Fueling Reform

• Author: Maria Jovanović

Fueling Reform Finance & Development, June 2017, Vol. 54, No. 2

Maria Jovanović

Energy subsidy reforms are challenging, but many countries are making progress

Energy subsidies are policy measures that aim to lower the cost of energy consumption. In 2015, these subsidies amounted to 6.5 percent of global GDP, or roughly $5.3 trillion. Subsidies have many negative economic and environmental effects, and they primarily benefit the wealthiest households. Despite this, they have proved difficult to reduce or remove. But in recent years a few factors may have shifted the balance to provide incentive for reform: subdued growth since the global financial crisis, lower energy prices since a sharp decline in mid-2014, and pledges to reduce greenhouse gas emissions signed by 190 countries as part of the December 2015 Paris Agreement.

In fact, at least 32 countries have actively reformed their subsidies since mid-2014. More than half of them are oil exporters and have had to make up for declining oil revenues. Most of these oil-exporting countries faced much larger fiscal deficits than oil importers did. Environmental concerns have been another driver in some countries—which have introduced a carbon tax, raised carbon tax prices on top of existing systems, or announced their own emission-trading systems. And recent reforms benefited from lessons of past experiences, which makes them more likely to succeed.

Successful energy subsidy reform has six key ingredients according to IMF research, and many recent...