The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries

Abstract

Understanding who benefits from fuel price subsidies and the welfare impact of increasing fuel prices is key to designing, and gaining public support for, subsidy reform. This paper updates evidence for developing countries on the magnitude of the welfare impact of subsidy reform and its distribution across income groups, incorporating more recent studies and expanding the number of countries. These studies confirm that a very large share of benefits from price subsidies goes to high-income households, further reinforcing existing income inequalities. The results can also help to approximate the welfare impact of subsidy reform for countries where the data necessary for such an analysis is not available.

Instrument Choice and Stranded Assets in the Transition to Clean Capital

“…First, while the literature on instrument choice for environmental policy has established that the carbon price is the most efficient instrument (Pigou, 1932;Goulder and Parry, 2008;Fischer and Newell, 2008), 3 less attention has been paid to their different distributional impacts. Most studies focus on the impact of carbon prices, and look at distribution in terms of different income categories (e.g., Rausch et al, 2010;Fullerton, Heutel and Metcalf, 2012;Coady, Flamini and Sears, 2015;Borenstein and Davis, 2015) or different generations (e.g., Karp and Rezai, 2012). Few papers explore how different policies set costs on different sectors of the economy.…”

The Other Side of the Boom: Energy Prices and Subsidies in Latin America and the Caribbean during the Super-Cycle

“…In practice, however, energy subsidies have proved to be an inefficient vehicle for providing economic protection to these groups . On the contrary, energy subsidies benefit the wealthy disproportionately (Arze del Granado, Coady, and Gillingham, 2014;Coady, Flamini, and Sears, 2015) . As will be examined further in Chapter 5, higher-income groups-which typically consume more energy-tend to capture more of the benefits from subsidies .…”

“…Established best practices for subsidy reform include: designing a comprehensive plan, starting with clarifying what objectives the government is trying to achieve with the reform and working backwards from there; reducing subsidies gradually and predictably, giving households and firms time to adapt rather than imposing sudden price hikes; assessing and managing distributional impacts of subsidy reform; designing and executing a comprehensive communication campaign about subsidies, their cost, the reform, and compensation measures; and, importantly, depoliticizing energy pricing schemes (Coady, Flamini, and Sears, 2015;Vagliasindi, 2012) .…”

“…The direct impact of energy price hikes is the additional share of its total budget that a household would now need to spend to continue to consume the same amount of energy as before the price hike . This practice, common in the literature (Arze del Granado, Coady, and Gillingham, 2014;Coady, Flamini, and Sears, 2015), provides a reasonable upper bound of the short-term impact of price hikes on households, before they have had time to adjust their consumption or adapt, by, for example, investing in more energy-efficient cars or appliances . The method also assumes that firms pass on the full increase in costs to consumers .…”

Seizing the opportunity: tackling fossil fuel subsidies under the UNFCCC

“…Importantly, they put significant pressure on government budgets, with less money being available for other priorities such as health and education. Moreover, in welfare terms, subsidies in developing countries tend to favour the rich (Arze del Granado and Coady 2012;Coady et al 2015). In addition, fossil fuel subsidies may have indirect local environmental (e.g.…”