Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms their share of the economic or environmental costs – a phenomenon known as political mobilisation bias. 105 It is easier to lobby political support for the clear interests of small, homogenous groups than for the comparatively vague “public interest”. This helps to explain why subsidies are as popular in practice as they are unpopular in theory. The resistance to cutting subsidies can be very strong. Plans to raise electricity prices in India in 2000 led to mass demonstrations and rioting, which left dozens dead. The German coalmining industry has been remarkably successful in garnering public support for maintaining subsidies, despite the large economic costs and determined claims from the green lobby that those subsidies boost coal use and exacerbate pollution. Indeed, it would be cheaper and the effects would be less distortionary if subsidies were paid to workers directly without linking them to coal production. Resistance to reform is particularly acute in the economies in transition. In these countries, the general public often still considers energy to be a basic social good, like food and housing, the pricing of which should not be left solely to market forces. The majority of the population, who bear the net cost of the subsidy, are typically less inclined to support political action to remove the subsidy since the cost is likely to be much smaller in per capita terms than the benefit to the recipients. Furthermore, it can be difficult to demonstrate the economic cost of subsidy in terms that the public can understand. Those that want to keep a subsidy often find it much easier to provide concrete examples of their social benefits, for example in terms of jobs supported or financial savings to poor people. Information about economic efficiency losses is much harder to document and explain to the general public. The problem is even bigger when the environmental costs of a subsidy are global, as with greenhouse gas emissions. Most people in poor developing countries have less concern for such matters, though they are likely to be affected most by climate change. These barriers to reform help to explain why it is so hard to remove subsidies once they have been introduced. This inertia makes it all the more important for policy makers to be extremely cautious in devising new subsidies. As a rule, a new subsidy should only be introduced if the immediate net benefits are demonstratively large and likely to persist for a long time. 13.2.2 Overcoming Resistance Reforming existing energy subsidies requires strong political will to take tough decisions that benefit society as a whole. Politicians are often more willing to tackle difficult subsidy issues immediately after elections in the hope that opposition to reform will have diminished by the time new elections come around. The following approaches can help policymakers to overcome resistance: • Reforms may need to be implemented in a gradual, programmed fashion to alleviate the financial pain of those who stand to lose out and give them time to adapt. This is likely to be the case where removing a subsidy has major economic and social consequences. The pace of reform, however, should not be so slow that delaying its full implementation involves excessive costs. Financial support for coal mining in France, 105 IEA (1999). 152
Designing and Implementing Energy Subsidy Reforms for example, has been gradually reduced under a 20-year programme agreed in 1986. This made the removal of subsidies politically easier and eased the pain of social adjustment, although the financial burden of coal subsidies was reduced only slowly. • If reforming an energy subsidy reduces the purchasing power of a specific social group, the authorities can introduce compensating measures that support their real incomes in more direct and effective ways – if that goal is considered socially desirable. It may, in any case, be the price that the government has to pay to achieve public support for reform. Such a move, however, depends on systems and structures for distributing welfare payments to the needy. • Politicians need to communicate clearly to the general public the overall benefits of subsidy reform with respect to the economy, the environment and society as a whole. They also need to involve stakeholders in the process of formulating subsidy reforms to counter political inertia and opposition. In most industrialised countries, for example, the public is becoming familiar with the environmental advantages of renewables and natural gas over coal, making it harder for politicians to maintain support to ailing coal industries. Multilateral lending institutions, other international organisations and aid providers have an important role to play in devising and implementing addressing energy-subsidy reforms. They can provide advice and expertise on subsidy reform and broader aspects of energypolicy making. They can also impose well-reasoned conditions on subsidy reform for lending and development aid. Indeed, countries trying to cut subsidies may find it politically safer and easier to have their hands tied by such conditions. These organisations should, nonetheless, take account of environmental and social considerations in formulating their strategies for developing countries and transition economies even if the primary aim should be to eliminate costly and ineffective subsidies. For example, at a Ministerial Meeting in July 2001, the G-8 Task Force on Renewable Energy committed to help developing countries strengthen institutional capacity and national strategies aimed at removing subsidies on conventional energy and attracting private investment in renewables. Conclusions Energy-subsidy reform can play a vital role in moving countries onto more sustainable development paths. Many of the subsidies described in this study – especially those that encourage fossil-fuel consumption – are clearly harmful to the environment as well as being economically costly. Removing them would, therefore, be a win-win policy. However, there may be a strong case in principle for retaining or even introducing subsidies in specific instances to address a particular social or environmental policy goal. Nevertheless, how such a subsidy is applied in practice has a big impact on how successful it is in meeting policy objectives and on its cost. By following the principles described in this chapter, policymakers can limit harmful sideeffects and greatly improve the cost-effectiveness of energy-subsidy programmes. The country chapters provide numerous examples of this. For instance, the targeted use of lifeline rates in India could greatly reduce the cost of ensuring a minimum level of service to poor households. And structural and regulatory reforms in OECD countries, the Czech and Slovak Republics and Chile demonstrate how market-based approaches to energy pricing can bring 153
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© Copyright 2003 UNEP This publica
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Acknowledgements Acknowledgements T
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United Nations Environment Programm
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Contents Contents Foreword 1 Acknow
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Contents 8.2.3 Renewable Energy Sou
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Executive Summary Executive Summary
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Executive Summary Summary of Findin
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Executive Summary employment in dom
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Abbreviations and Acronyms Abbrevia
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Energy Subsidies: Lessons Learned i
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Energy Subsidies in OECD Countries
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Energy Subsidies in the Czech and S
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Energy Subsidies in Russia: The Cas
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Electricity Subsidies in India 6. E
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Electricity Subsidies in India (SEB
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Electricity Subsidies in India rura
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Electricity Subsidies in India Usin
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Electricity Subsidies in India and
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Electricity Subsidies in India For
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Oil Subsidies in Indonesia 7. Oil S
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Oil Subsidies in Indonesia Table 7.
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Oil Subsidies in Indonesia 7.4 Econ
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Energy Subsidies in Korea 8. Energy
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Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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