Economic, Social, and Environmental Impacts of Energy Subsidies: A Case Study of Malaysia

The Malaysian government has shown a strong intention to reduce energy subsidies in recent years. This study quantitatively investigates the potential impacts of removing energy subsidies on Malaysia’s macroeconomic indicators, household welfare, and carbon emissions. A computable general equilibrium model with a breakdown of households by income level is constructed to perform the assessment. We show that either a petroleum or gas subsidy removal, or both, would improve economic efficiency and increase real gross domestic product by up to 0.97 %. The budget deficit would be largely reduced after removing the government-funded petroleum subsidies, especially as the saved subsidy costs could be entirely used to buy back government bonds. Households would be worse off in most scenarios due to higher price levels, but compensating policies through labour income tax rebates or direct transfer payments could make the poorest income group no worse than the baseline, with almost no extra impacts on the economy. The overall positive economic and environmental impact suggests that fossil fuel subsidies should be removed and the saved subsidy costs or increased tax revenue used to reduce fiscal deficits and compensate the most affected households and industries.