{
  "title": "Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it",
  "publication": "IMF Blog, March 27, 2013",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it",
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  "summary": "Energy subsidies are the difference between the price consumers should pay (to cover supply costs and the appropriate consumption tax) and what they actually pay.",
  "sections": [
    {
      "heading": "Summary of the problem",
      "content": "- Energy subsidies are the difference between the price consumers should pay (to cover supply costs and the appropriate consumption tax) and what they actually pay.\n- Subsidies are widely used to make energy cheap for households and companies, often justified as protecting the poor or maintaining competitiveness.\n- Key negative effects identified:\n  - Poor targeting: in emerging and low-income countries, 43 percent of energy subsidies (before taxation) go to the richest 20 percent of the population.\n  - Fiscal cost: pre-tax subsidies in 2011 amounted to $480 billion, or 0.7 percent of world GDP and 2 percent of public revenues.\n  - Macroeconomic opportunity cost: subsidies preempt public spending on education, infrastructure, or other productive uses; even energy producers forego revenue that could be used productively.\n  - Environmental damage: eliminating energy subsidies would reduce CO2 emissions by 4½ billion tons, a 13 percent reduction.\n  - Overconsumption: subsidies lead to excessive energy use and associated externalities."
    },
    {
      "heading": "Magnitude and distribution of subsidies (2011 figures)",
      "content": "- Pre-tax subsidies:\n  - $480 billion total.\n  - 0.7 percent of world GDP.\n  - 2 percent of public revenues.\n  - Regional example: Middle East and North Africa — 8.6 percent of GDP and 21.8 percent of revenues.\n- Post-tax subsidies (accounting for under-taxation to cover externalities, using relatively conservative estimates):\n  - $1.9 trillion total.\n  - 2.7 percent of world GDP.\n  - 8 percent of total government revenues.\n  - Advanced economies: every single one is under-taxing energy.\n  - The Unites States accounts for about one fourth of all post-tax subsidies."
    },
    {
      "heading": "Why subsidies fail to achieve policy goals",
      "content": "- Poor targeting: benefits skew toward the rich who consume more energy.\n- Efficiency costs: subsidized energy supports survival of inefficient firms, harming long-run growth.\n- Fiscal and environmental externalities: large fiscal burdens and increased CO2 emissions."
    },
    {
      "heading": "Evidence on reform feasibility",
      "content": "- The IMF study examined subsidy reform in 19 countries, focusing on cases where governments reduced pre-tax subsidies.\n- Reforms are feasible and have a body of country experience that provides a roadmap."
    },
    {
      "heading": "Six key elements for successful reform",
      "content": "- A comprehensive reform plan:\n  - Preferable to ad hoc decisions.\n  - Requires clear long-term objectives, such as achieving full price liberalization and improving the quality of service.\n- A far-reaching communications strategy and consultation with stakeholders:\n  - People must understand that subsidies involve costs for the economy and society as a whole, not benefits.\n- Protecting the poor:\n  - With most subsidies benefiting the rich, their elimination allows not only to fully compensate the poor, but also to make resources available for pro-growth, pro-equity public spending.\n- Appropriately phased and sequenced price increases:\n  - Allow time for households and governments to adjust their energy consumption.\n  - Absent large and immediate fiscal pressures, gradual pace is more acceptable if part of a clear comprehensive strategy.\n- Improving the efficiency of state-owned enterprises:\n  - Helps reduce their fiscal burden.\n- Depoliticizing the setting of energy prices:\n  - Needed to make reforms durable."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Reform energy subsidies to improve targeting, fiscal space, and environmental outcomes.\n- Consider increases in energy taxation as part of fiscal consolidation, especially in advanced economies with high public debt.\n- Use savings from subsidy removal to:\n  - Compensate and protect the poor.\n  - Finance pro-growth and pro-equity public spending (education, infrastructure).\n- Adopt comprehensive, communicated, phased reforms with measures to improve state enterprise efficiency and depoliticize pricing.\n\nSource: Carlo Cottarelli, \"Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it\", March 27, 2013 (IMF Blog).\n\n---\n\n Content in this bundle\n\n- Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013\n  - Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 012813a\n  - 012813a (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 012813a (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it"
    }
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    "Authors: Carlo Cottarelli",
    "Published: March 27, 2013",
    "Energy subsidies are the difference between the price consumers should pay (to cover supply costs and the appropriate consumption tax) and what they actually pay.",
    "Subsidies are widely used to make energy cheap for households and companies, often justified as protecting the poor or maintaining competitiveness.",
    "Key negative effects identified:",
    "Pre-tax subsidies:",
    "Post-tax subsidies (accounting for under-taxation to cover externalities, using relatively conservative estimates):",
    "Poor targeting: benefits skew toward the rich who consume more energy.",
    "Efficiency costs: subsidized energy supports survival of inefficient firms, harming long-run growth.",
    "Fiscal and environmental externalities: large fiscal burdens and increased CO2 emissions.",
    "The IMF study examined subsidy reform in 19 countries, focusing on cases where governments reduced pre-tax subsidies.",
    "Reforms are feasible and have a body of country experience that provides a roadmap.",
    "A comprehensive reform plan:",
    "A far-reaching communications strategy and consultation with stakeholders:",
    "Protecting the poor:",
    "Appropriately phased and sequenced price increases:",
    "Improving the efficiency of state-owned enterprises:",
    "Depoliticizing the setting of energy prices:",
    "Reform energy subsidies to improve targeting, fiscal space, and environmental outcomes.",
    "Consider increases in energy taxation as part of fiscal consolidation, especially in advanced economies with high public debt.",
    "Use savings from subsidy removal to:",
    "Adopt comprehensive, communicated, phased reforms with measures to improve state enterprise efficiency and depoliticize pricing.",
    "**Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013**",
    "**012813a**"
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