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Energy subsidies - Scrap them

There are moves around the world to get rid of energy subsidies. Here s the

best way of going about it

Jun 14th 2014

FOR decades, governments from Egypt to Indonesia have subsidised the price of

basic fuels. Such programmes often start with noble intentions to keep down the

cost of living for the poor or, in the case of oil-producing countries, to

provide a visible example of the benefits of carbon wealth but they have

disastrous consequences, wrecking budgets, distorting economies, harming the

environment and, on balance, hurting rather than helping the poor.

Emerging markets are not the only places that distort energy markets. America,

for instance, suppresses prices by restricting exports. But subsidies are more

significant in poorer countries. Of the $500 billion a year the IMF reckons

they cost the equivalent of four times all official foreign aid half is spent

by governments in the Middle East and north Africa, where, on average, it is

worth about 20% of government revenues. The proceeds flow overwhelmingly to the

car-driving urban elite. In the typical emerging economy the richest fifth of

households hoover up 40% of the benefits of fuel subsidies; the poorest fifth

get only 7%. But the poorest suffer disproportionately from the distortions

that such intervention creates. Egypt spends seven times more on fuel subsidies

than on health. Cheap fuel encourages the development of heavy industry rather

than the job-rich light manufacturing that offers far more people a route out

of poverty.

For all these reasons the benefits of scrapping subsidies are immense. Emerging

economies could easily compensate every poor person with a handout that was

bigger than the benefits they got from cheap fuel and still save money. In the

process, they would help the planet. According to the International Energy

Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions

by 6% by 2020.

How to save $500 billion and the planet

Some emerging-market governments are persuaded by these arguments, and are

getting serious about reform (see article). Indonesia raised petrol prices by

more than 40% last year, and the front-runner in the upcoming presidential

election says he will consider a more comprehensive fuel-subsidy revamp. Iran

has just begun the second phase of a big subsidy overhaul, raising the price of

petrol, gas and electricity. Egypt s new president is being pushed towards

tackling energy subsidies by a gaping budget deficit. Morocco and Jordan have

cut subsidies in the past couple of years. Even Kuwait announced this week that

it plans to scrap diesel subsidies.

Yet the politics of reform are exceedingly difficult. Politicians are loth to

antagonise the urban elite; insiders benefit (often corruptly) from cheap fuel;

ordinary citizens do not believe they will be compensated. Many previous

attempts to cut subsidies have been abandoned in the face of popular protests

or rising global oil prices. Experience suggests that any attempt to cut

subsidies needs to be accompanied by a public-education campaign to explain the

costs and inequities of subsidies, to have a clear timetable for gradual price

increases and to be supported by targeted transfers to counter the effect of

higher fuel prices on poorer people.

Even with better politics and the best-laid plans, it would be a mistake to

expect too much too fast. Entrenched subsidies anywhere are devilishly

difficult to get rid of. If the oil price rises, so too will the pressure on

emerging economies to protect their citizens from dearer fuel. But, for the

moment, there seems to be a chance to accelerate reform. It is an opportunity

not to be missed.