budget.
  - On-budget transfers then were mainly government “oil bonds”; direct budget transfers negligible.
  - By FY 2011/12: all on-budget financing took the form of direct budget transfers to OMCs, accounting for around three-fifths of subsidies; remainder financed by upstream transfers.
- Measurement notes:
  - Petroleum product consumer subsidies estimated for gasoline, diesel, and kerosene for 176 countries for 2000–2011 using price-gap approach; producer subsidies to refineries not estimated (lower bound).
  - Electricity subsidies estimated for 77 countries using combined approaches; comparability varies.

### Box 4 — Energy Subsidy Reform and Competitiveness (selected findings)
- Short-run competitiveness:
  - Higher energy prices raise production costs; impacts vary by sector and depend on energy use and indirect input linkages.
  - Input-output analysis useful to trace sectoral exposure.
- Macroeconomic policy responses:
  - Appropriate monetary and fiscal policies help anchor inflation expectations and contain second-round effects.
  - Flexible exchange rates mitigate international price volatility transmission.
- Long-term effects:
  - Reforms can lower deficits and interest rates, stimulate private investment, and allow public investment in productivity-enhancing areas.
  - Not all sectors benefit; aggregate effects on competitiveness are positive.
- Environmental and health impacts (see above CO2 and pollutant reductions).
- Equity and distribution:
  - A $0.25 per liter increase in fuel prices can reduce real consumption of the poorest 20 percent by about 5½ percent.
  - Only 30 percent of households in sub-Saharan Africa are connected to the grid (IFC, 2012); lifeline tariffs protect connected poor but not the unconnected.
- Growth and investment:
  - Empirical estimates suggest up to 1 percent long-term growth boost from higher investment in efficient technologies.

### Appendix I & methodological highlights (estimating pre-tax and post-tax subsidies)
- Petroleum product pre-tax coverage: 176 countries, 2000–2011; international prices = monthly average spot prices from IEA.
- Transport and distribution margins for importers: $0.10 per liter (international transport) + $0.10 per liter (domestic distribution and retailing); net oil exporters: no margin adjustment.
- Imputation used where consumer prices unavailable — approximately 54 countries in 2009 and one country (Venezuela) in 2011; end-of-year prices used except for 30 countries where quarterly data available.
- Coal and natural gas pre-tax data: IEA for 39 (coal) and 37 (natural gas) countries between 2007 and 2011; producer coal subsidies for 16 OECD countries included.
- Electricity pre-tax estimates: 77 countries using mixed methods—combined producer/consumer estimates for 40 countries; IEA consumer price subsidies for 37 countries (2007–2011); 31 of the 40-country subset use 2009 as latest year.
- Post-tax subsidy components:
  - Add corrective (Pigouvian) taxes for CO2 and local pollution, plus a revenue component aligning energy VAT/GST with standard consumption taxes.
  - Global warming damages assumed at $25 per ton of CO2 (2010 dollars) (US IAWG, 2010).
  - VAT/GST rates for 150 countries in 2011 used; regional averages applied where VAT data missing.
- Consumption shares treated as final consumption (averages used for VAT incidence):
  - Gasoline 99 percent; Diesel 7 percent; Kerosene 39 percent; Coal 12 percent; Natural gas 46 percent; Electricity 51 percent.

### Appendix Table 1 — corrective motor fuel taxes (summary figures)
- Corrective motor fuel taxes table header and totals (as presented): United StatesUnited KingdomChileUnited StatesChile — Total 3642713762.
- Contributions to totals (as presented): local pollution 34181016; carbon 65666; congestion 1526191016; accidents 12828312; noise 00021; road damage 000612.
- Vehicle types footnote: Gasoline (cars) and Diesel (trucks).
- Key parameters:
  - Global warming damages assumed $25 per ton of CO2 (2010 dollars).
  - Literature range for CO2 damages cited: $12 per ton to $85 per ton.
  - The $25 per ton CO2 damage translates into "$0.05–$0.06 per liter of gasoline or diesel".
  - Income elasticity of willingness to pay for reductions in externalities: 0.8.

### Appendix Table 4 & Table 5 — post-tax subsidies (selected percent-of-GDP and percent-of-government-revenues figures)
- World (Percent of GDP): Petroleum products 1.26, Electricity 0.26, Natural gas 0.43, Coal 0.77.
- World (Percent of government revenues): Petroleum products 3.77, Electricity 0.77, Natural gas 1.28, Coal 2.31.
- Selected country examples (Percent of GDP and percent of government revenues):
  - United States (Advanced economies, Percent of GDP): Petroleum products 2.42, Natural gas 0.27, Coal 0.64.
  - United States (Percent of government revenues): Petroleum products 7.70, Natural gas 0.87, Coal 2.05.
  - Turkmenistan (Percent of GDP): Petroleum products 8.31, Electricity 2.39, Natural gas 19.92.
  - Turkmenistan (Percent of government revenues): Petroleum products 44.05, Electricity 12.67, Natural gas 105.63.
  - Uzbekistan (Percent of GDP): Petroleum products 0.92, Electricity 5.95, Natural gas 25.50.
  - Uzbekistan (Percent of government revenues): Petroleum products 2.28, Electricity 14.80, Natural gas 63.40.
  - Venezuela (Percent of GDP): Petroleum products 8.11, Electricity 1.24, Natural gas 1.05.
  - Venezuela (Percent of government revenues): Petroleum products 23.00, Electricity 3.52, Natural gas 2.97.
  - Nigeria (Percent of GDP): Petroleum products 2.04, Electricity 1.34, Natural gas 0.19.
  - Nigeria (Percent of government revenues): Petroleum products 6.94, Electricity 4.55, Natural gas 0.64.
- Notes: Values in Appendix Table 4 are rounded to the nearest one-hundredth percent; some electricity data taken from 2009 and natural gas data from 2010 for select countries.

*Source: ENERGY SUBSIDY REFORM: LESSONS AND IMPLICATIONS — EXECUTIVE SUMMARY, Box 2, Box 4, sections 26 and 33, Appendix I, Appendix Table 1, Appendix Table 4 (IMF, January 28, 2013).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Scope and purpose
- Provides the most comprehensive estimates of energy subsidies currently available for 176 countries.
- Presents analysis of "how to do" energy subsidy reform based on 22 country case studies (covering 28 reform episodes) undertaken by IMF staff and additional institutional analyses.
- Publication date: January 28, 2013.

### Magnitude and composition of energy subsidies
- Pre-tax subsidies in 2011:
  - Total: $480 billion in 2011.
  - Equivalent to 0.7 percent of global GDP.
  - Equivalent to 2 percent of total government revenues.
  - Oil exporters account for about two-thirds of the total pre-tax subsidies.
- Post-tax subsidies in 2011 (including negative externalities from energy consumption):
  - Total: $1.9 trillion in 2011.
  - Equivalent to 2½ percent of global GDP.
  - Equivalent to 8 percent of total government revenues.
  - Advanced economies account for about 40 percent of the global post-tax total.
  - Oil exporters account for about one-third of the global post-tax total.
- Environmental impact:
  - Removing these subsidies could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand.

