Rolling back energy subsidies is one of the most vexing problems energy export-revenue-dependent countries face. The problems starts innocently enough when countries discovery vast natural resource deposits and begin profiting substantially from their development. In developing economies, it has been common practice everywhere from Venezuela to Nigeria to the Middle East to supply the population with cheap energy products like electricity, liquid transport fuel or natural gas. Initially, governments can easily absorb the costs of these subsidies which can help quell otherwise impoverished populations.
Over decades however, as domestic energy consumption and populations swell, the cost of subsidized energy grows, biting larger chunks of government revenue until it becomes clear the situation is unsustainable. But now cheap energy has become a birth right for younger generations that may also be struggling with poverty and high unemployment. Taking away that cheap energy could now be a recipe for disaster.
Read Breaking Energy coverage of Myanmar’s efforts to increase subsidized power prices here.
A new paper “Navigating the Perils of Energy-Subsidy Reform in Exporting Countries” authored by Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute, examines cases where price increases have worked and suggests policies others can enact to enable energy subsidy reform.
“Removing state subsidies on energy is one of the most politically dangerous acts there is,” Krane said in a statement. “No government in the world wants to antagonize motorists or raise electricity prices. But previous experience shows that with proper preparation, subsidies can be rolled back without undermining government legitimacy, even in autocracies that use these discounts to preserve popular support. (…) However, subsidy benefits are dwarfed by the harmful consequences of encouraging uneconomic use of energy. These effects include wasted resources, foregone revenue and outsized emissions of carbon dioxide as well as local pollutants such as sulfur oxides and nitrogen oxides. Now, with consumption posing a threat to long-term exports, governments face a heightened need to raise prices that have come to be viewed as entitlements.” – Jim Krane
Access the entire paper here.