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Balancing Act : Cutting Energy Subsidies While Protecting Affordability

Author

Listed:
  • Caterina Ruggeri Laderchi
  • Anne Olivier
  • Chris Trimble

Abstract

The cost of energy in Eastern Europe and Central Asia, as elsewhere, is an important policy issue, as shown by the concerns for energy affordability during the past harsh winter. Governments try to moderate the burden of energy expenditures that is experienced by households through subsidies to the energy providers, so that households pay tariffs below the cost recovery level for the energy they use. These subsidies result in significant pressures on government budgets when international prices rise. They also provide perverse incentives for the overconsumption of energy as households do not pay the true cost of energy, and therefore, have fewer incentives to save or to invest in energy efficiency. Balancing competing claims-fiscal and environmental concerns which would push for raising energy tariffs on the one hand, and affordability and political economy concerns which push for keeping tariffs artificially low on the other-is a task that policy makers in the region are increasingly unable to put off. Addressing this issue is all the more pressing as the ongoing crisis continues to add stress to government budgets, and that international energy prices remain high. While challenging, the reforms needed for this balancing act can build on much that has been learned in the last decade about improving the effectiveness of social assistance systems and increasing energy efficiency. This is the first report to assess, at the micro level for the whole region, the distributional impact of raising energy tariffs to cost recovery levels and to simulate policy options to cushion these impacts. In conclusion, this report highlights that countries face a difficult balancing act between fiscal and environmental concerns that call for raising energy tariffs to lower fiscal burdens and curb household consumption and concerns for the affordability of energy and the political economy of unpopular reforms.

Suggested Citation

  • Caterina Ruggeri Laderchi & Anne Olivier & Chris Trimble, 2013. "Balancing Act : Cutting Energy Subsidies While Protecting Affordability," World Bank Publications - Books, The World Bank Group, number 12296.
  • Handle: RePEc:wbk:wbpubs:12296
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    File URL: https://openknowledge.worldbank.org/bitstream/handle/10986/12296/9780821397893.pdf?sequence=7
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    Citations

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    Cited by:

    1. Rentschler, Jun, 2016. "Incidence and impact: The regional variation of poverty effects due to fossil fuel subsidy reform," Energy Policy, Elsevier, vol. 96(C), pages 491-503.
    2. Gu, Jiafeng, 2023. "Energy poverty and government subsidies in China," Energy Policy, Elsevier, vol. 180(C).
    3. Christoph Lakner & Maria Ana Lugo & Jorge Puig & Leandro Salinardi & Martha Viveros, 2016. "The Incidence of Subsidies to Residential Public Services in Argentina: The Subsidy System in 2014 and Some Alternatives," CEDLAS, Working Papers 0201, CEDLAS, Universidad Nacional de La Plata.
    4. Jun Rentschler & Morgan Bazilian, 2017. "Policy Monitor—Principles for Designing Effective Fossil Fuel Subsidy Reforms," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 138-155.
    5. World Bank, 2015. "Adapting to Higher Energy Costs," World Bank Publications - Reports 22083, The World Bank Group.
    6. Rentschler, Jun & Kornejew, Martin, 2017. "Energy price variation and competitiveness: Firm level evidence from Indonesia," Energy Economics, Elsevier, vol. 67(C), pages 242-254.
    7. Rentschler, Jun & Kornejew, Martin & Bazilian, Morgan, 2017. "Fossil fuel subsidy reforms and their impacts on firms," Energy Policy, Elsevier, vol. 108(C), pages 617-623.
    8. Bacchiocchi, Emanuele & Florio, Massimo & Taveggia, Giulia, 2015. "Asymmetric effects of electricity regulatory reforms in the EU15 and in the New Member States: Empirical evidence from residential prices 1990–2011," Utilities Policy, Elsevier, vol. 35(C), pages 72-90.
    9. Stefan Bouzarovski & Saska Petrova & Sergio Tirado-Herrero, 2014. "From Fuel Poverty to Energy Vulnerability: The Importance of Services, Needs and Practices," SPRU Working Paper Series 2014-25, SPRU - Science Policy Research Unit, University of Sussex Business School.

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