### Economic and distributional consequences
- Fiscal and macroeconomic effects:
  - Subsidies aggravate fiscal imbalances.
  - Subsidies crowd out priority public spending and depress private investment, including in the energy sector.
  - Underpriced energy distorts resource allocation by encouraging excessive energy consumption and promoting capital-intensive industries, which can discourage employment creation.
  - Subsidies reduce incentives for investment in renewable energy and accelerate depletion of natural resources.
  - Higher energy consumption from subsidies exerts pressure on the balance of payments of net energy importers and promotes smuggling to neighbors with higher domestic prices.
- Distributional effects:
  - Most subsidy benefits are captured by higher-income households, reinforcing inequality.
  - Lack of public confidence in governments’ ability to reallocate budgetary savings and protect vulnerable groups undermines support for reform.
- Institutional and sectoral complexities:
  - Electricity sector reform is often complex due to inefficiencies and production costs associated with state-owned enterprises (SOEs).
  - How subsidies are financed and recorded in the budget varies across countries; subsidies may appear as direct budget expenditure, SOE losses, lower tax payments, arrears, or off-budget items.

### Definition and measurement approach
- Energy subsidies include both consumer and producer subsidies:
  - Consumer subsidies: when prices paid by consumers (firms and households) are below a benchmark price.
  - Producer subsidies: when prices received by suppliers are above the benchmark.
- Benchmarking and price-gap approach:
  - For internationally traded energy products, benchmark price is the international price adjusted for transport and distribution costs.
  - For mostly non-traded products (e.g., electricity), benchmark is the cost-recovery price for the domestic producer, including normal return and distribution costs.
  - This "price-gap approach" captures explicit and implicit consumer subsidies (e.g., oil-exporting countries supplying petroleum products domestically below international prices).
  - Producer subsidies arising from inefficient suppliers making losses at benchmark prices are not fully captured by the price-gap approach.
- Consumer subsidy components:
  - Pre-tax subsidy: Pw – Pc (where Pw is benchmark price and Pc is price paid by consumers).
  - Post-tax subsidy: (Pw + t*) – Pc (where t* is the efficient tax capturing revenue needs and correction for negative consumption externalities).

### Key barriers and political economy considerations
- Reform reversals:
  - Price increases for subsidized energy often lead to public protests and in some cases to partial or full reversals of price increases.
  - Examples of reform reversals cited in country cases include Bolivia (2010), Cameroon (2008), Nigeria (2012), Venezuela (1989), and Yemen (2005).
- Special challenges:
  - In oil-exporting countries, subsidies are often perceived as a mechanism to distribute natural resource benefits, complicating reform.
  - Many countries lack capacity to administer targeted social programs to protect vulnerable groups.
  - Governments worry about inflationary effects of higher energy prices and impacts on international competitiveness.

### Six key elements for successful subsidy reform (lessons from country experiences)
- Comprehensive energy sector reform plan:
  - Clear long-term objectives, analysis of the impact of reforms, and consultation with stakeholders.
- Extensive communications strategy and transparency improvements:
  - Dissemination of information on the magnitude of subsidies and recording of subsidies in the budget.
- Appropriately phased price increases:
  - Phasing can be sequenced differently across energy products.
- Improving efficiency of state-owned enterprises:
  - Reduce producer subsidies by addressing SOE inefficiencies.
- Targeted measures to protect the poor:
  - Implement protection mechanisms for vulnerable groups during reform.
- Institutional reforms to depoliticize pricing:
  - Examples include the introduction of automatic pricing mechanisms.

### Research and analysis components of the paper
- Presents definitions and measurement methodology (pre-tax and post-tax concepts).
- Reviews macroeconomic, environmental, and social implications of subsidies.
- Provides equity analysis showing distributional impacts (higher-income households capture most benefits).
- Draws lessons from 22 country case studies (28 reform episodes) and earlier IMF and external analyses.
- Appendices include methodological details for estimating pre-tax and post-tax global energy subsidies and assessing environmental and health impacts of reform.

*Source: ENERGY SUBSIDY REFORM: LESSONS AND IMPLICATIONS — EXECUTIVE SUMMARY (January 28, 2013).*

### Box 2. Financing Fuel Subsidies in India

### Box 2. Financing Fuel Subsidies in India

### Domestic evolution and magnitude (India)
- Domestic fuel prices in India did not keep pace with rising international fuel costs, resulting in consumer price subsidies.
- Subsidies peaked at over 2 percent of GDP in FY 2008/09.
- Subsidies fell to just under 0.9 of a percent of GDP in FY2009/10 after international prices collapsed in the second half of 2008.
- Subsidies rose again with the rebound in international prices, reaching nearly 2 percent of GDP in FY 2011/12.

### Financing mechanisms for fuel subsidies in India
- Subsidies are incurred initially by predominantly state-owned oil marketing companies (OMCs) who sell fuel products to consumers at subsidized prices.
- In FY 2007/08, just less than one-half of the financing was recorded on budget, with the remaining half financed off budget.
  - On-budget transfers mainly took the form of government “oil bonds” issued to OMCs.
  - Direct budget transfers to OMCs were negligible in FY 2007/08.
- Off-budget financing in FY 2007/08 was split between transfers from state-owned enterprises involved in upstream crude oil production and OMCs’ self-financing (using profits from sale of other unregulated fuel products to offset subsidy losses).
- By FY 2011/12, all on-budget financing took the form of direct budget transfers to OMCs, which accounted for around three-fifths of subsidies, with the remainder financed by upstream transfers.

### Pre-tax subsidy measurement methodology (global context referenced)
- Petroleum product consumer subsidies are estimated for gasoline, diesel, and kerosene using the price gap approach for 176 countries for 2000–2011 (data from IMF staff, OECD, GIZ).
  - Producer subsidies to refineries to cover inefficient operations are not estimated due to lack of data; thus estimated petroleum product subsidies capture only consumer subsidies and are a lower bound.
- Natural gas and coal subsidies are estimated for 56 countries largely via the price gap approach (IEA data for 2007–2011). Producer subsidies for coal are included for 16 OECD countries.
- Electricity subsidies for 77 countries are estimated using a mix of methods:
  - For some countries, combined producer and consumer subsidies compiled from World Bank and IMF reports based on average domestic prices and cost-recovery prices (including production, investment, distributional losses, and non-payment).
  - For other countries, consumer price subsidies are taken from IEA (price gap approach).

### Caveats on subsidy estimates
- Estimates likely underestimate energy subsidies due to:
  - Incomplete data on producer subsidies for all countries and products.
  - Exclusion of consumer subsidies for liquefied petroleum gas (LPG) due to lack of data.
  - Use of snapshot/end-of-period prices or averages of end-of-quarter prices.
  - Lack of full comparability across countries for electricity, natural gas, and coal due to different sources and approaches.
  - Assumption of similar transportation and distribution margins across countries.
  - Estimates of corrective taxes are based on studies for a few countries and a common assumption regarding variation with country income levels.

### Magnitude of global energy subsidies (key statistics for 2011)
- Global pre-tax energy subsidies in 2011: $480 billion (0.7 percent of global GDP or 2 percent of total government revenues).
  - Petroleum products: $212 billion (about 44 percent of the total pre-tax subsidies).
  - Electricity: $150 billion (about 31 percent of the total).
  - Natural gas: $112 billion.
  - Coal: $6½ billion.
- Pre-tax subsidies closely mirror changes in international energy prices and surged since the 2008–09 crisis.
- Pre-tax subsidies are concentrated in developing and emerging economies; oil exporters tend to have the largest subsidies (absolute and relative to GDP and per capita).

