Publication: Energy Subsidy Reform Assessment Framework: Analyzing the Incidence of Consumer Price Subsidies and the Impact of Reform on Households — Quantitative Analysis
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Published
2018-06-30
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Date
2018-08-20
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Olivier, Anne
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Abstract
This note aims to provide guidance on how to assess the distributional implications of energy subsidy reform (ESR) using quantitative methods.It is intended for use by those familiar with the basics of welfare measurement, ideally part of a multi-disciplinary team. Ideally this assessment would therefore be complemented by insights from qualitative analysis and by an analysis of the effectiveness of feasible compensatory measures. The note focuses on how to assess the distributional implications of household level impacts of ESR (as opposed to firm level, discussed in Good Practice Note 6). Its scope is confined to cases where ESRs lead to higher prices paid by energy consumers. As Good Practice Note 1 outlines, ESRs do not necessarily lead to higher prices, and could even decrease prices actually 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, because a lack of data often forces the distributional analysis of ESRs to take observed expenditures on subsidized energy and scale them in proportion to the calculated price gaps—the gap between the unsubsidized price and the official price—to estimate the incidence of subsidies, whereas in practice consumers may be paying much higher prices than the official prices. Further, this note is not confined only to ESRs in that the distributional effects of higher prices of fuels used as feed stocks—such as natural gas used in fertilizer manufacturer—are also captured. In addition, while this note tries to present a general approach, practical pointers are provided that are relevant for the analysis of different types of energy, the prices of which are rising, and which are used either directly or in the production of goods and services widely in the economy. Overall, therefore, the note discusses the analysis of liquid fuels, gas, electricity and district heating (a source of heating used primarily in Eastern Europe). The word prices applies to all forms of energy, while tariffs applies to schedules of regulated prices that are applicable to regulated electricity, gas, or district heating. For households—the focus of this paper—two main channels of impacts can be identified, relating respectively to consumption patterns and income streams. goth consumption and income can be affected directly by higher prices for energy, or indirectly through other price changes triggered by the changes in energy prices (most notably through higher transport costs caused by rises in gasoline and diesel prices). These indirect effects, though harder to quantify than direct effects, can be significant for petroleum products.
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“Olivier, Anne; Ruggeri Laderchi, Caterina. 2018. Energy Subsidy Reform Assessment Framework: Analyzing the Incidence of Consumer Price Subsidies and the Impact of Reform on Households — Quantitative Analysis. © World Bank. http://hdl.handle.net/10986/30254 License: CC BY 3.0 IGO.”
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Publication Balancing Act : Cutting Energy Subsidies While Protecting Affordability(Washington, DC: World Bank, 2013-01-05)The cost of energy in Eastern Europe and Central Asia, as elsewhere, is an important policy issue, as shown by the concerns for energy affordability during the past harsh winter. Governments try to moderate the burden of energy expenditures that is experienced by households through subsidies to the energy providers, so that households pay tariffs below the cost recovery level for the energy they use. These subsidies result in significant pressures on government budgets when international prices rise. They also provide perverse incentives for the overconsumption of energy as households do not pay the true cost of energy, and therefore, have fewer incentives to save or to invest in energy efficiency. Balancing competing claims-fiscal and environmental concerns which would push for raising energy tariffs on the one hand, and affordability and political economy concerns which push for keeping tariffs artificially low on the other-is a task that policy makers in the region are increasingly unable to put off. Addressing this issue is all the more pressing as the ongoing crisis continues to add stress to government budgets, and that international energy prices remain high. While challenging, the reforms needed for this balancing act can build on much that has been learned in the last decade about improving the effectiveness of social assistance systems and increasing energy efficiency. This is the first report to assess, at the micro level for the whole region, the distributional impact of raising energy tariffs to cost recovery levels and to simulate policy options to cushion these impacts. 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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. 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Yemen, as the country with the lowest per capita income in the group of countries with a high level of energy subsidies, started to reduce subsidies in 2010 and is discussing further options for reform. The results of this paper support a comprehensive petroleum subsidy reform in Yemen. Economic growth is projected to accelerate between 0.1 and 0.8 percentage points annually as a result of reform. Yet, the design of the reform is critically important, especially for the poor. Outcomes of alternative reform scenarios range from an increase in poverty of 2 to 6 percentage points. A promising strategy combines subsidy reduction with direct transfers of 13,800 to 19,700 Yemeni rials annually to the poorest 30 percent of households and enhanced public investments. 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