Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms
A2.3 Natural Resource Depletion
Assessing the value of depletion of fossil-fuel resources requires an approach based on capital
stocks, as changes in the stock of capital available for future use affect its potential for
generating welfare for future generations. Valuing the future welfare change simply by
multiplying the market price of the resource by the volume sold in the last period does not
yield the true cost of over-depletion due to subsidies in terms of loss of welfare. Applying the
approach in this manner does not give an indication of whether the revenue has been used to
fund investment in alternative capital stocks for generating future welfare (sustainable
income) or whether it has simply been spent on current consumption. So, appropriate
methodologies must assess how much current production results in sustainable income. A
number of studies have been carried out in this area, though none of them specifically address
the issue of energy-subsidy reform. 122 The effects of government policies on natural resource
stocks are usually assessed in physical units, such as tonnes per year or the proportion of total
remaining proven reserves.
A3
Assessing Social Effects
The assessment of the social effects of energy-subsidy reform must address two principal
concerns:
Firstly, how different social groups are affected by changes in energy prices. Changes in real
income distribution result both from changes in the pattern of economic activity and changes
in environmental conditions. The former is generally more significant.
An understanding of the winners and losers from subsidy reform is essential to a full
assessment of the potential welfare benefits.
Secondly, how subsidy reform affects peoples’ access to and use of different types of energy
and consequently their health and well being. This in turn affects their comfort levels and
their ability to generate income. For example, a shift of industrial subsidies to those that
promote rural electrification can have a major impact on livelihoods and poverty alleviation
in rural areas.
The relevance of the two sets of concerns will also differ considerably between developed and
developing countries, with the latter being much more interested in the second set of issues.
Within this category the results will also depend critically on the types of fuels used as well
as the urban/rural distribution of population.
A3.1 Measuring Income Distribution Effects
An extension of the partial and general equilibrium methodologies outlined above can be
used to identify distributional effects. The price and quantity changes derived from
equilibrium-based economic modelling provide a starting point for assessing changes in
employment, consumption patterns and real incomes for different income groups within
society. A matrix of the distribution of gains and losses can be generated in this way. This
122
See, for example, Repetto et al. (1989) for Indonesia; Repetto and Cruz (1991) for Costa Rica; van Tongeren
et al. (1993) for Mexico; Bartelmus et al. (1993) for Papua New Guinea; and World Bank (1997) for 103 countries
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