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.
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