Publication: The Energy Subsidy Reform Assessment Framework: Guidance for Comprehensive Energy Subsidy Reforms
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2017-11-13
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2017-11-15
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Reforming subsidies can be a complex and politically difficult process. Countries embarking on this journey underline the need for understanding the political context of reform, crafting the right energy pricing, designing solutions that mitigate the adverse impacts of reform on affected populations, and engaging with citizens. The Energy Subsidy Reform Assessment Framework (ESRAF) is a comprehensive analytical toolkit and assessment framework for helping countries to achieve politically and socially sustainable reforms. It highlights issues, tools and practices to help identify, analyze and facilitate a comprehensive reform of energy subsidies. It also outlines analytical approaches to diagnose the impacts of energy subsidies, including their effect on energy consumption, emissions, and health. Finally, it explains how to better understand the political context of reform, consult with stakeholders and engage with the public, and it proposes a checklist for rapid diagnostics to aid and guide the reform process.
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“Flochel, Thomas; Gooptu, Sudarshan. 2017. The Energy Subsidy Reform Assessment Framework: Guidance for Comprehensive Energy Subsidy Reforms. © World Bank. http://hdl.handle.net/10986/28863 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 aims to provide an overview and guidance on the use of tools to assess the environmental and health effects of changes in the levels of fine particulate matter caused by higher consumption of energy due to subsidized prices at the country level. It also provides information to help practitioners develop reliable estimates even in the absence of data and with limited resources. The topic of the note is highly complex and involves multiple fields and disciplines. The note attempts to reduce such complexity by breaking the assessment down into several distinct steps, each with its own methodologies. The note is intended to serve as a source of resources and practical advice to guide practitioners along each of these steps. This note focuses the analysis of price subsidies on primary and secondary fine particulate matter (PM2.5, atmospheric particulate matter with a diameter of less than 2.5 microns), the pollutant with the largest health effects worldwide, and using intake fractions to estimate population exposure to PM2.5 from fossil fuels and solid biomass. This approach is like that of recent global studies of energy price subsidies and taxes. The intake fractions are combined with the relative-risk functions for major health outcomes of air pollution from the Global Burden of Disease study to estimate the health effects associated with energy price subsidies. The note proposes three geographic-demographic scales: urban areas with a population over 100,000, urban areas with a population less than 100,000, and rural areas. The note also discusses the availability of monitoring measurement data and alternative options for determining ambient PM2.5 concentrations at the proposed geographic-demographic scale, as well as approaches to deal with data scarcity. The method for estimating the economic value of mortality caused by air pollution follows a recent World Bank report, using a cross-country transfer method of the value of statistical life (VSL). In addition, the note proposes methods for incorporating valuation of increased illness, although morbidity is generally found to constitute a relatively minor share of the health costs of air pollution.Publication Energy Subsidy Reform Assessment Framework(World Bank, Washington, DC, 2018-06-30)The objective of this good practice note is to outline the ingredients of an assessment of the fiscal impacts of energy subsidies in an economy from the aggregate fiscal perspective of the government. It demonstrates the interrelations between the fiscal balance, its financing, and impact on key debt and fiscal sustainability indicators. As discussed in the Energy Sector Reform Assessment Framework (ESRAF) Good Practice Note on the definition of energy subsidies (Good Practice Note 1), energy subsidies may be provided through various channels on the production and consumption sides, and may generate contingent liabilities—explicit or implicit—for a government that must be monitored and managed as part of overall macroeconomic management. ESRAF defines an energy subsidy as a deliberate policy action by the government that specifically targets electricity, fuels, or district heating and that reduces the net cost of energy purchased, reduces the cost of energy production or delivery, increases the revenues retained by energy suppliers, or has any combination of these three effects. ESRAF also covers non-energy use of oil, gas, and coal, such as natural gas used as a feed stock for fertilizer manufacture and naphtha and liquefied petroleum gas (LPG) used as feed stocks in petrochemicals. Subsidies are not always paid for by the government. Consumers may subsidize producers, producers may subsidize consumers, and financiers and other actors not linked to energy consumption or production, including those outside the country, may be covering the costs of subsidies. This note focuses on the costs of subsidies to the government. One important form of subsidies consists of direct budgetary transfers from the government to either consumers or producers, which are recorded in the government public sector budget. For instance, with the justification of social benefits, governments often establish consumer prices for energy that are below reference prices (prices that would have prevailed in a competitive market, or the cost of efficient production if a competitive market does not exist), and then compensate the energy suppliers for the difference (also referred to as the price gap) between the reference prices and the government controlled prices.' Another subsidy delivery mechanism is provision of the subsidy benefits directly to end