### Regional distribution highlights (2011)
- Middle East and North Africa (MENA):
  - Accounted for about 50 percent of global energy subsidies.
  - Energy subsidies totaled over 8½ percent of regional GDP or 22 percent of total government revenues.
  - One-half of regional subsidies reflected petroleum product subsidies.
  - Of 20 countries in the region, 12 have energy subsidies of 5 percent of GDP or more.
- Emerging and Developing Asia:
  - Responsible for over 20 percent of global energy subsidies.
  - Nearly 1 percent of regional GDP or 4 percent of total government revenues.
  - Petroleum products and electricity account for nearly 90 percent of subsidies.
  - Energy subsidies exceeded 3 percent of GDP in four countries (Bangladesh, Brunei, Indonesia, and Pakistan).
- Central and Eastern Europe and CIS:
  - Accounted for about 15 percent of global energy subsidies and nearly 36 percent of global natural gas subsidies.
  - Energy subsidies amounted to over 1½ percent of regional GDP or 4½ percent of total government revenues.
  - Natural gas and electricity account for about 95 percent.
  - Subsidies exceeded 5 percent of GDP in four countries (Kyrgyz Republic, Turkmenistan, Ukraine, and Uzbekistan).
- Latin America and Caribbean:
  - Made up over 7½ percent of global energy subsidies (approximately ½ percent of regional GDP or 2 percent of total government revenues).
  - Petroleum subsidies accounted for nearly 65 percent.
  - Energy subsidies exceeded 5 percent of GDP in two countries (Ecuador and Venezuela).
- Sub-Saharan Africa:
  - Accounted for about 4 percent of global energy subsidies.
  - Energy subsidies amounted to 1½ percent of regional GDP or 5½ percent of total government revenues.
  - Electricity subsidies accounted for over 70 percent.
  - Total subsidies exceeded 4 percent of GDP in three countries (Mozambique, Zambia, and Zimbabwe).
- Advanced economies:
  - The only advanced economy with non-negligible share of GDP in energy subsidies was Taiwan Province of China at 0.3 percent of GDP (electricity).

### Post-tax subsidies and adjustments for externalities and taxes
- Global post-tax energy subsidies in 2011: $1.9 trillion (about 2½ percent of global GDP or 8 percent of total government revenue).
  - Pre-tax subsidies account for about one-quarter of the global total; tax subsidies account for about three-quarters.
  - Petroleum products (post-tax): $879 billion.
  - Coal (post-tax): $539 billion.
  - Natural gas (post-tax): $299 billion.
  - Electricity (post-tax): $179 billion.
- Post-tax subsidies are larger because:
  - Corrective taxes to address global warming, local pollution, congestion, accidents, and road damage are not applied.
  - Energy products are taxed less than other goods (VAT/sales taxes).
  - Example: In MENA, applying the same rate of VAT or sales taxes to energy products as other goods and services would generate ¾ percent of GDP.
- Advanced economies account for about 40 percent of the global post-tax total.
  - Top three subsidizers in absolute terms: United States ($502 billion), China ($279 billion), and Russia ($116 billion).
- Assumed damages from global warming used in post-tax benchmark: $25 per ton of CO2 emissions (following the United States Interagency Working Group on Social Cost of Carbon (2010)).
- For final consumption, the post-tax benchmark assumes energy products are subject to the economy’s standard consumption tax rate (an ad valorem tax) on top of the corrective tax; VAT rates for 150 countries in 2011 are used, with regional averages applied where VAT data are missing.

### Macroeconomic, environmental, and social implications
- Energy subsidies depress growth through multiple channels beyond fiscal impacts:
  - Subsidies can discourage investment in the energy sector by reducing profits and making expansion unattractive for SOEs and private investors, leading to energy shortages that hamper economic activity.
  - Subsidies can crowd out growth-enhancing public spending; some countries spend more on energy subsidies than on public health and education.
  - Subsidies diminish longer-term private sector competitiveness by delaying resource reallocation to less energy-intensive, more efficient activities; removing subsidies can crowd-in private investment and promote R&D in energy-saving technologies.
  - Subsidies create incentives for smuggling when domestic prices are substantially lower than neighboring countries, increasing budgetary costs and undermining taxation in destination countries.
- Examples of smuggling noted: Canadians buy cheap fuel in the United States; Algerian fuel smuggled into Tunisia; Yemeni oil smuggled into Djibouti; Nigerian fuel smuggled into many West African countries.
- Electricity subsidies and growth in Sub-Saharan Africa (Box 3 summary):
  - Average cost of subsidized electricity prices in a sample of 30 SSA countries was 1.7 percent of GDP; in 12 countries it exceeded 2 percent of GDP.
  - On average, the effective tariff in SSA was about 70 percent of the cost-recovery price during 2005–09.
  - High costs (inefficiencies, back-up generation, low economies of scale, limited regional integration) are primary drivers of subsidies rather than low retail prices.
  - Losses constrain suppliers’ ability to invest in new capacity; installed per capita generation capacity in SSA (excluding South Africa) is about one-third of South Asia and one-tenth of Latin America.
  - Per capita consumption in SSA (excluding South Africa) is about 10 kWh per month, compared with roughly 100 kWh in developing countries and 1,000 kWh in high-income countries.
  - Improving electricity infrastructure could reduce sector costs by more than 1 percentage point of GDP for at least 18 SSA countries; simulations suggest long-term per capita growth rates could be 2 percentage points higher if SSA countries’ electricity infrastructure matched better performers.

*Source: Box 2. Financing Fuel Subsidies in India (extracted from the IMF PDF chapter “Energy Subsidy Reform: Lessons and Implications”).*

### Box 4. Energy Subsidy Reform and Competitiveness

### Box 4. Energy Subsidy Reform and Competitiveness

### Short-run effects on competitiveness
- Higher energy prices to reduce subsidies—or avoid the emergence of subsidies in periods of rising international prices—increase production costs.
- Effects vary by sector depending on direct energy use and indirect use through intermediate inputs (Gupta, 1983; Dick and others, 1984).
- Higher fuel prices can lead to higher electricity prices, affecting manufacturing costs and output (Clements, Jung, and Gupta, 2007).
- Input-output tables can be helpful to trace direct and indirect effects and quantify which sectors will be most affected.
- The effect on competitiveness depends on developments in energy prices in competing countries; if all countries pass through international price increases to domestic prices, effects on production costs may be similar across countries.
- Empirical example: in 2011, it was estimated that more than 80 percent of gasoline consumed in Benin was smuggled from Nigeria (IMF, 2012c).

### Macroeconomic policies and “second-round” effects
- The extent to which higher energy costs result in a persistently higher price level and an adverse effect on competitiveness depends on the strength of “second round” effects on wages and prices of other inputs (Fofana, Chitiga, and Mabugu, 2009).
- If domestic prices rise relative to trading partners, the real exchange rate will appreciate, reducing competitiveness.
- Containment measures:
  - Appropriate monetary and fiscal policies to help anchor inflationary expectations (IMF, 2012a).
  - Subsidy reform supports fiscal policy by reducing budget deficits and helping contain demand pressures on prices.
  - Flexible exchange rate regimes mitigate the impact of volatile international prices on economic growth (IMF, 2008b).
- Policy implication: some smoothing of price increases can be considered to offset concerns about transmission of high international price volatility to domestic prices (see paragraph 45).

### Long-term effects and resource reallocation
- Resources freed from subsidy reform can boost competitiveness over the longer term:
  - Subsidy reform can contribute to lower budget deficits and interest rates, stimulating private investment (Fofana, Chitiga, and Mabugu, 2009; Clements, Jung, and Gupta, 2007).
  - Investing freed resources in productivity-enhancing public spending can generate high growth dividends (Breisinger, Engelke, and Ecker, 2011; Lofgren, 1995).
  - Removing distortions in price signals helps reallocate resources toward best use and improves incentives to adopt energy-saving technologies.
- Not all sectors will benefit: sectors unable to adapt to higher energy prices may lose competitiveness; however, aggregate effects on competitiveness are positive.

