For political leaders the attractiveness of fuel subsidies is obvious. Access to cheap energy is important to people and subsidies are a very visible
For political leaders the attractiveness of fuel subsidies is obvious. Access to cheap energy is important to people and subsidies are a very visible way of government support. Subsidies, once they are established, are very hard to get rid of.2
Billions of the poorest people in the world do not have access to modern sources of energy. Four out of ten people in the world – that’s 3 billion – do not have access to clean, modern energy for cooking. They have to cook and heat with wood, crop waste, charcoal, coal or dried dung. Millions die every year from indoor air pollution as a result, as I wrote in this essay on energy poverty.
Fossil fuel subsidies are expensive and environmentally disastrous. But because energy access is so crucial the solution is not as simple as just repealing these subsidies. If they cannot access fossil fuel energy, they need substitutes. To end the subsidies that sustain the consumption of fossil fuels we need to make energy from clean sources affordable.
Whether industry and private individuals choose energy from fossil fuels or from clean alternatives is largely decided by their price. To transition away from fossil fuels to clean sources, the clean alternatives need to be cheaper. The fact that fossil fuels are subsidised makes this transition much harder. Clean alternatives don’t just have to be cheaper than fossil fuels, they need to be cheaper than fossil fuels with subsidies.
As so often with progress, the world rarely solves a problem through a single event. Repealing subsidies is a process. The good news is that there are several countries that are making progress and that others can learn from. Indonesia – home to 270 million people and a country with a major oil industry – is one of them. Researchers Beaton, Lontoh, and Wai-Poi (2017) show how the country overcame the political obstacles to gasoline and diesel subsidy reforms and focus on the reforms after the 2014 price hike. They emphasize the virtuous circle that can take place between subsidy reforms and investments in social assistance capacity.3 The data in the charts above shows that Italy, Ukraine, and Thailand are also examples of countries that have recently reduced subsidies.
Research beyond the case of Indonesia shows that a transition can be achieved when the freed up fiscal resources are used for targeted support for those that need it.4