Energy subsidies are often a major drain on the resources of developing countries. Energy subsidies are inefficient, and lead to overconsumption of fossil fuels—reducing the incentive to use cleaner energy sources, and thereby increasing pollution and greenhouse gas emissions. They also rarely provide much benefit to their intended recipients—the poor—and have little impact on the underlying causes of poverty.
However, artificially low energy prices have proved popular as a tool to lower the cost of living and protect national industries from international competition. Worldwide energy consumption subsidies were estimated at $492 billion in 2011 (IMF 2013), the equivalent of 0.7 percent of global GDP, or over 2 percent of total government revenues.
Even though the negative impacts of energy subsidies are often well known, attempts to reduce or remove subsidies have been challenging, in many cases leading to social unrest and policy reversals. Phasing out subsidies, particularly if done suddenly and without a strengthening of social safety nets, can have a negative impact on the poor and vulnerable.
Countries looking to embark upon energy subsidy reforms have highlighted the need for significant support in dealing with the complexity of this issue, particularly with regard to handling the political economy of subsidy and pricing reforms, communicating the negative impacts of subsidies and the need to reduce them, and designing specific solutions to mitigate the adverse impacts of reform on poor and vulnerable populations.
Technical Assistance Facility
In response, ESMAP has launched an Energy Subsidy Reform and Delivery Technical Assistance Facility. This multi-year initiative supports countries as they design and implement subsidy reform programs, and involves close collaboration with key stakeholders such as government ministries, think tanks, and civil society organizations.
This initiative supports countries across East Asia, Latin America, Eastern Europe, and the Middle East and North Africa. The facility offers countries financing for comprehensive technical assistance on issues related to subsidy reform, including:
- Analysis of the poverty, social, fiscal, macroeconomic, political economy, and climate change aspects of subsidy reform
- Assessment of distributional impacts of subsidies at the household and macroeconomic levels
- Support for policy dialogue, consultations, communications strategies, and consensus building
- Support for improving the targeting and delivery of subsidies, including through technology-enhanced approaches
- Design and implementation of subsidy reform approaches, energy pricing frameworks, transition plans, energy efficiency and renewable energy solutions, and suitable social protection and other mitigation mechanisms
Engagement at the country and regional level is being conducted through World Bank teams composed of experts in poverty reduction, social protection, energy pricing and reforms, fiscal policy, climate change, social development and communications.
A Global Conference was held in Copenhagen in October 2014, bringing together governments from across the world that have undertaken energy subsidy reforms or may be considering such reforms. Several other regional workshops have been held in the Middle East and North Africa and Central America, and upcoming events at the World Bank/IMF Spring Meetings are coming up.
ESMAP collaborates with other organizations that produce important analysis and research on subsidy reforms, such as the IMF, OECD, the Global Subsidies Initiative (GSI), and the International Energy Agency (IEA). Through country engagements and events, the Facility is also connecting with global experts and former politicians with a track record of reforming subsidies in their country. This network is being consolidated into a Panel of Experts and Peers who will help with country engagements and speak at future events.
The Energy Subsidy Reform Online Community Platform (ESROC)
In order to provide feedback to this growing network of peers, ESMAP is also hosting a web platform called “Energy Subsidy Reform Online Community” (ESROC), where government officials, experts and World Bank Group staff can connect, discuss and learn from each other. The goal is to provide a safe collaboration-space for practitioners who are reforming or are planning on reforming their energy subsidies. The platform is available in Arabic, Russian and Spanish and is currently populated by over 200 members from 31 countries, including staff from five Global Practices at the World Bank Group. To ensure knowledge exchange amongst the members, ESROC hosts regular global webinars through video connections, as well as eDiscussions and blogs, on topics of interest to the group, and inputs provided by governmental counterparts.
The work of ESMAP’s Energy Subsidy Reform and Delivery Technical Assistance Facility is made possible in part by funding from the European Commission.