Publication: Macroeconomic Modeling and Energy Subsidy Reform Policy Dialogue
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2023-12-22
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2023-12-22
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The report explores modeling approaches, designs, and impacts of CGE modeling exercises carried out for energy subsidy reforms in different country settings. The report reviews approaches used as part of operational and analytical engagements supported by the World Bank, including those funded by ESMAP, as well as activities by other institutions. The review considers four main dimensions: (1) energy subsidy reform context and challenges, (2) transmission channels covered by the model, (3) data collection and consolidation process, and (4) key model parameters, including calibration of shocks, choice of elasticities, and others. The review explores the ways in which CGE models were adapted for the situations in which they were used, and how they informed energy subsidy reform design and implementation, paying attention to the drivers, impacts, and lessons from the use of these models. Finally, the report offers insights, conclusions, and considerations for future work on CGE modeling supporting energy subsidy reform, with attention to the choice of approach, data availability, and capacity needs for effective modeling that can render analytical results that are useful for policy engagements. Given the strong case for using CGE in energy subsidy reform engagements, the report draws practical insights and lessons for future work.
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“Njinkeu, Dominique; Djiofack, Calvin; Gencer, Defne; Beyene, Lulit Mitik; Alli, Mosuru Olukayode. 2023. Macroeconomic Modeling and Energy Subsidy Reform Policy Dialogue. Energy Subsidy Reform in Action Series; ESMAP Technical Report. © World Bank. http://hdl.handle.net/10986/40802 License: CC BY 3.0 IGO.”
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Publication Energy Subsidy Reform Assessment Framework(World Bank, Washington, DC, 2018-06-30)This note provides guidance on the different economy-wide modeling tools that can be utilized to quantify the economic effects of energy subsidy reform. ESRAF defines an energy subsidy as a deliberate policy action by the government that specifically targets electricity, fuels, or district heating and that has one or more of the following effects: i) It reduces the net cost of energy purchased; ii) It reduces the cost of energy production or delivery; iii) It increases the revenues retained by those engaged in energy production and delivery (energy suppliers). Subsidies are provided through four primary mechanisms: 1) Budgetary transfers of government funds; 2) Government-induced transfers between producers and consumers; 3) Forgone taxes and other government revenues; 4) Under pricing of goods and services. Examples include government control of energy prices that are kept artificially low (referred to as consumer price subsidies hereafter); budgetary transfers to energy suppliers or tax expenditures granted to energy suppliers to keep costs down to benefit consumers, producers, or both; underpricing of goods and services, such as fuels, land, and water used by energy producers; subsidized loans; and shifting of risk burdens, such as the assumption of risks created by energy supply or use through limits on commercial liability. Among the economy wide modeling tools, the main focus of this note is computable general equilibrium (CGE) models. Partial equilibrium models are discussed only briefly The latter models, by carefully mapping the details of energy production technologies including substitution between fuel types and process and efficiency improvements (Bohringer and Rutherford 2008), can generate important insights to shape the design of a reform. However, they tend to have limited or no interaction between the market of interest and the rest of the economy. As a result, they are unable to measure the indirect and dynamic effects that a reform can generate, particularly with respect to energy-consuming sectors, the prices of goods and services that use energy as an intermediate input, and the impact of all of these changes on investment, industrial structure, and household welfare. The rest of the note is organized as follows. It begins with a brief overview of the different types of modeling tools in section two. Existing studies on estimating the effects of energy price subsidy reforms are outlined in annex A. The literature review shows that the bulk of studies use a CGE model for examining the effects of energy subsidy reform. 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The use of cash transfers to mitigate the impact of price increases from an energy subsidy reform puts a country’s social protection framework in the spotlight, along with the role social protection can play in bolstering national commitments to reduce greenhouse gas (GHG) emissions. While getting prices right is important in eliminating distortions and incentivizing efficient use of energy, cash transfers can help countries mitigate and adapt to climate change and make the transition to a green economy by smoothing the adjustment to changing energy costs.Publication Political Economy Analysis and Communications for Energy Subsidy Reform(Washington, DC: World Bank, 2024-04-17)This report takes stock of political economy analysis (PEA) and communications in the context of country-specific technical assistance activities supporting energy subsidy reforms that benefited from financial and technical support from ESMAP. Initiated as part of a retrospective assessment of technical assistance activities that ESRF has supported since its establishment, this report reviews designs and implementation approaches of World Bank–executed technical assistance activities. The assessment is based on a qualitative review of key outputs of select PEA and communications support activities carried out in the context of country grants. The report documents different approaches, assesses activity designs and outputs, and attempts to draw insights from emerging practices and substantive findings, along with making recommendations for future work. Key questions include, What practical approaches are used for providing technical and advisory support to developing-country governments for political economy assessments and communications strategies in support of energy subsidy reform efforts? What good practice examples are available for assessing political economy dimensions, using them to inform reform designs by addressing key impacts and concerns identified and conducting meaningful stakeholder engagement to explain the reform and build support?
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