IMF Study Provides Lessons for Energy Subsidies Reform

28 January 2013: The International Monetary Fund (IMF) has released a report, titled "Energy Subsidy Reform: Lessons and Implications," which explores how conventional energy subsidies reduce incentives for investment in renewable energy and accelerate the depletion of natural resources.

Divided in two main sections, the paper updates estimates of energy subsidies in 176 countries and analyzes energy subsidy reform, based on 22 country case studies. It emphasizes subsidy cost and adverse macroeconomic and environmental consequences. The study underscores that the removal of these subsidies could cut 13% of global carbon dioxide emissions and contribute to the reduction of global energy demand, both of which would reduce climate change.

The study also indicates that subsidies aggravate fiscal imbalances, depress private investment, dislocate public investments, and reinforce socioeconomic inequalities because most benefits go to higher-income households. Based on a pre-tax analysis, the report shows that subsidies for petroleum products, electricity, natural gas, and coal reached US$480 billion in 2011, or 0.7% of global GDP. On a post-taxes basis, i.e. including externalities from energy consumption, the number is US$1.9 trillion per annum.

The report then presents six elements of successful energy subsidies reform based on the case studies, namely: a comprehensive energy sector reform plan entailing clear long-term objectives, analysis of the impact of reforms, and consultation with stakeholders; an extensive communications strategy, supported by improvements in transparency, such as the dissemination of information on the magnitude of subsidies and the recording of subsidies in the budget; appropriately phased price increases, which can be sequenced differently across energy products; improved efficiency of state-owned enterprises to reduce producer subsidies; targeted measures to protect the poor; and institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms." [Publication: Energy Subsidy Reform: Lessons and Implications]