### Environmental and health impacts of eliminating subsidies
- Estimated impacts of raising energy prices to eliminate tax-inclusive subsidies for petroleum products, natural gas, and coal:
  - CO2 emissions reduced by 4½ billion tons, representing a 13 percent decrease in global energy-related CO2 emissions.
  - SO2 emissions reduced by 10 million tons.
  - Other local pollutants reduced by 13 percent.
- The impact of electricity subsidy removal is not assessed due to data limitations.
- Over-consumption due to subsidies aggravates global warming and local pollution, increases traffic congestion, accidents, and road damage, and can deplete groundwater via subsidized diesel–driven irrigation.

### Global spillovers on energy markets
- Multilateral removal of pre-tax fuel subsidies in non-OECD countries, under a gradual phasing-out, would reduce world prices in 2050 relative to the no-change baseline by:
  - Crude oil: 8 percent
  - Natural gas: 13 percent
  - Coal: 1 percent
- Reductions would be substantially larger if prices were raised to eliminate subsidies on a post-tax basis.
- Spillovers imply non-subsidizers share gains from subsidy reform and extended availability of scarce natural resources.

### Equity implications and distributional effects
- Energy subsidies are highly inequitable; on average the richest 20 percent of households in low- and middle-income countries capture six times more in total fuel product subsidies (43 percent) than the poorest 20 percent of households (7 percent).
- Product-specific distribution (percent of total product subsidies by quintile, bottom to top):
  - Gasoline: 3, 6, 10, 19, 61
  - Kerosene: 19, 20, 21, 20, 21
  - LPG: 4, 8, 13, 21, 54
  - Diesel: 7, 12, 16, 23, 42
- Gasoline is the most regressive; kerosene is progressive. Natural gas and electricity subsidies are also badly targeted: the poorest 20 percent receive 10 percent of natural gas subsidies and 9 percent of electricity subsidies (IEA, 2011a).
- A sharp increase in energy prices can significantly affect poor households directly and indirectly; example: a $0.25 per liter increase in fuel prices can reduce real consumption of the poorest 20 percent of households by about 5½ percent (Arze del Granado, Coady, and Gillingham, 2012).
- Policy tools to protect the poor:
  - Well-designed safety nets and increases in pro-poor spending to accompany subsidy removal.
  - Electricity lifeline tariffs to protect low-income connected households—note that such tariffs do not help households without access: only 30 percent of households are connected to the grid in sub-Saharan Africa (IFC, 2012).

### Growth and investment estimates
- Empirical estimates suggest that higher investment in more efficient and energy-saving technologies could boost growth by up to 1 percent over the long term (Burniaux and others, 2009; Ellis, 2010; UNEP, 2008; von Moltke, McKee, and Morgan, 2004).

*Source: Box 4, “Energy Subsidy Reform and Competitiveness,” from the IMF chapter _012813 - Box 4. Energy Subsidy Reform and Competitiveness.*

### 26.      Country reform experiences suggest a number of barriers to successful subsidy reform.

### 26. Country reform experiences suggest a number of barriers to successful subsidy reform.

### Barriers to reform
- Lack of information regarding the magnitude and shortcomings of subsidies.
  - The full fiscal cost of energy subsidies—including both producer and consumer subsidies—are rarely reflected in the budget; subsidies provided by low energy prices are often implicit and not explicitly recorded in the budget (especially in oil exporters).
  - Populations often lack awareness of how domestic energy prices compare with international market prices, the consequences for the budget and economic efficiency, and the benefit distribution of energy subsidies.
  - Out of the 28 reform episodes, 17 indicate that the lack of information was a barrier to reform (examples include fuel subsidy reforms in Ghana, Mexico, Nigeria, the Philippines, Uganda, and Yemen; electricity subsidy reforms in Mexico and Uganda).
  - Most countries that successfully reformed energy subsidies undertook an evaluation of the magnitude of energy subsidies prior to implementing subsidy reforms. Public discussions based on such studies were important in Ghana, Namibia, and the Philippines.

- Lack of government credibility and administrative capacity.
  - Public skepticism that savings from subsidy reform will be used wisely undermines reforms, particularly in countries with histories of widespread corruption, lack of transparency, and perceived inefficiencies in public spending.
  - The middle class may resist removal of subsidies seen as one of the few concrete benefits from the state.
  - Oil exporters with ample fiscal resources but limited administrative capacity to implement cash transfer programs face particular challenges.
  - Lack of credibility was an important factor in less successful fuel subsidy reforms in Indonesia in 2003 and Nigeria in 2011.

- Concerns regarding the adverse impact on the poor.
  - Energy price increases can substantially reduce real incomes of the poor via higher costs for cooking, heating, lighting, personal transport, and higher prices for other goods and services, including food.
  - In 20 episodes, subsidy reform was accompanied by specific measures to mitigate the impact of price increases on the poor.
  - In seven episodes, price increases were initially concentrated on products less important for poor household budgets.

- Concerns regarding inflation, international competitiveness, and price volatility.
  - Increases in energy prices have short-term effects on inflation and can give rise to expectations of further increases in prices and wages unless appropriate macroeconomic policies are in place.
  - Higher energy prices may raise concerns about international competitiveness of energy-intensive sectors.
  - Countries may hesitate to liberalize energy prices to avoid high volatility in domestic prices arising from international price developments.
  - Examples: Armenia mitigated inflation impact of electricity price increases with macroeconomic stabilization measures; Iran and Nigeria accompanied fuel subsidy reform with measures to mitigate impacts on energy-intensive sectors.

- Opposition from specific interest groups benefiting from the status quo.
  - Politically vocal, well-organized groups that benefit from subsidies (urban middle class, industrial sector, SOEs) can block reforms.
  - Examples: unsuccessful initial mining sector reforms in Poland due to inadequate support for miners; Mexico electricity sector reform stalled by strong opposition from labor unions; SOEs often resist governance and performance improvements.

- Weak macroeconomic conditions.
  - Public resistance is lower when economic growth is relatively high and inflation is low; rising household incomes can help households better afford higher energy prices.
  - Example: Peru implemented subsidy reforms in early 2010 during stable prices and strong economic growth; Turkey’s electricity reforms coincided with growth and improving standards of living.
  - High inflation is an obstacle to reform because frequent large changes in controlled prices are needed to avoid re-emergence of fuel subsidies (example: Brazil).

### Designing a Subsidy Reform Strategy — key elements
- Staff’s review suggests the following elements increase likelihood of successful subsidy reform:
  - (i) a comprehensive reform plan;
  - (ii) a far-reaching communications strategy, aided by improvements in transparency;
  - (iii) appropriately phased energy price increases, which can be sequenced differently across energy products;
  - (iv) improving the efficiency of SOEs to reduce producer subsidies;
  - (v) targeted mitigating measures to protect the poor;
  - (vi) depoliticizing energy pricing to avoid the recurrence of subsidies.

### (i) Comprehensive reform plan
- Successful reforms were well planned with a clear reform strategy, objectives, compensating measures, and a timetable; some required extensive preparation time.
  - Example: Iran’s 2010 fuel subsidy reform included clear objectives, compensating measures, a timetable, an extensive public relations campaign, bank accounts opened for most citizens prior to reform, and cash transfers deposited preceding price increases.
  - Example: Namibia undertook comprehensive planning with broad consultation, introduced a fuel price adjustment mechanism, and a targeted subsidy for those in remote areas.
  - Lack of effective planning contributed to less successful outcomes in Indonesia in 1998 and partial success in Nigeria in 2011.

