While the exact potential for reallocation depends on which countries have subsidies and how savings can be used, given political and economic realities, there are several ways in which this could happen in practice. While Organisation for Economic Development and Co-operation (OECD) countries committed USD 8.3 billion annually for development assistance to the energy sector in 2015 and 2016, they spent 10 times as much to support fossil fuels.
Reforming these fossil fuel subsidies could further increase support for the energy transition. In countries with high energy access deficits and high fossil fuel subsidies, just a share of savings could help raise substantial volumes of energy access finance – and in many cases, this would be much larger than equivalent flows of overseas development aid. Countries with high fossil fuel subsidies and large energy access deficits were found to spend the equivalent of USD 573 per household without access to electricity or USD 321 per household without access to clean cooking on fossil fuel subsidies. For example, Nigeria, where 61 per cent of households have access to electricity and only 6 per cent of households have access to clean cooking, spent USD 2.5 billion on fossil fuel subsidies in 2016. In comparison, Nigeria received on average USD 132 million per year in development finance for electricity between 2011 and 2015.
At their best, untargeted fossil fuel consumption subsidies are an inefficient and unjust tool for improving energy access.
At their worst, they can even have a negative impact on energy access. Untargeted consumption subsidies are subsidies that benefit anyone who buys a product, regardless of whether they are rich or poor. They only benefit people that are reached by electricity or fuel distribution networks, which typically excludes a large number of poorer households. They are also highly unfair – richer households buy larger volumes of energy, so they capture most of the benefits. That makes them highly inefficient – that is, they achieve small energy access benefits at exorbitant costs that cannot be justified in comparison with other interventions.
When untargeted subsidies are badly designed, they can even make energy access problems worse. One common problem is smuggling and diversion of subsidized fuels, or when governments cut back supply because they are struggling to manage subsidy costs. This can result in fuel scarcity, which in turn creates long queues, panic paying and prices far above the official subsidized level. If the financial burden for subsidies is pushed onto state energy companies, they may cope by restricting investments for energy access.
Smart strategies for fossil fuel subsidy reform can boost sustainable energy access
Experience with fossil fuel subsidy reform has yielded a wealth of knowledge on how subsidies can be reformed to improve energy access. Good data about the socioeconomic situation of households and the energy services needed is crucial: the focus should be on energy needs for cooking, transport or lighting, instead of focusing on just one fuel. This could mean levelling the playing field between subsidized grid electricity and off-grid technologies. It could also mean targeted lifeline tariffs or support for access to clean cooking equipment. Ideally, support for energy access would be provided in a technology-neutral way, even though this is difficult to implement in practice. In some cases, countries may prefer to subsidize incomes instead of or as well as energy sources.
1. Phase out fossil fuel subsidies that have no or little potential for energy access
Some fossil fuel subsidies have little or no potential to improve energy access. Governments should aim to phase out such subsidies, taking adequate steps to mitigate negative economic or social impacts, particularly for poor households and women.
Examples: producer subsidies; gasoline and diesel subsidies
2. Targeted subsidies aimed at access for those that really need them
Some fossil fuel subsidies are used to incentivize the use of energy technologies for which there is no short-term sustainable alternative. If these subsidies are deemed necessary, governments should improve the effectiveness and efficiency of these subsidies through targeted subsidies aimed at poor households. Facilitating new connections should be a major focus in this respect.
Examples: liquefied petroleum gas (LPG) subsidies; electricity subsidies
3. Shift fossil fuel subsidies to investments in renewable energy and energy efficiency
Shifting subsidies to renewable energy technologies for energy access and energy efficiency can support households and improve the sustainability of energy access.
Examples: kerosene subsidies for lighting; diesel subsidies for agriculture; subsidies to transport fuels; subsidies to coal and gas for electricity generation
Excerpt of "Getting on Target: Accelerating energy access through fossil fuel subsidy reform", GSI 2018
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