Ukraine Gas Pricing Policy: Distributional Consequences of Tariff Increases

IMF Working Papers, October 15, 2012

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Ukraine’s gas pricing policy subsidizes gas and heating for all households.
Rising cost of imported gas increasingly:
- weighs on government finances,
- sustains energy over-consumption,
- dampens investment in delivery systems,
- undermines incentives for domestic production.
Gas price hikes have been deferred to the medium-term because they are politically unpopular.
Estimation of household demand functions by income quintiles indicates:
- tariff reforms combined with targeted social support can address the economic inefficiencies of the current pricing policy,
- such reforms can be implemented without large welfare costs to the lower income segments of the population.

Household demand functions were estimated by income quintiles to evaluate distributional consequences of tariff reform.
Analysis focuses on distributional impacts and welfare effects across income segments under tariff adjustment scenarios.

Replace universal price subsidies with reforms that:
- reduce fiscal burden from rising import costs,
- correct incentives to curb energy over-consumption,
- encourage investment in delivery systems,
- restore incentives for domestic gas production.
Complement tariff reforms with targeted social support to protect lower income households and limit adverse welfare impacts.

Pritha Mitra and Ruben V Atoyan; October 15, 2012. IMF Working Paper No. 2012/247.