Defne Gencer and Beatriz Arizu from the World Bank examine government support for the energy industry. A significant portion of the public budget is allocated to artificially lowering the cost of electricity and fossil fuels. Although this reform was initially intended to assist the most vulnerable populations, it primarily benefits higher-income households, as they tend to consume more energy and the subsidy policy does not differentiate among applicants. This situation creates unintended economic costs that could be redirected toward renewable energy initiatives or other critical areas like healthcare and education. Additionally, energy subsidies distort market signals, encouraging the consumption of fossil fuels while discouraging investment in sustainable energy by artificially undermining its efficiency.
Reforming the energy sector is a complex challenge, often met with resistance from households and energy-intensive industries. Additionally, the lack of accurate data hinders governments from tailoring reforms to specific populations, which is essential for implementing social programs that can ease the burden of these changes. Low- and middle-income countries face extra difficulties, as they often lack the financial capacity to support the lowest-income households during this transition, while waiting for renewable energy to become more affordable and accessible.
Improved awareness of the ecological and economic implications of the reform could help address some of the initial criticisms. A strong communication campaign, both before and after the reform, would ensure transparency regarding its goals and outcomes. Policymakers should carefully consider the timing and sequence of the reform. Gradually increasing prices could allow companies to develop long-term strategies and ease the financial impact of the reform. However, it remains essential to maintain flexibility in the reform to adapt to external shocks and economic fluctuations.
From Ambition to Action: Practical Insights on Energy Subsidy Reforms – ESMAP Report