- Components of a comprehensive plan:
  - Clear long-term objectives: embed subsidy reform within a broader reform agenda including sustainable energy pricing and improved efficiency of energy consumption and supply.
    - In the Philippines and Turkey, full price liberalization and structural reform were articulated as ultimate goals; this focus aided eventual success.
    - Electricity reforms should combine tariff adjustments with service quality improvements and operational efficiency measures (reduce distribution losses, improve bill collection and metering). Examples of successful electricity subsidy reforms as part of broader supply packages: Armenia, Brazil, Kenya.
  - Assessing the impact of reforms: requires information on fiscal and macroeconomic effects and identification of winners and losers.
    - Example: Ghana in 2005 commissioned an independent poverty and social impact analysis prior to reform; this informed communication and mitigation design.
    - Contrast: Nigeria’s 2011 gasoline subsidy removal lacked National Assembly support partly due to claimed lack of firm data on subsidies’ size and incidence.
  - Consultation with stakeholders: stakeholder participation in formulation of strategy can improve outcomes.
    - Kenya overcame early difficulties in electricity tariff increases after intense negotiations with large consumers and communication efforts.
    - Namibia’s National Deregulation Task Force examined fuel price deregulation through a consultative process.
    - Niger established the Comité du Différé to discuss fuel subsidy reforms with stakeholders.
    - In Indonesia, inadequate consultation contributed to opposition to 2003 fuel subsidy reform.

### (ii) Communications strategy
- A far-reaching communications campaign throughout the reform process can generate broad political and public support.
  - The likelihood of success almost tripled with strong public support and proactive public communications (IMF, 2011).
  - The campaign should explain the magnitude of energy subsidies, their implications for other parts of the budget, and the benefits of removing subsidies (including on a post-tax basis), highlighting options to finance education, health, infrastructure, and social protection with savings.
  - Information campaigns underpinned success in fuel subsidy reforms in Ghana, Iran, Namibia, the Philippines, and electricity reforms in Armenia and Uganda.
    - Namibia produced a White Paper on Energy Policy as the basis for its communications campaign.
    - The Philippines ran a nationwide road-show to inform the public on petroleum price subsidies.
    - Uganda communicated the cost and incidence of the electricity subsidy, leading much of the media to view tariff increases as pro-poor.

- Transparency as a key component:
  - Disseminate: (i) magnitude of subsidies and funding sources (including implicit subsidies in oil-exporting countries and off-budget items as memorandum items); (ii) distribution of subsidy benefits across income groups; (iii) changes in subsidy spending over time; (iv) potential environmental and health benefits from reform.
  - Reporting producer subsidies may require better reporting of SOE accounts and inclusion of SOEs in budget documents.
  - Example: Prior to successful reform, Niger started recording fuel subsidies explicitly in the budget.
  - Ghana and South Africa regularly publish details for petroleum products on government websites and in national media.
  - Governments should disclose price-formulation methods and factors behind planned price increases.

### (iii) Appropriately phased and sequenced price increases
- Phasing and sequencing depend on required price increases to eliminate subsidies, fiscal position, political/social context, and time to develop communications and social safety nets.
  - In the case studies, successful and partially successful subsidy reforms required, on average, about five years.

- Pace and timing:
  - Too sharp increases can provoke intense opposition (examples: Mauritania in 2008; Nigeria in 2012).
  - A phased approach permits households and enterprises to adjust, allows time to build credibility, helps reduce inflationary impact, and creates room to establish social safety nets.
  - Case studies: 17 out of the 23 reform episodes that were successful or partially successful involved a phased reduction of subsidies.
    - Namibia removed subsidies steadily according to a three-year reform plan.
    - Brazil pursued a step-by-step petroleum subsidy reform approach during the 1990s.
    - Iran planned to eliminate petroleum subsidies over a five-year period.
    - Kenya (electricity) adopted a gradual approach, gaining support by delivering improved services.
  - Timing considerations: coordinate electricity increases with capacity expansion (example: Uganda); avoid coinciding tariff increases with price increases for other socially sensitive products.

- Sequencing across energy products:
  - Price increases can be initially larger for products consumed more by higher-income groups and industry (e.g., gasoline, jet kerosene) and delayed for products more important to poor households; subsequent rounds can extend increases as safety nets are strengthened.
  - For electricity, initial tariff increases can focus on large residential and commercial users.
  - Out of the 28 reform episodes, seven reforms sequenced price increases in this manner.
    - Brazil: began liberalization with petroleum products used primarily by industry, then gasoline, and finally diesel.
    - Peru: initially focused on raising high-octane gasoline prices.

*Source: 26. Country reform experiences suggest a number of barriers to successful subsidy reform.*

### 33.      However, gradual reform can create additional reform challenges. First, a slower pace of

### _012813 - 33.      However, gradual reform can create additional reform challenges. First, a slower pace of

### Challenges of gradual reform
- A slower pace of reform reduces budgetary savings in the short term, creating a trade-off between achieving budgetary savings and softening the impact of reforms on households.
- Sequencing of reforms can severely distort consumption patterns; example risks include redirection of kerosene and LPG from households to the transport sector and cross-border smuggling.
- Turkey had to curtail LPG subsidies more rapidly than planned because of a sharp increase in LPG consumption due to the conversion of vehicles to LPG.
- Gradual reform runs the risk that opposition may build up over time; to address this, gradual reforms must be accompanied by the government’s long-term commitment to follow-through on planned price increases, possibly over several successive administrations.
- Building a broad support base can overcome political risk; examples:
  - Turkey started toward a more liberalized regime for energy pricing in the late 1980s and early 1990s and continued implementation under subsequent administrations.
  - Effective planning and communication promoted broad consensus in the Philippines and enabled gradual implementation.

### (iv) Improving the efficiency of SOEs to reduce producer subsidies
- Improving SOE efficiency can reduce the fiscal burden of the energy sector, as energy producers often receive substantial current and capital transfers to compensate for inefficiencies in production and revenue collection.
- Country experiences suggest priorities to improve enterprise efficiency:
  - Strengthen SOE governance by improving reporting of information on operations and costs to identify system inefficiencies (e.g., overstaffing) and vulnerabilities (e.g., major loss points and bottlenecks). Countries that have adopted information systems include Kenya, Uganda, and Zambia.
  - Consistent with the Code of Good Practices on Fiscal Transparency, all extrabudgetary activity of the central government, including that undertaken by SOEs, should be reported in budget documents.
  - Set performance targets and incentives based on improved information. Example: In Cape Verde, the electricity company is allowed to keep resources from over-performance on their targets for investment.
  - Introduce competition, including from the private sector, especially where markets are large enough to "unbundle" petroleum and electricity activities. The private sector’s role in electricity is growing in many emerging and low-income countries; many have permitted competition among private generation companies and invited private sector management of distribution to address operational inefficiencies.
  - Improve demand management by charging higher prices during peak periods to shift demand to periods with lower marginal costs (Antmann, 2009). Programs distributing compact fluorescent bulbs have reduced demand/costs in Cape Verde, Ethiopia, Malawi, Uganda, and Rwanda.
  - Enhance revenue collection and metering, starting with large customers and extending to medium and smaller ones.
  - Exploit regional trade in electricity to improve efficiency and expand access; example: Mali and Burkina Faso expanded domestic supply and household access through regional market integration.

