## Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it

_IMF Blog, March 27, 2013_

## Source details

**Canonical URL:** [Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it](https://www.imf.org/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it)

## Other formats

- [Markdown version](/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it/index.md)
- [Structured JSON version](/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it/index.json)
- [Bundle manifest](/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it/bundle-manifest.json)

## Bibliographic details
- Authors: Carlo Cottarelli
- Published: March 27, 2013

---

### Summary of the problem
- 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:
  - Poor targeting: in emerging and low-income countries, 43 percent of energy subsidies (before taxation) go to the richest 20 percent of the population.
  - Fiscal cost: pre-tax subsidies in 2011 amounted to $480 billion, or 0.7 percent of world GDP and 2 percent of public revenues.
  - Macroeconomic opportunity cost: subsidies preempt public spending on education, infrastructure, or other productive uses; even energy producers forego revenue that could be used productively.
  - Environmental damage: eliminating energy subsidies would reduce CO2 emissions by 4½ billion tons, a 13 percent reduction.
  - Overconsumption: subsidies lead to excessive energy use and associated externalities.

### Magnitude and distribution of subsidies (2011 figures)
- Pre-tax subsidies:
  - $480 billion total.
  - 0.7 percent of world GDP.
  - 2 percent of public revenues.
  - Regional example: Middle East and North Africa — 8.6 percent of GDP and 21.8 percent of revenues.
- Post-tax subsidies (accounting for under-taxation to cover externalities, using relatively conservative estimates):
  - $1.9 trillion total.
  - 2.7 percent of world GDP.
  - 8 percent of total government revenues.
  - Advanced economies: every single one is under-taxing energy.
  - The Unites States accounts for about one fourth of all post-tax subsidies.

### Why subsidies fail to achieve policy goals
- 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.

### Evidence on reform feasibility
- 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.

### Six key elements for successful reform
- A comprehensive reform plan:
  - Preferable to ad hoc decisions.
  - Requires clear long-term objectives, such as achieving full price liberalization and improving the quality of service.
- A far-reaching communications strategy and consultation with stakeholders:
  - People must understand that subsidies involve costs for the economy and society as a whole, not benefits.
- Protecting the poor:
  - 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.
- Appropriately phased and sequenced price increases:
  - Allow time for households and governments to adjust their energy consumption.
  - Absent large and immediate fiscal pressures, gradual pace is more acceptable if part of a clear comprehensive strategy.
- Improving the efficiency of state-owned enterprises:
  - Helps reduce their fiscal burden.
- Depoliticizing the setting of energy prices:
  - Needed to make reforms durable.

### Policy implications and recommendations
- 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:
  - Compensate and protect the poor.
  - Finance pro-growth and pro-equity public spending (education, infrastructure).
- Adopt comprehensive, communicated, phased reforms with measures to improve state enterprise efficiency and depoliticize pricing.

*Source: Carlo Cottarelli, "Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it", March 27, 2013 (IMF Blog).*

---

## Content in this bundle

- **Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013**
  - [Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013 (Markdown version)](/external/np/pp/eng/2013/012813.pdf.md){rel="alternate" type="text/markdown"}
  - [Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013 (PDF)](/external/np/pp/eng/2013/012813.pdf){rel="external" type="application/pdf"}
- **012813a**
  - [012813a (Markdown version)](/external/np/pp/eng/2013/012813a.pdf.md){rel="alternate" type="text/markdown"}
  - [012813a (PDF)](/external/np/pp/eng/2013/012813a.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/blogs/articles/2013/03/27/subsidizing-energy-consumption-why-its-wrong-and-what-can-be-done-about-it_