This document discusses the political challenges of reforming energy subsidies. It notes that while the economic costs of subsidies are understood, political factors make reform difficult. Governments struggle to address issues like uncertainty, identifying winners and losers, and proposing alternative social assistance. Citizens and interest groups often favor retaining subsidies due to self-interest in benefits, perceptions of inequity, and distrust in government. The document outlines key steps in effective subsidy reform policy design, including developing policy scenarios, extensive consultation, scenario testing, and implementation strategies that address these political challenges.

1. POLITICAL ECONOMY OF
ENERGY SUBSIDY REFORM
SIMON COMMANDER
ALTURA PARTNERS & IE BUSINESS SCHOOL
September
9,
2014
MENA
Knowledge
Sharing
and
How-­‐
To
in
Subsidy
Reform:
Regional
Workshop

2. 2
Why is it so difficult to reform
energy subsidies?
• Generally accepted that subsidies are undesirable
Ø Fiscally costly, often unsustainable & growth impeding
Ø Distort the structure of the economy
Ø Create large negative external effects
Ø Regressive – mostly appropriated by non-poor
Ø Inefficient as instruments of social policy & protection
• Elements of best practice in reform well understood
• So why are energy subsidies so difficult to reform?
• Answer lies normally not just with technical or
institutional limitations but political factors

3. 3
Reasons for a status quo bias
Ø Governments often lack credibility when promising
improvements contingent on reform
Ø Unable to address the problem of uncertainty
Ø Inability to identify accurately winners & losers, vested
interest & other interested parties
Ø Lack of consultation-based reform strategies that reflect
citizens’ preferences
Ø è inability to convince of merits of reform
Ø Inability to propose better systems of social assistance
Ø Absence of alternative delivery mechanisms & weak
institutional capacity affecting scope & integrity

4. 4
Why citizens & interest groups
often favour retention
Ø Self interest – they benefit directly from subsidies
Ø Main barrier to reform mostly non-poor
Ø Reform options often perceived as creating only losers –
other than government
Ø Perceptions of inequity – benefits of growth seen as
accruing to only a minority of citizens - subsidies as
offset
Ø Sense of entitlement + longevity of subsidy regime
Ø Insufficient attention paid to designing transitional
compensation to non-poor groups
Ø Inability to see how alternative systems of social
protection may work
Ø Changes to subsidy regimes seen as driven by outsiders
Ø Lack of legitimacy/trust between governments & citizens

5. Strategic
consideraIons
Ø IdenIfy
main
policy
objecIves
including
energy,
socio-­‐
economic
&
climate
change
objecIves
Ø IdenIfy
principal
instruments
including;
Ø Price
adjustments;
fuel
switching;
technology
soluIons;
differenIated
tariffs;
compensaIon
mechanisms
&
incidence;
funding
for
renewables;
insItuIonal
channels
Ø Timing
of
implementaIon
-­‐
ex
ante/ex
post
Ø IdenIfy
main
constraints;
Ø PoliIcal/civic/other
opposiIon
Ø Shocks
to
compeIIveness
(sectoral
dimensions)
Ø Macroeconomic,
including
impact
on
prices
&
earnings
Ø Impact
on
poverty
5

6. Strategic
consideraIons
Ø IdenIfy
changes
to
market
structure,
ownership,
compeIIon
&
regulatory
agencies
Ø ParIcularly
relevant
to
power
sector
including
extent
of
integraIon
&/or
unbundling
Ø Note:
such
changes
may
improve
performance
but
operators
can
sIll
face
constraints
on
pricing
Ø IdenIfy
which
stakeholders
to
consult
Ø but
vested
interests
can
oVen
block
Ø IdenIfy
transparent
longer
term
price
seWng
mechanisms/rules
6

7. 7
Key steps in effective policy design
1. Policy scenarios - fiscal & financial parameters,
timing/phasing & institutional capacity
2. Consultation with citizens, key constituencies &
interested parties/stakeholders to answer:
Ø What trade-offs are different interests prepared to make
in reforming existing subsidy regimes?
Ø What complementary policies are required to bolster
acceptance of reform (e.g., energy saving technology)?
Ø Are changes required to market structure & ownership?
Ø Are changes required to existing system of social
protection on a transitional or permanent basis?

8. 8
Key steps in effective policy design
3. Scenario testing with focus groups & other
sampled individuals, firms & other bodies
4. Adaptation of policy scenarios consistent with
consultation-based feasibility analysis
5. Implementation & communications strategy
Ø Elements of a professional communications strategy
include:
Ø Elaboration of series of messages tailored for
specific outlets & audiences
Ø Use of multiple channels – Broadcast/ TV/Radio/
Digital Communications/ Print….