### (v) Targeted mitigating measures
- Well-targeted measures to mitigate the impact of energy price increases on the poor are critical for building public support.
- First step: assess capacity to expand existing (or implement new) social programs in the short term.
- Implementing or expanding targeted programs immediately prior to price reforms can demonstrate government commitment to protecting the poor.
- Untargeted cash transfers limited to the amount consumed by the poorest can generate fiscal savings because poor households typically consume substantially lower quantities of energy than the rich.
- Targeted cash transfers to lower income groups generate further fiscal savings.
- In some oil-exporting countries, uniform per capita transfers can be both more efficient and more equitable than untargeted energy subsidies; however, wealth sharing may be better achieved through targeted and productive public spending aimed at building physical and human capital.
- The degree of targeting is a strategic decision involving trade-offs between fiscal savings, capacity to target, and need for broad acceptance.
- Out of the 28 reform episodes, 18 relied on targeted mitigating measures, including expansion of public works, education, and health programs in poor areas.

### Preferred compensation mechanisms and country experiences
- Targeted cash transfers or near-cash transfers (vouchers) are the preferred approach:
  - Cash transfers give beneficiaries flexibility and remove the need for costly, abuse-prone government distribution of subsidized energy.
  - Targeted cash transfers were used to protect poor households in nine out of the 28 reform episodes.
  - Indonesia’s unconditional cash transfer program covered 35 percent of the population and was an important component of its successful strategy in overcoming social and political opposition to fuel subsidy reforms; such programs require good preparation and monitoring.
  - Armenia introduced a targeted cash transfer program during its electricity reform and gradually reduced coverage from 25 percent in 1999 to 18 percent in 2010.
  - Expansion of conditional cash transfer programs in emerging and low-income economies has increased capacity to protect poor households while addressing root causes of poverty.

- When cash transfers are not feasible, expand other programs while administrative capacity is developed:
  - Focus on existing programs that can be expanded quickly with improved targeting (e.g., school meals, public works, reductions in education and health user fees, subsidized mass urban transport, subsidies for water and electricity consumption below a threshold).
  - This approach was used in 15 of the reform episodes, sometimes alongside targeted cash transfers.
  - Examples:
    - Gabon, Ghana, Niger, Nigeria, and Mozambique expanded targeted social spending programs to protect lower-income households from fuel price increases.
    - Armenia, Brazil, Kenya, and Uganda kept lower electricity lifeline tariffs fixed and concentrated tariff increases on households with higher electricity consumption.
    - The Philippines maintained electricity subsidies for indigent families, college scholarships for low-income students, and subsidized loans to convert public transport engines to less costly LPG.
    - Kenya subsidized connection costs instead of electricity price subsidies, expanding coverage from 650,000 connections in 2003 to 2 million at present, with a donor-financed fund for connection fee payments.

- Provide affordable alternative energy sources:
  - Subsidy reform can be more acceptable if accompanied by measures supporting affordable energy for low-income households.
  - Such measures were included in five reform episodes.
  - Indonesia and Yemen facilitated household conversion from kerosene for cooking to low-cost LPG.

- SOE restructuring and temporary social measures:
  - SOE restructuring may require temporary sector-specific social measures for employees and enterprises (e.g., unemployment assistance, job training, investment in energy-saving technologies).
  - Example: coal sector reform in Poland provided social assistance and job training for unemployed miners.
  - In fuel subsidy reform, Iran consulted enterprises and implemented a program targeted to agriculture and energy-intensive sectors, including direct assistance and access to subsidized fuel.
  - Such measures should be temporary with a clearly specified lifespan communicated to the public.

### (vi) Depoliticize energy pricing
- Successful and durable reforms require a depoliticized mechanism for setting energy prices; subsidies have reappeared in many countries when international oil prices increased.
- Out of 28 reform episodes, 11 were classified as partially successful because subsidies later re-emerged.
- Examples:
  - Ghana eliminated fuel subsidies in 2005 but abandoned linking domestic to international prices in 2007–2008 when oil prices soared.
  - In Indonesia, fuel subsidies fell from 3½ percent of GDP in 2005 to 2 percent of GDP in 2006, but unwillingness to fully pass through further international price increases led fuel subsidies to escalate again to 2.8 percent of GDP in 2008.

- Automatic pricing mechanisms:
  - Establishing an automatic pricing formula for fuel products can distance governments from pricing decisions and make domestic price changes reflect international prices.
  - Reliance on a formula can reassure the public that price increases will not lead to windfall profits for suppliers.
  - South Africa has implemented an automatic pricing mechanism for fuel products for over five decades.
  - Philippines and Turkey successfully implemented such mechanisms during transition to liberalized fuel pricing.
  - Detailed information on mechanisms and implementation was disseminated via government websites and other media in these countries.

- Limitations and conditions for sustainability:
  - Adoption of automatic mechanisms is not a panacea; mechanisms have been abandoned when governments were unwilling to pass through sharp international price increases.
  - Examples of suspension:
    - Gabon suspended its mechanism in August 2002 as international oil prices started to increase.
    - Ghana adopted an automatic mechanism in February 2001 but suspended it before year-end; it reintroduced in January 2003 and suspended again in June 2003.
    - More recently, newly adopted mechanisms were suspended in the Gambia, Sierra Leone, and Togo.
  - Sustainability can be enhanced if mechanisms are packaged and communicated as part of broader structural reforms, including expansion of targeted social safety nets and social spending programs.
  - Using price smoothing rules can help avoid large price increases (see paragraph 45).

- Independent implementation:
  - Responsibility for implementing automatic mechanisms can be given to an independent body to ensure reform proceeds as planned; such institutions can also implement the mechanism once subsidies are eliminated.
  - Countries that gave responsibility to an independent agency include South Africa, Turkey (petroleum), and Armenia, Kenya, the Philippines, and Turkey (electricity).

### Smoothing mechanisms and fiscal protection
- A smoothing rule can be incorporated into automatic pricing mechanisms to avoid sharp domestic price increases (Coady and others, 2012).
- Smoothing addresses concerns about political and social consequences of fully passing through sharp international price increases (example: China).
- Countries using smoothing rules include Chile, Colombia, Malawi, Nigeria, Peru, Thailand, and Vietnam.
- Smoothing mechanisms can contain inflationary expectations if supported by appropriate macroeconomic policies and dampen effects of international price and exchange rate volatility.
- Several sub-Saharan countries, including the Gambia, Sierra Leone, and Togo, are considering smoothing rules.
- Example smoothing design: energy price changes could be limited to a maximum of, say, 5 percent of the current consumer price in any given month.
- To protect the budget over the medium term, smoothing must be applied both to price increases (when subsidies increase or taxes fall) and to price decreases (when subsidies decrease or taxes increase).
- Peru's approach:
  - Adopted a smoothing rule in 2004: international price changes were fully passed through to domestic prices as long as they fell within a fixed price band.
  - When prices fell outside the band, the cost (if above) or benefit (if below) was absorbed by the budget.
  - Since 2010, the band price limits are updated to reflect trends in international prices, with adjustments limited to 5 percent.
- Experience with stabilization funds has been mixed; funds have exhausted reserves or incurred large contingent liabilities during sharp international price increases (examples: Chile, Namibia, Peru, the Philippines, and Thailand).

### Longer-term objectives and electricity sector considerations
- Petroleum products:
  - Over the longer term, subsidy reforms should aim to fully liberalize pricing so prices are determined by private sector suppliers and move freely with international prices; such regimes tend to be more robust to reintroduction of subsidies than automatic mechanisms (Baig and others, 2007).
  - Under liberalization, government role is to ensure competitive fuel markets with free entry and exit.
  - A well-functioning social safety net should be in place before liberalization to protect low-income groups and avoid pressure to reintroduce subsidies.
  - Successful implementation of automatic mechanisms can facilitate transition to liberalized pricing by acclimating the public to frequent domestic price changes and building private supplier confidence (example: the Philippines adopted an automatic pricing mechanism in 1996 as part of transition to a liberalized regime in 1998).

