Africa: Countries Urged to Reform Energy Subsidies

Washington — Energy subsidies intended to help consumers by keeping prices low hinder government efforts to reduce budget deficits and compete with public spending on infrastructure, schools and health care, says David Lipton, first deputy managing director of the International Monetary Fund.

"For some countries, the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy," Lipton said as he introduced the IMF's new Reforming Energy Subsidies report March 27 at the Peterson Institute for International Economics in Washington. The report covers petroleum, electricity, natural gas and coal consumption in 176 countries during 2011.

Lipton said subsidies encourage excessive energy consumption, which aggravates climate change and worsens air pollution.

He stressed that subsidies benefit energy consumers unequally, with the richest 20 percent of households in developing countries enjoying 43 percent of subsidy benefits. "It is no wonder that the greatest beneficiaries are those with cars and air-conditioned houses," he said.

He cited two types of energy subsidies: Pre-tax subsidies are when consumers pay prices below the cost of producing the energy, and mostly exist in developing economies. Tax subsidies exist if taxes on energy are below the level of taxes on other products or don't account for all of the energy's adverse impacts, such as pollution and global warming. Advanced economies account for many of the tax subsidies.

Lipton said the IMF found that 20 of the countries it studied have pre-tax subsidies of more than 5 percent of gross domestic product. In other countries, energy subsidies account for more than public spending on health care and education combined, "undermining the development of human capital," he said.

Lipton noted that "subsidy reform can lead to a more efficient allocation of resources, which will help spur economic growth" and provide incentives for research and development of energy-saving technologies.

He urged countries to create measures to protect lower-income people as subsidy reform is implemented.

Energy should be taxed the same way as any other consumer products, the report states, adding that because emissions from some forms of energy contribute to pollution and climate change, energy taxes "should reflect these adverse effects on society."

To that point, Lipton said that cutting subsidies would reduce worldwide greenhouse gas emissions by 13 percent.

He noted that at the Group of 20 summit in 2009, the world's major economies pledged to eliminate all fossil fuel subsidies. "It is surely time to get on with fulfilling this very important commitment," he said. "The link between subsidies, consumption of energy and climate change has added a new dimension to the debate." The G20 includes the United States, which supports energy subsidy reform.

Lipton said an energy reform plan should be comprehensive, with clear long-term objectives and analysis of the impact of reforms. The plan should be transparent and communicated to all stakeholders and include information about the size of subsidies and how they affect the government's budget.

He said price increases should be phased in over time and that subsidy reform can be facilitated with implementation of automatic prices and a rule to avoid sharp price increases.

"The bottom line is that energy subsidization is a major problem, but one that can be solved. ... Many countries now see the benefits of doing so and intend to try," Lipton said. "Some have already succeeded."

The report Reforming Energy Subsidies is available on the IMF website, as is the IMF paper Energy Subsidy Reform — Lessons and Implications (PDF, 844KB).

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