Energy Subsidies – Widespread, Significant, and Largely Not Reaching the Poor

Energy subsidies are widespread and significant. In 2014, according to the IEA (2015), government support for global fossil fuel consumption amounted to 490 billion US$. An IMF working paper (Coady et al., 2015) reports even higher numbers. Distinguishing between subsidies before (pre) and after (post) “corrective” taxes to account for environmental damage and an additional consumption tax, it estimates post-tax energy subsidies in 2013 at a colossal amount of 5.3 trillion US$ – or 6.5% of global GDP. Its estimate for Latin America amounts to close to 5% of GDP for post-tax energy subsidies and close to 2% of GDP for pre-tax subsidies (see also Di Bella et al., 2015, and Navajas, 2015).

Research underpins an emerging global consensus that these subsidies are harmful for growth, detrimental for employment, and regressive. A recent, not yet published, report (FIEL, 2015) for the Inter-American Development Bank (IDB) offers further empirical evidence. Based on fiscal statistics, market information on prices and consumption, as well as micro-data from expenditure surveys across 17 countries in Latin America and the Caribbean, it shows that energy subsidies differ significantly within the region, but have one thing in common: they are largely “pro non-poor”. On average, 80% of them are transferred to households above the national poverty line.

Figure 1 provides disaggregated details. It plots both energy subsidies and transfers to the non-poor as a percentage of GDP – the slope thus indicating payments to the non-poor per dollar spent. The range of subsidy levels reaches from zero in Belize, Chile, Paraguay, Peru and Jamaica up to more than 2% of GDP in Argentina and more than 3% of GDP in Bolivia. Notwithstanding this heterogeneity in terms of transfer levels, almost all countries are positioned close to the regression line with 80 cents of each dollar being captured by the non-poor. Put differently, while the surveyed countries spend 1% of their GDP on energy subsidies, close to 0.8% of GDP is being transferred to non-poor households.

Countries need to find robust institutional mechanisms that improve the targeting of these transfers. With 80% of energy subsidies not reaching the poor, there is vast scope for change. With median voters in most of these economies living above the poverty line, such change will not be easy to master politically. But it is imperative.

This is a shortened version of a blog that was previously published in Spanish on Foco Económico.

References

Coady D., I. Parry, L. Sears and B. Shang (2015), “How Large are Global Energy Subsidies?”, IMF Working Paper WP/15/105, May 2015.

Di Bella, G., L. Norton, J. Ntamatungiro, S. Ogawa, I. Samake, M. Santoro (2015), “Energy Subsidies in Latin America and the Caribbean: Stocktaking and Policy Changes”, IMF Working Paper WP/15/30, February 2015.

FIEL (2015), “Mejorando la calidad y eficiencia del gasto público en energía y asistencia social en América Latina y el Caribe”, report commissioned by the Inter-American Development Bank, forthcoming.

Navajas, F. (2015), “Energy Subsidies Revisited”, 5th Latin America Energy Economics Meeting, Medellin, Colombia, March 17, 2015.  http://www.fiel.org/publicaciones/Novedades/NEWS_1427393526485.pdf.

International Energy Agency (IEA) (2015), “Energy Subsidies”, http://www.worldenergyoutlook.org/resources/energysubsidies/.