ViewpointFossil fuel subsidy removal and inadequate public power supply: Implications for businesses
Highlights
► We consider the impact of fuel subsidy removal in the context of energy poverty. ► Calls for subsidy removal often do not reflect the developing country realities. ► Businesses impaired by power supply deficiencies, become even less competitive.
Section snippets
Happy new year
On January 1st 2012 Nigerians woke to discover that the Petroleum Products Pricing Regulatory Agency (PPPRA), the price regulatory body under the Nigerian National Petroleum Corporation (NNPC), had overnight, and with little signal, more than doubled the price of gasoline, completing the liberalization of the downstream sector of the oil industry that commenced on January 1st 2002. President Goodluck Jonathan has since revised his decision by reducing gasoline prices by 30 percent, which led to
Context
Fossil fuel subsidies for consumers have been used by developing country governments principally as a means of achieving certain social, economic, and environmental objectives. They include: alleviating energy poverty and improving equity, increasing domestic supply, redistributing national resource wealth, protecting domestic production and associated employment, correcting externalities, and controlling inflation. In recent years, there has been a wave of subsidy-removal efforts. Many
International perspectives
The International Energy Agency (IEA) estimates that fossil-fuel subsidies to consumers worldwide amounted to $312 and $409 billion in 2009 and 2010, respectively (IEA (International Energy Agency), 2010, IEA (International Energy Agency), 2011). Consumption fuel subsidies benefit consumers because they artificially reduce end-user prices for fossil fuels, thereby helping to alleviate poverty, redistributing national (resource) wealth, or promoting economic development by supporting
Industrialization is not a dirty word
There is a general consensus that adequate infrastructure services supply is essential for growth and economic development7
The rapture of decreasing demand
Many commentators cite the energy security benefits that accrue from the reduction in energy consumption through subsidy removal programs. The IEA stipulates that removal of fossil-fuel subsidies will incentivise consumers to use energy efficiently, resulting in a reduction of energy consumption and energy-related GHG emissions (IEA, 2011). Lower demand, in this line of reasoning, would lead to less important dependence and expenditure in net-importing countries and would boost export
Conclusion and policy implications
International calls for the removal of fossil fuel subsidies for reasons ranging from market distortions to impacts on climate change and clean energy development have been common and increasing over the last two years. But simplistic rhetoric that assumes that the vast quantities of money used for these subsidies can quickly and effectively be diverted to internationally-determined priority areas are not useful. History has repeatedly shown the complex political terrain associated with
Acknowledgments
We would like to thank Reid Detchon (UN-Foundation), and Kandeh Yumkella and Paul Maseli (UNIDO) for their useful comments. The usual disclaimer applies.
References (32)
Productivity growth and energy consumption in the Nigerian manufacturing sector: a panel data analysis
Energy Policy
(1998)- et al.
The economic impact of subsidy phase out in oil exporting countries: a case study of Algeria, Iran and Nigeria
Energy Policy
(1995) Impact of energy subsidies on energy consumption and supply in Zimbabwe. Do the urban poor really benefit?
Energy Policy
(2003)- et al.
The cost of doing business in Africa: evidence from enterprise survey data
World Development
(2008) - et al.
Estimating petroleum products demand elasticities in Nigeria: a multivariate cointegration approach
Energy Economics
(2010) - et al.
A new perspective on the competitiveness of nations
Socio-Economic Planning Sciences
(2008) - et al.
When do firms generate? Evidence on in-house electricity supply in Africa
Energy Economics
(2010) - et al.
Ten Years of Reforms: The Impact of an Increase in the Price of Oil on Welfare
Journal of Indonesian Social Sciences and Humanities
(2008) - Adenikinju, A., n.d. Energy pricing and subsidy Reforms in Nigeria. Department of Economics, University of Ibadan,...
- CBA (Central Bank of Nigeria), 2003. Overview of Government's efforts in the development of SMEs and the emergence of...