Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms
relative terms since a greater proportion of their budget is spent on fuel. Therefore, some sort
of safety net is essential. But the cost of such a safety net would be significantly less than the
current cost of oil subsidies.
7.7 Implementing Reforms
The Government recognises the need to reduce subsidies, but in a way that does not harm the
welfare of the poorest households. The implementation of a scheme that targets subsidies at
the poor is one possible approach. In addition, the government could allocate at least part of
the savings from the removal of oil as well as power subsidies to programmes for alleviating
poverty, expanding access to education, improving public transportation and health services
and other social programmes. Direct income support would be much more effective than
indirect support such as oil subsidies. Direct payments to the poor should be clearly identified
in the national budget.
Both the Government and the House of Representatives have agreed to implement a twotiered
pricing policy for oil products. This plan ensures that the prices of kerosene for lowincome
groups and fuel for public transportation are not increased. The Government has also
proposed a coupon system, whereby coupons would be allocated to eligible holders giving
them the right to buy kerosene at a subsidised price. However, this proposal is unlikely to
work well in practice. The administration costs would be excessive as it involves too many
institutions. And abuses of the system, including the production of fake coupons, the
distribution of coupons to unintended recipients and the resale of coupons for profit, would
undoubtedly be a major problem.
References
World Bank (2000), Indonesia: Oil and Gas Sector Study (June 2000).
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