- Electricity sector:
  - Small market size in many emerging and low-income economies limits scope for competition and price liberalization; markets may not support firms large enough to reap economies of scale.
  - Under these circumstances, price regulation will be needed; competition alone may not be the best reform approach (Besant-Jones, 2006).
  - Prices should be determined by an autonomous agency and set at a level sufficient to avoid subsidies and ensure adequate return to investment under efficient operations.
  - Enhance progressivity of tariff structures by imposing higher tariff rates for larger consumers to reduce subsidy expenditures while protecting the poor; there is scope for more progressive tariffs in many African countries.
  - Greater emphasis could be given to subsidizing connections rather than consumption of electricity.

*Source: ENERGY SUBSIDY REFORM: LESSONS AND IMPLICATIONS (selected content unit)._012813 - 33.*

### References

### References

### Appendix I — Estimating Pre-tax and Post-tax Global Energy Subsidies
- Scope: estimation of subsidies for petroleum products, coal, natural gas, and electricity.
- Pre-tax subsidies — petroleum products:
  - Coverage: 176 countries between 2000 and 2011.
  - International prices: monthly average of spot prices from IEA.
  - Transport and distribution margins for importers: $0.10 per liter (international transport) + $0.10 per liter (domestic distribution and retailing).
  - Net oil exporters: no margin adjustment.
  - Domestic consumer prices:
    - OECD countries: publicly available sources.
    - Other countries: prices provided by country authorities to IMF staff, supplemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (Ebert and others, 2009).
    - Gasoline price: regular unleaded or other grades as available.
    - Imputation: used where consumer prices were unavailable — approximately 54 countries in 2009 and one country (Venezuela) in 2011.
    - Timing: end-of-year prices used except for 30 countries (mostly MENA) where quarterly price data are available.
  - Consumption levels: OECD and IEA data; include households and enterprises.
  - Note: Subsidies for oil-based heating fuels and non-road transportation vehicles are not included due to data limitations.

- Pre-tax subsidies — coal and natural gas:
  - Data: IEA data for coal (39 countries) and natural gas (37 countries) between 2007 and 2011.
  - Additional IMF staff estimates on natural gas: available for an additional four countries in the MENA region.
  - Producer coal subsidies: OECD data for 16 countries between 2007 and 2011.
  - Measurement: difference between reference price and domestic price paid by households and firms.
  - IEA reference prices:
    - Net importers: price at nearest international market adjusted for quality, freight and insurance, distribution and marketing costs, and any VAT; excludes excise duties.
    - Net exporters: price at nearest international market adjusted for quality, less freight and insurance, plus distribution, marketing, and VAT.
  - Quantities: do not include coal and natural gas used for electricity and heat generation.
  - To estimate pre-tax subsidies: VAT is subtracted from IEA estimates using the standard VAT rate in the country.
  - Producer coal subsidies capture tax subsidies or budgetary expenditures designed to support producer incomes (OECD, 2012a).

- Pre-tax subsidies — electricity:
  - Multiple approaches due to varying data availability.
  - For 40 countries (Africa and Middle East, and some emerging European economies): combined producer and consumer subsidies compiled from World Bank reports and IMF staff estimates; methodology based on average domestic prices and cost-recovery prices that cover production costs, investment cost, distributional loss, and non-payment of electricity bills. Upward adjustment for input subsidies through use of subsidized fossil fuels. For 31 of these 40 countries, latest year available is 2009.
  - For 37 countries: consumer price subsidies 2007–2011 from IEA, based on difference between costs (adjusted for any fossil-fuel input subsidy) and average domestic prices. These IEA-based estimates do not include investment cost, non-payment of electricity, and distributional losses, and thus may understate subsidies.
  - Total sample coverage: 77 countries.

- Post-tax subsidies:
  - Defined as pre-tax subsidies plus:
    - a corrective (or “Pigouvian”) tax to charge for externalities associated with CO2 emissions, local pollution, and (for gasoline and motor diesel) traffic congestion, accidents, and road damage.
    - a revenue component consistent with taxation of other consumer goods at the standard VAT or GST rate.
  - Corrective taxes:
    - Externalities for electricity generation are not measured to avoid double counting.
    - Externalities for other generation fuels are not measured due to lack of available evidence.
    - Environmental and transportation-related externalities have been quantified for the United States and a few other countries.
  - Petroleum-product externalities:
    - Combustion of gasoline, diesel, and kerosene contributes to global warming (CO2) and local pollution.
    - Motor-vehicle-related externalities apportioned to gasoline and diesel include traffic congestion, accidents, and (primarily for trucks) road damage.
    - Appendix Table 1 (in source) summarizes estimates of motor fuel taxes to correct for these externalities for the United States, the United Kingdom, and Chile; Chile’s corrective tax estimate is higher due to elevated local emission rates and high incidence of pedestrian deaths and traffic congestion.

### Key bibliographic entries (selected, as presented in source)
- Antmann, Pedro, 2009, “Reducing Technical and Non-Technical Losses in the Power Sector,” Background Paper for the World Bank Group Energy Sector Strategy (Washington: World Bank).
- Arze del Granado, Javier, David Coady, and Robert Gillingham, 2012, “The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries,” World Development, Vol. 40 (November) pp. 2234–48.
- Baig, Taimur, Amine Mati, David Coady, and Joseph Ntamatungiro, 2007, “Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies,” IMF Working Paper No. 07/71 (Washington: International Monetary Fund).
- Coady, David, et al., 2012, “Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications," Technical Notes and Manuals No. 12/03 (Washington: International Monetary Fund).
- Coady, David, et al., 2006, “The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka,” IMF Working Paper No. 06/247 (Washington: International Monetary Fund).
- Coady, David, et al., 2010, “Petroleum Product Subsidies: Costly, Inequitable, and Rising,” IMF Staff Position Note No. 10/05 (Washington: International Monetary Fund).
- Ebert, Sebastian, et al., 2009, International Fuel Prices 2009 (Eschborn: Deutsche Gesellschaft für Technische Zusammenarbeit, 6th ed.).
- International Energy Agency (IEA), 2011b, “Fossil-Fuel Subsidies—Methodology and Assumptions,” World Energy Outlook.
- IMF, 2008a, “Fuel and Food Price Subsidies—Issues and Reform Options” (Washington).
- IMF, 2012b, “Fiscal Transparency, Accountability, and Risk,“ IMF Policy Paper (Washington).
- Parry, Ian W. H., and Jon Strand, 2011, “International Fuel Tax Assessment: An Application to Chile,” IMF Working Paper No. 11/168 (Washington: International Monetary Fund).
- U.S. Interagency Working Group on Social Cost of Carbon, 2010, “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866” (Washington).

*Source: _012813 - References*

### Appendix Table 1. Corrective Motor Fuel Taxes, Selected Countries

### _012813 - Appendix Table 1. Corrective Motor Fuel Taxes, Selected Countries

### Appendix Table 1 — Summary figures (as presented)
- Header line (country/vehicle type as shown): United StatesUnited KingdomChileUnited StatesChile
- Total3642713762
- Contribution of:
  - local pollution34181016
  - carbon 65666
  - congestion1526191016
  - accidents12828312
  - noise00021
  - road damage000612
- Footer label (vehicle types): Gasoline (cars)Diesel (trucks)

### Key assumptions and parameter values referenced in the appendix text
- Global warming damages assumed at $25 per ton (in 2010 dollars) of CO2 emissions, following the US IAWG (2010).
- Literature range cited for CO2 damages: $12 per ton (Nordhaus, 2011) to $85 per ton (Stern, 2006).
- The $25 per ton CO2 emission translates into "$0.05–$0.06 per liter of gasoline or diesel" (as stated).
- Income elasticity of willingness to pay for reductions in externalities: 0.8 (following OECD, 2012b).
- For coal local pollution damages (U.S. estimate): about $65 (in 2010 dollars) per (short) ton (NRC, 2010).

