Assessment and Implications of Rationalizing and Phasing Out Fossil-Fuel Subsidies

PROJECT DESCRIPTION

The rationale for reforming fossil-fuel subsidies is increasingly well-recognized: fossil-fuel subsidies contribute to fiscal deficits; use up resources that could be better focused on other development priorities; are inefficient tools at supporting low-income households; and incentivize consumption, increasing air pollution and greenhouse gas emissions. Most countries in Asia with extensive fossilfuel subsidies have tried to reduce them. But such reforms have been difficult to implement in practice. Reforms can have wide-ranging impacts, and it can be challenging for governments to design reform plans that transition away from subsidies without negative impacts. Politically, it can be challenging to communicate why fossil-fuel subsidies should be removed. This project contributes to this issue by assessing the extent of fossil-fuel subsidies in three Asian countries—India, Indonesia and Thailand—and projecting the impact that their removal would have on the macroeconomy, households and energy use. Three different kinds of models were employed for the impact analysis. This allowed assessment of a wide range of impacts but also the opportunity to contrast the models’ capabilities. The project aimed where possible to use existing models and to allow for only a limited degree of adaptation, to replicate real-world challenges of policy-making. Finally, a review of international literature was conducted to recommend approaches to reduce the impact of reform on poor households. The purpose of the study is to provide inputs to policy-makers in India, Indonesia and Thailand, and to illustrate for other countries in Asia the methodological approach and challenges involved in preparing for fossil-fuel subsidy reform.

SECTORS OR AREAS OF WORK

1. Energy policy and planning

Region/Location