## "Energy Subsidy Reform: The Way Forward" — Presentation by David Lipton, First Deputy Managing Director, International Monetary Fund

_IMF News, March 27, 2013_

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## Bibliographic details
- Published: March 27, 2013

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### Overview
- Presentation delivered as prepared for delivery on March 27, 2013.
- Focus on three broad topics: (1) the consequences of energy subsidies; (2) the magnitude of these subsidies; and (3) the ingredients for successful subsidy reform.
- Key framing: energy subsidies are pervasive globally, affect fiscal sustainability, growth, equity, and the environment, and have proven difficult but feasible to reform.

### Consequences of energy subsidies
- Fiscal and growth effects:
  - Subsidies reduce incentives for private and state-owned investment in energy production, constraining supply and service quality (example: electricity suppliers in Africa).
  - Installed per capita generation capacity in sub-Saharan Africa, excluding South Africa, is about one-third of that of South Asia and one-tenth of that in Latin America.
  - Subsidies crowd out public spending on infrastructure, education, health care, and social safety nets; some countries spend more on energy subsidies than on public health and education.
  - Subsidies misallocate resources toward capital- and energy-intensive activities and discourage R&D in energy-saving and alternative technologies.
  - Subsidies put pressure on balance of payments for net energy importing countries.
- Environmental and distributional effects:
  - By boosting energy consumption, subsidies increase emissions, aggravate climate change, local pollution, and congestion.
  - Eliminating pre-tax subsidies alone would reduce CO2 emissions by about 1-2 percent.
  - If countries implemented emissions reduction pledges from the 2009 Copenhagen Accord, global greenhouse gas emissions in 2020 would be reduced by 7 percent below levels that would otherwise occur if lenient targets were met — implying that stopping pre-tax subsidies could achieve about 15-30 percent of that key global emissions reduction objective.
  - Tackling post-tax subsidies would reduce CO2 emissions by 4½ billion tons, a 13 percent reduction.
  - Subsidies reinforce inequality: on average, the richest 20 percent of households in low- and middle-income countries capture 43 percent of fuel subsidies; many poor households (e.g., in Africa) gain little because they lack grid connections.

### Magnitude of subsidies (estimates for 2011 dataset across 176 countries)
- Definitions:
  - Pre-tax subsidies: consumers pay less than the supply cost of energy (including transportation and distribution).
  - Tax subsidies: energy taxes are too low to account for negative externalities (climate change, local pollution, congestion).
  - Post-tax subsidies: sum of pre-tax and tax subsidies.
  - Producer subsidies: losses of state-owned enterprises due to inefficiency rather than consumer price controls.
- Key figures:
  - Pre-tax subsidies: 0.7 percent of global GDP, or about 2 percent of global tax revenues; mostly petroleum products and electricity.
  - Regional concentration: Middle East and North Africa (MENA) accounts for about half of pre-tax subsidies.
  - Pre-tax subsidies in MENA reach 8.6 percent of GDP and 21.8 percent of government revenues.
  - Post-tax subsidies worldwide: 1.9 trillion dollars, equivalent to 2.7 percent of global GDP, or 8 percent of government revenues.
  - Post-tax distribution: advanced economies account for 40 percent of the global total; some 159 economies are subsidizing energy on a post-tax basis.
  - As a share of GDP, post-tax subsidies are highest in MENA and lowest in advanced economies; as a share of revenues, highest in MENA and emerging and developing Asia.
  - Top three subsidizers in absolute terms: the United States (US$ 502 billion), China (US $279 billion), and Russia (US$ 116 billion).
  - Across regions, under-pricing for externalities accounts for a large share of post-tax subsidies.
  - Worldwide, more than a quarter of post-tax subsidies is devoted to coal.

### Ingredients for successful subsidy reform (lessons from 22 case studies)
- Six key ingredients:
  1. Spell out a comprehensive reform plan
     - Articulate long-term objectives (e.g., full price liberalization, improved service quality).
     - Assess fiscal and macroeconomic effects and identify winners and losers (example: Ghana commissioned an independent poverty and social impact analysis in 2005).
     - Consult stakeholders and invite participation (example: Kenya’s negotiations with large consumers).
  2. Implement a far-reaching communications strategy
     - Inform the public of subsidy size and potential benefits, including scope to raise priority social spending (examples: Namibia, the Philippines for fuel; Armenia and Uganda for electricity).
     - Strengthen transparency: publish subsidy size, funding sources, and price-formulation details (examples: Ghana and South Africa publish petroleum product pricing details).
  3. Phase and sequence price increases appropriately
     - Phasing depends on size of required price increases, fiscal position, and political/social context.
     - Phased increases give time to adjust consumption and strengthen safety nets; trade-off between short-term budgetary savings and softening household impacts.
     - Consider phasing across products (e.g., larger initial increases for gasoline, which is consumed more by upper-income households).
  4. Improve efficiency of state-owned enterprises
     - Improve cost information, set performance targets and incentives, introduce competition where appropriate.
     - Improve collection of energy bills (electricity).
  5. Implement mitigating measures to protect the poor (described as in some ways the most critical)
     - Preferred approach: targeted cash or near-cash transfers (e.g., vouchers) to give beneficiaries flexibility and reduce distribution costs and abuse.
     - Where cash transfers are not feasible, rapidly expand existing programs (school meals, public works, subsidized urban transport) while improving targeting; example: Ghana also eliminated fees for state-run primary and secondary schools.
     - Sector-specific measures may be needed to mitigate impacts on workers and facilitate restructuring (example: coal sector reform in Poland included social assistance and job training for unemployed miners).
  6. Depoliticize price-setting
     - Implement automatic price mechanisms with smoothing rules; assign implementation to an independent body to make reforms durable.
- Case examples of successful reforms: Philippines and Turkey (petroleum), Kenya and Uganda (electricity).

### Policy implications and concluding messages
- Energy subsidies have adverse effects on public finances, economic growth, equity, and the environment, but reform is feasible.
- Successful reform requires planning, targeted mitigation for the poor, transparency, stakeholder engagement, appropriately phased pricing, SOE efficiency measures, and mechanisms to depoliticize pricing.
- The IMF will support countries pursuing reform and emphasizes that "subsidy reform is needed, but it is better to do it the right way, than to do it right away."

*Presentation by David Lipton, First Deputy Managing Director, International Monetary Fund; March 27, 2013.*

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## References

- [PRESS CENTER](http://presscenter.imf.org/)
- [David Lipton](https://www.imf.org/external/np/omd/bios/dl.htm)
- [Press Release: IMF Calls for Global Reform of Energy Subsidies: Sees Major Gains for Economic Growth and the Environment](https://www.imf.org/external/np/sec/pr/2013/pr1393.htm)
- [Reforming Energy Subsidies](https://www.imf.org/external/np/fad/subsidies/index.htm)
- [Webcast](https://www.imf.org/external/mmedia/view.aspx?vid=2259938875001)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp032713_