users, typically households. In addition, a government may provide subsidies in the form of tax exemptions to energy service providers, tax credits for investment, or allowing the energy-related public utilities and national oil companies to run arrears on their debt service and other payment obligations to the government.Publication Energy Subsidy Reform Assessment Framework(World Bank, Washington, DC, 2018-06-30)This note comes in three sections. First, the information required for political economy analysis of energy subsidy reforms is presented. Second, a summary is given of the information that can usually be obtained through desk research to provide the context for subsequent interviews and another field research. Third, information that probably requires interviews and field data collection is provided. The ultimate audience of the proposed types of analysis lies with policy reformers themselves and with external development and policy institutions that are seeking to help governments adopt more sustainable reforms. However, the direct audience for this note are those commissioning political economy analysis of energy subsidies, and technocrats, researchers, and advisers to policy makers carrying out the analysis. Often, a team made up of sector experts and political economy experts will provide a greater depth of analysis. Significant attention is devoted here to the origins and operation of existing subsidies since that history conditions what is possible for the adoption and sustainability of future reforms. The main interest and audience for this note is forward-looking, people and institutions who need to understand what is politically possible and how to realign political forces around successful reform. The authors are mindful that this role is perhaps different from other more technocratic roles of agencies and institutions focused on technical analysis and thus they also devote some attention to the processes needed to obtain and manage sensitive information and political insights since mismanagement in that realm can, itself, affect the political prospects for reform and harm the standing of reform agents in the process. In contrast to desk research or analysis of existing datasets, field research on political economy will always be an intervention in the local system, which needs to be managed well to increase and not decrease the space for reform and coalition building.Publication Energy Subsidy Reform Assessment Framework(World Bank, Washington, DC, 2018-06-30)This note provides guidance to policy makers who are looking to utilize Social Safety Nets (SSNs) to mitigate the welfare impacts of energy subsidy reforms (ESRs) on the poor. The good practice note explains (a) why SSNs are an effective tool in the context of ESR, and (b) different options for rapid scale-up or implementation of SSNs. It introduces a three-stage analytical approach that includes (a) assessing the welfare losses caused by ESR; (b) taking stock of existing SSN and near-SSNs, and modeling expansion options; and (c) assessing the readiness of the existing or planned SSNs for providing protection against the negative consequences of the price shock. The scope of this good practice note is confined to cases where ESRs lead to higher prices paid by energy consumers. As good practice note one outlines, ESRs do not necessarily lead to higher prices, and could even decrease prices paid, such as when producer subsidies in the form of price support paid for by consumers are eliminated, or when consumer price subsidies lead to illegal diversion and out-smuggling, acute fuel shortages, and prices that are even higher than official prices on the black markets. The latter is particularly important: consumers may be paying much higher prices before the reform, having to develop coping mechanisms to deal with energy shortages. ESRs may improve the quality of energy delivery service, reducing energy shortages and thereby improving the welfare of energy consumers. In this context, the note has been prepared for social protection specialists and government officials responsible for social sectors portfolio. It provides an overview and guidance on the use of tools, principles, methods, and practices, in the analysis of social protection issues relevant to ESR. The note has a narrow focus, specifically looking at SSNs as measures that can support the poor during times of ESR.Publication Implementing Energy Subsidy Reforms : An Overview of the Key Issues(World Bank, Washington, DC, 2012-07)Poorly implemented energy subsidies are economically costly to taxpayers and damage the environment. This report describes the emerging lessons that could help policy makers to address implementation challenges, including overcoming political economy and affordability constraints. The analysis provides strong evidence of the success of reforms in reducing the associated fiscal burden. For the selected sample of 20 developing countries, the average energy subsidy recorded in the budget was reduced from 1.8 percent in 2004 to 1.3 percent of gross domestic product in 2010. The reduction of subsidies is particularly remarkable for net energy importers. In spite of the relatively price inelastic demand for gasoline and diesel, fossil fuel consumption in the road sector (per unit of gross domestic product) declined in the 20 countries examined from 53 (44) in 2002 to about 23 kilotonnes oil equivalent per million of gross domestic product in 2008 in the case of gasoline (diesel). The most notable decline in consumption was recorded in the low-income and lower-middle-income countries. This reflects the much higher rate of growth in gross domestic product in this group of countries. And it underlines the opportunities to influence future consumption behavior rather than modifying the existing consumption patterns, overcoming inertia and vested interests. Similar trends are recorded for power consumption. While there is no one-size-fits-all model for subsidy reform, implementation of compensatory social policies and an effective communication strategy, before the changes were introduced, made a difference in securing the successful implementation of reforms.
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