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How to cut fossil fuel subsidies without causing riots

Source: Thomson Reuters Foundation - Wed, 11 Dec 2013 01:03 PM
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A Chevron gas pump is seen at a retail gas station in Cardiff, California on October 9, 2013. REUTERS/Mike Blake
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As a government, how do you soften the impact of reforms you know might be unpopular with voters - like reducing subsidies for fossil fuels and hiking energy and power prices? In the case of Iran, you introduce compensation payments for more than 61 million individuals - 80 percent of the population - as the changes are ushered in.

When Tehran launched reforms to phase out energy subsidies in 2010, it also helped businesses, providing funds for things like energy audits, so they could boost efficiency and cope with higher prices while taking broader measures to cope with inflation.

In Malaysia, a "Subsidy Lab" was set up, bringing together representatives of around 60 major groups to plan together for reforms in 2010. And in Indonesia, a register of poor households was compiled to make cash transfers to those worst affected by 2005 fuel price rises, and then updated for a further reform attempt this year, alongside other social welfare measures including building rural infrastructure and expanding support for rice farmers.

These examples were cited by expert participants in a debate hosted by AlertNet Climate and the Climate and Development Knowledge Network this week, exploring how cutting the world's annual $600 billion in subsidies for fossil fuels could help curb both climate change and poverty.

A key message was that phasing out fuel subsidies is "difficult but possible", as the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development put it.

The expert panel recommended a staggered approach coupled with adequate protection for poorer families and measures to keep energy costs down.

"Emerging countries cannot do without subsidies 'cold turkey' - the process has to be gradual and well prepared," wrote Carlo Sdralevich, deputy division chief for the Middle East and Central Asia Department of the International Monetary Fund (IMF). As for success stories, some Middle Eastern countries have started reducing subsidies and boosting social safety nets, including Jordan, which has increased cash transfers to households hit by higher fuel prices, he added.

"This is the standard approach to subsidy reduction: transform the resources devoted to subsidies into targeted cash transfers to the poor. But implementation should not be underestimated - even a uniform cash transfer may be difficult to administer," Sdralevich warned.

Iran, which has been praised by the IMF and others for the way it implemented its cash transfer programme, has in fact found it an expensive policy - and this, along with the negative effects of cutting fuel subsidies for industry, may explain why energy reforms have stalled there, Sdralevich added.

GOVERNANCE

Armsfree Onomo, project manager for civil participation at the Heinrich Boell Foundation-Abuja in Nigeria, stressed that good governance is essential to make fuel subsidy cuts work in his country.

"Savings from the removal of subsidies in January 2012 have not had real impacts on the lives of ordinary Nigerians. The promise underlying the removal has not been fulfilled - such that promised interventions in maternal health, infrastructure (etc) have actually not materialised," he wrote.

"The Nigerian government established the Subsidy Reinvestment and Empowerment Scheme, and even talked about putting safety nets in place,” he said. But “if such interventions have no real impacts, you lose the constituency that should stand up in favour of the removal of subsidy. That is the Nigerian reality for now.”

For Onomo, the use of cash transfers would be risky in the West African oil-rich nation due to the potential for corruption. Better to invest the money saved from reducing fuel subsidies in infrastructure, health services and helping people access renewable energy in rural areas, he said.

"Nigerians must get governance right first, and every other thing will fall in(to) place," he emphasised.

Transparency and communication are paramount to successful energy reform, panelists agreed. But that can be hard to achieve, noted the IMF's Sdralevich.

"One of the reasons it is difficult to have transparency on subsidies is that they are very difficult to account for, because they are dispersed in the economy and very rarely on the budget. So the first step would be to do some accounting and budgeting of subsidies - and that's not necessarily easy in some countries even with the best of intentions," he said.

And it's not just the poor who need to understand what is happening, he added. After all, the poorest 20 percent of households typically receive less than 7 percent of the benefits generated by fossil fuel subsidies, according to IMF research.

"It is important that governments can credibly explain where the money will go, otherwise the middle classes lose the subsidy but do not see anything in return," Sdralevich said.

If badly implemented and poorly communicated, cuts to fuel subsidies can result in protests and unrest on the streets, as has occurred in Nigeria, Sudan and Indonesia, debate participants warned.

Shelagh Whitley, a research fellow with the Overseas Development Institute (ODI) who recently produced a report on ending fossil fuel subsidies, identified some important elements for doing it right: research to identify subsidies and their impact; targeted information for all concerned; building coalitions and cross-political party consensus; integration into long-term planning - particularly in the energy and transport sectors; and protection for the poor and vulnerable.

"Where is best to spend additional revenue or money saved from subsidy phase-out will be different for every country," she said. "But protection of the poor and vulnerable (from price increases) and investment in efficiency (to keep energy costs low) have to be priorities across the board."

LACK OF PUBLIC PRESSURE?

While G20 countries have pledged to phase out their fossil fuel subsidies, the ODI recommends they should commit to getting rid of all fossil fuel subsidies by 2020. Early action in particular is needed on coal subsidies, with similar action on oil and gas exploration by 2015, Whitley said.

Participants in the online debate noted that joint regional efforts could help push forward reforms by removing opportunities for fuel smuggling across borders and widening unsubsidised electricity markets.

But there was a suggestion that governments around the world are still pouring precious dollars into propping up dirty energy demand in part because not enough citizens are telling them to stop.

"Governments need the confidence to act and for that (they) do need pressure from the public. There are many more vested interests protecting their positions than the majority pushing for change," said the Global Subsidies Initiative.

"The ideal situation would be a group of stakeholders who not only want fossil-fuel subsidy reform, but who have and (make) demands of what they would like to achieve with the saved revenue. This, however, has never happened anywhere in the world! Perhaps the most we can hope for is relatively low opposition to reform?"

To read the full debate, visit the event page.

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