Fossil-fuel consumption subsidy (% of GDP), 2010
Subsidies in developing Asia are
larger than elsewhere except the Middle East, and they are increasing (Table 2.2.2).
A lot of attention has been paid to fossil fuel subsidies globally, as overconsu...
mption damages energy supply adequacy and the environment. Member countries of the Group of 20 and Asia–Pacific Economic Cooperation have
declared that such subsidies will be phased out. According to the IEA (2012a), oil-exporting countries offer the highest subsidies in terms of their share of GDP. Among non-oil exporting countries in Asia, Bangladesh and Pakistan have the highest GDP shares—though estimates vary from year to year with fluctuations in international prices for liquefied petroleum gas, natural gas, and oil. Such subsidies are well-intentioned, or at least popular, but they increase energy consumption, distort energy
development planning, and, when applied unevenly, provide incentives for adulteration and illegal cross-border sales.
Worse, the main beneficiaries of energy subsidies are not the
poor. If the intent is to make energy more affordable to the
poor, only the poorest 20 percentile should benefit from the
subsidy. In fact, the poor in Asia benefit little from subsidized
fuel prices because many lack electricity and gas connections,
few own vehicles, and most transport sparingly. The IEA
(2011a) surveyed nine Asian countries with the highest fossil
fuel subsidies, along with two countries in Africa, and found
that only 15% of the benefit of kerosene subsidies—and a paltry
5% of subsides for liquefied petroleum gas—went to the poorest
20th percentile (Figure 2.2.2).
As the stated intent of energy subsidies is to provide affordable energy to the disadvantaged, the better solution would be to give the target populations direct cash benefits or energy coupons. Poor households are identified for benefits like food distribution, education support, and medical treatment. The energy subsidy could be similarly targeted.
For example, a cash payment scaled for the energy used by a typical energy-poor household, not tied to the household’s energy consumption, would extend access without use. In fact, a beneficiary household would have incentive to use less energy and keep the surplus from the payout to pay for other needs. This achieves the objective of restraining energy use without creating the perverse incentives that so frequently drive energy systems off track.
Replacing general energy subsidies with subsidies targeting the energy poor can immediately restrain energy demand without denying those in need. It can go a long way toward laying the foundation for Asian energy security. The Indonesian experience explains the government’s efforts to reduce subsidies despite political difficulties (Box 2.2.1).
- Source IEA - World Energy Outlook : Energy Subsidies