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Fossil Fuel Subsidy Reform in the Developing World: Who Wins, Who Loses, and Why?

Author

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  • Coxhead, Ian

    (University of Wisconsin)

  • Grainger, Corbett

    (University of Wisconsin)

Abstract

Fossil fuel subsidies are widespread in developing countries, and reform efforts are often derailed by disputes over the likely distribution of gains and losses. Subsidy reform is transmitted to households through changes in energy prices and prices of other goods and services, but also factor earnings. Most empirical studies focus on consumer expenditures alone, and computable general equilibrium analyses typically report only total effects without decomposing them by source. Meanwhile, analytical models neglect important open-economy characteristics relevant to developing countries. In this paper we develop an analytical model of a small open economy with a pre-existing fossil fuel subsidy and identify direct and indirect impacts of subsidy reform on real household incomes. Our results, illustrated with data from Viet Nam, highlight two important drivers of distributional change: the mix of tradable and nontradable goods, reflecting the structure of a trade-dependent economy, and household heterogeneity in sources of factor income.

Suggested Citation

  • Coxhead, Ian & Grainger, Corbett, 2018. "Fossil Fuel Subsidy Reform in the Developing World: Who Wins, Who Loses, and Why?," Staff Paper Series 589, University of Wisconsin, Agricultural and Applied Economics.
  • Handle: RePEc:ecl:wisagr:589
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    References listed on IDEAS

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    Cited by:

    1. Ryan Wong & Aninda Dewayanti, 2024. "Indonesiaʼs energy transition: Dependency, subsidies and renewables," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 11(2), May.
    2. Majidpour, Mehdi, 2022. "Policy lessons from the execution of fuel dual-pricing: Insights for fuel-subsidizing economies," Energy, Elsevier, vol. 247(C).
    3. S. Mauricio Medinaceli Monrroy & Marcelo G. Velázquez Bilbao La Vieja, 2023. "Hydrocarbon Prices and Subsidies in Bolivia 1986 - 2025," Development Research Working Paper Series 05/2023, Institute for Advanced Development Studies.
    4. McCulloch, Neil & Moerenhout, Tom & Yang, Joonseok, 2021. "Fuel subsidy reform and the social contract in Nigeria: A micro-economic analysis," Energy Policy, Elsevier, vol. 156(C).
    5. Lin, Boqiang & Kuang, Yunming, 2020. "Household heterogeneity impact of removing energy subsidies in China: Direct and indirect effect," Energy Policy, Elsevier, vol. 147(C).
    6. Anan Wattanakuljarus, 2021. "Diverse effects of fossil fuel subsidy reform on industrial competitiveness in Thailand," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(3), pages 489-517, September.

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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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