Distributional effects of higher natural gas prices in Russia

Domestic gas prices are regulated in Russia and they are substantially lower than export netback prices (the Russian Government , 2010; Gazprom , 2015). For example, in 2015, the average domestic gas price in Russia was $59.4/thousand cubic meter (tcm), whereas the average export netback price for gas to the Western Europe accounted for $245.6/tcm (Gazprom, 2015). The Russian government has planned to increase the domestic price level in the long term (the Russian Government , 2010), but the gas price reform has been postponed for a long time because of increases in the oil price and the economic crisis. Recently, several studies have assessed the sectoral and economy-wide effects of an increase in domestic gas prices in Russia, but none of them has addressed the issue of income distribution. Adverse income distributional effects and loss in competitiveness in energy-intensive industries are two main concerns related to the gas-price reform in Russia. Increases in consumer prices for gas typically could have a regressive impact on income distribution. Because expenditure shares of gas consumption in total consumption expenditures of poor households tend to be larger than those of rich households, poor household groups are expected to be most adversely impacted from an increase in consumer gas prices. On the other hand, eliminating subsidies on domestic gas consumption could increase government revenues, allowing a reduction in distortionary taxes. Moreover, higher domestic gas prices could have a significant impact on factor income and prices for other commodity. Therefore, the overall impact on poverty and income distribution is rather ambiguous. The objective of this paper is to analyse the impact on the poor and the income distributional effects resulting from the abolishment of gas subsidies in Russia under different revenue-recycling strategies. The results of policy simulations aim to shed light on how to design an optimal gas price-reform in Russia, which would encourage economic and energy efficiency in Russia and, at the same time, would not further exacerbate income inequality. Because the gas sector plays an important role in the Russian economy, we need to take into account general equilibrium effects (e.g., changes in factor and output prices), which can be captured in a general equilibrium framework. Therefore, our analysis is based on a computable general equilibrium (CGE) model. For the purpose of analysis, we disaggregate the representative household in the core version of the model into 10 household groups, which differ by income composition and consumption pattern. Furthermore, due to a vital role of the power generation sector, which heavily relies on gas, we disaggregate it into different electricity generating technologies, such as gas-fired, coal-fired, hydro, nuclear, bioenergy and other renewables. To depict distortions associated with labour income taxation, we incorporate a labour-leisure choice into the model. We found that the income distributional effects are very sensitive to how additional government revenues are used. When the Russian government implements the gas-price reform supplemented by a reduction in the value added tax rate, it has a strong regressive impact on income distribution among households. For example, the total private consumption of the poorest decile declines by 2.3%, whereas the richest decile gains an increase in total private consumption by 2.6%. Furthermore, reducing the capital income tax has even a stronger regressive impact on income distribution, leading to more income inequality in Russia. In contrast, reducing labour income taxes results in a significant increase in total private consumption of poor households. For example, the total private consumption of the poorest decile increases by 6.6%, whereas for the richest decile, it increases only by 0.1%. Assuming perfect capital mobility does not change the results qualitatively, but the results do differ quantitatively. Overall, under perfect capital mobility, poor households are more adversely affected by an increase in domestic gas prices, whereas rich households benefit more than under imperfect capital mobility. Although reducing labour income taxes outperforms other revenue-recycling policies in terms of income distribution motives, reducing capital taxes (e.g., tax credits or adoption subsidies for energy saving technologies) could be a more effective policy to encourage diffusion of energy saving technologies Russia.