Energy Subsidy Reforms in Nigeria: An ADVAD Study

Energy subsidies have wide-ranging economic consequences. While aimed at protecting consumers, subsidies aggravate fiscal imbalances, crowd out priority public spending, and depress private investment, including in the energy sector. Subsidies also distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources. Most subsidy benefits are captured by higher-income households, reinforcing inequality. Even future generations are affected by the increased damaging effects of energy consumption on global warming.

Energy subsidies are pervasive and impose substantial fiscal and economic costs in most regions. On a ―pre-tax‖ basis, subsidies for petroleum products, electricity, natural gas, and coal reached $480 billion in 2011 (0.7 percent of global GDP or 2 percent of total government revenues). The cost of subsidies is especially acute in oil exporters, which account for about two-thirds of the total. On a ―post-tax‖ basis—which also factors in the negative externalities from energy consumption—subsidies are much higher at $1.9 trillion (2½ percent of global GDP or 8 percent of total government revenues). The advanced economies account for about 40 percent of the global posttax total, while oil exporters account for about one-third. Removing these subsidies could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand.

Country experiences suggest there are six key elements for subsidy reform and they include but are not limited to the following:

 (i) a comprehensive energy sector reform plan entailing clear long-term objectives, analysis of the impact of reforms, and consultation with stakeholders;

(ii) an extensive communications strategy, supported by improvements in transparency, such as the dissemination of information on the magnitude of subsidies and the recording of subsidies in the budget; 

(iii) appropriately phased price increases, which can be sequenced differently across energy products;

 (iv) improving the efficiency of state-owned enterprises to reduce producer subsidies; 

(v) targeted measures to protect thepoor; and 

(vi) institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.