Elsevier

Energy Policy

Volume 45, June 2012, Pages 1-5
Energy Policy

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Fossil fuel subsidy removal and inadequate public power supply: Implications for businesses

https://doi.org/10.1016/j.enpol.2012.02.057Get rights and content

Abstract

We briefly consider the impact of fossil fuel subsidy removal policies in the context of inadequate power supply, with a focus on the implications for businesses. In doing so, we utilize the case of the early 2012 fuel subsidy removal in Nigeria. The rationale for such subsidy-removal policies is typically informed by analysis showing that they lead to an economically inefficient allocation of resources and market distortions, while often failing to meet intended objectives. However, often the realities of infrastructural and institutional deficiencies are not appropriately factored into the decision-making process. Businesses in many developing countries, already impaired by the high cost of power supply deficiencies, become even less competitive on an unsubsidized basis. We find that justifications for removal often do not adequately reflect the specific environments of developing country economies, resulting in poor recommendations – or ineffective policy.

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.

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