### Methodology notes (as described)
- Corrective diesel fuel taxes for the United States and Chile are estimated in the cited studies; corrective diesel fuel taxes are not estimated for the United Kingdom (Notes).
- Adjustments to estimates for other countries use purchasing power parity income comparisons with the United States, the United Kingdom, and Chile; the income elasticity of 0.8 is applied to scale willingness to pay.
- Corrective tax per ton of coal: CO2 emissions per ton of coal (derived from IEA data) multiplied by global warming damages of $25 per ton of CO2.
- Local pollution damages for coal: U.S. committee estimate (~$65 per (short) ton) adjusted similarly to petroleum products when extrapolating to other countries; no adjustment made for differences in coal pollution content or scrubber use across countries.
- For natural gas: only a carbon damage is applied; corrective tax per thousand cubic feet based on IEA data on consumption and CO2 emissions and the $25 per ton CO2 damage.
- Revenue component: estimates based on VAT rates for 150 countries in 2011; where VAT rates unavailable or not applicable, the average VAT rate of countries with similar income in the region is assumed.
- Subsidy-free post-tax prices are derived by applying VAT/GST rates to pre-tax international prices/cost recovery prices and excise tax for externalities; subsidy-free post-tax prices compared with domestic prices and combined with consumption levels to compute subsidies.
- VAT is effectively assessed only on energy products as final consumption goods; IEA energy consumption data by industry type used to separate intermediate inputs from final consumption. Approximate shares treated as final consumption (average):
  - gasoline consumption: 99 percent
  - diesel consumption: 7 percent
  - kerosene consumption: 39 percent
  - coal consumption: 12 percent
  - natural gas consumption: 46 percent
  - electricity consumption: 51 percent

### Additional contextual figures and impacts noted
- Post-tax subsidies as a share of GDP for low-income countries would increase from 3.3 percent of GDP to 5.3 percent without the adjustment for non-carbon externalities of petroleum products and coal (footnote 21).
- The appendix notes that electricity VAT/GST is only estimated for countries with pre-tax subsidies because domestic prices and cost recovery prices are unknown for other countries.
- For coal and natural gas, in countries without pre-tax subsidies it is assumed that domestic prices equal international reference prices.

*Source: Appendix Table 1 and accompanying appendix text, "_012813 - Appendix Table 1. Corrective Motor Fuel Taxes, Selected Countries" (IMF).*

### Appendix Table 4. Post-tax Subsidies for Petroleum Products, Electricity,

### _012813 - Appendix Table 4. Post-tax Subsidies for Petroleum Products, Electricity, Natural Gas, and Coal, 2011

### Key statistics from Appendix Table 4 (Percent of GDP) and Appendix Table 5 (Percent of government revenues)
- World (Percent of GDP): Petroleum products 1.26, Electricity 0.26, Natural gas 0.43, Coal 0.77.
- World (Percent of government revenues): Petroleum products 3.77, Electricity 0.77, Natural gas 1.28, Coal 2.31.
- Note: "The estimate for Luxembourg reflects, to a large extent, cross-border sales of petroleum products to neighboring countries, with buyers attracted by lower tax rates."
- Values are rounded to the nearest one-hundredth percent; electricity subsidies are taken from 2009 for 31 countries and natural gas data are taken from 2010 for four countries.
- World estimates are calculated as identified subsidies divided by global GDP (Appendix Table 4) and divided by global government revenues (Appendix Table 5).

### Selected country-level figures (as reported in the tables)
- Advanced economies (Percent of GDP): United States — Petroleum products 2.42, Natural gas 0.27, Coal 0.64.
- Advanced economies (Percent of government revenues): United States — Petroleum products 7.70, Natural gas 0.87, Coal 2.05.
- Notable high reported values (Percent of GDP): Turkmenistan — Petroleum products 8.31, Electricity 2.39, Natural gas 19.92; Uzbekistan — Petroleum products 0.92, Electricity 5.95, Natural gas 25.50.
- Notable high reported values (Percent of government revenues): Turkmenistan — Petroleum products 44.05, Electricity 12.67, Natural gas 105.63; Uzbekistan — Petroleum products 2.28, Electricity 14.80, Natural gas 63.40.
- Selected developing-country examples (Percent of GDP): Venezuela — Petroleum products 8.11, Electricity 1.24, Natural gas 1.05; Nigeria — Petroleum products 2.04, Electricity 1.34, Natural gas 0.19.
- Selected developing-country examples (Percent of government revenues): Venezuela — Petroleum products 23.00, Electricity 3.52, Natural gas 2.97; Nigeria — Petroleum products 6.94, Electricity 4.55, Natural gas 0.64.

### Methodology for assessing environmental and health impacts of subsidy reform
- Scenario considered: energy prices raised to levels that would eliminate tax-inclusive subsidies for petroleum products, coal, natural gas, and electricity.
- Petroleum products
  - Price elasticity assumed for gasoline, diesel and kerosene: -0.4 (Parry, 2011).
  - CO2 calculation: reduction in CO2 emissions = reduction in consumption × CO2 coefficient of 0.0089 tons per gallon of gasoline.
  - Diesel and kerosene CO2 coefficient: assumed 16 percent higher than gasoline (Parry, 2011).
  - Local pollution: reduction (in percentage terms) in other local pollutants approximated by reduction in fuel consumption; petroleum combustion produces only a small amount of SO2, so impact on SO2 from petroleum subsidy removal is not estimated.
- Coal
  - Price elasticity assumed: -0.2 (EIA, 2012). (An upward adjustment is made to the EIA estimate as it is generally viewed as being on the conservative side.)
  - CO2 emissions: reduction in CO2 emissions from coal = same percent reduction in total CO2 emissions from coal, based on OECD data.
  - SO2 emissions: estimated using an SO2 coefficient of 0.01 tons of SO2 per short ton of coal (EPA, 2012; EIA, 2012).
  - Local pollution other than SO2 from coal is considered minor.
- Natural gas
  - Price elasticity assumed: -0.3 (EIA, 2012).
  - CO2 emissions: reduction in CO2 emissions from natural gas = same percent reduction in total CO2 emissions from natural gas, based on OECD data.
  - Local pollution from natural gas use is assumed relatively small; impacts on local pollutants are not emphasized.
- Electricity
  - The effects of electricity subsidy removal on emissions are not quantified for several reasons:
    - Part of electricity subsidies reflect inefficiencies in the electricity sector rather than prices being too low; successful reforms could reduce inefficiencies without raising prices and suppressing demand.
    - Data limitations, including limited price and cost data and lack of information on the marginal energy source for electricity generation, make quantification difficult.
    - Environmental impacts of fuel price increases for inputs to electricity generation (coal, natural gas) are already incorporated in the calculations for those products.
  - Electricity subsidies are relatively small as a share of total post-tax subsidies; omission expected to have only a small impact on overall estimates.
- Caveats
  - Methods provide rough estimates and have limitations.
  - Estimates do not take into account substitution between different energy products and resulting offsetting effects.

*Source: Appendix Table 4, Appendix Table 5, and Appendix II from the supplied IMF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_012813.pdf_