Article Series: Fossil Fuel Subsidies

Case studies: Lessons Learned From Attempts to Reform Fossil-Fuel Subsidies

The GSI has developed a broad range of case studies of fossil-fuel subsidy reform. This includes a review of subsidies and reform attempts across APEC economies and case studies on Brazil, France, Ghana, North Sudan, Malaysia, India, Indonesia, Iran, Poland and Senegal.

Research Type: 

Lessons Learned from China's Residential Tiered Electricity Pricing Reform

Because electricity is an essential commodity for every day life, the government mostly regulates its retail price. In order to ensure that all sections of society can access electricity affordably, pricing is done in blocks so that the poor, who consume less, pay less. Under such a tiered electricity pricing (TEP) system, electricity consumers pay a low rate for an initial consumption block and a higher rate as they increase use beyond that block. TEP is widely used by power-sector regulators and can, if properly designed, improve equity by providing the poor with subsidized rates, while maintaining economic efficiency (i.e., avoiding overconsumption) and limiting subsidy expenditure. In October 2010, China introduced a TEP pricing reform for the residential sector,1 in accordance with an official document (No. [2010] 2617) issued by China’s National Development and Reform Commission. Previously, households were charged a flat rate, which varied by province, regardless of how much each consumed. 

This paper reviews and evaluates the TEP reform, examining the impacts on equity, efficiency and subsidy expenditure. It also looks at how problems associated with the reform were addressed, and the form and mode of communication with stakeholders.

Diesel Subsidy Reform in India: Lessons Learned

The Indian government’s declaration of a formal end to diesel price regulation in October 2014 marked the culmination of a two-year process of price reform. The effective removal of diesel subsidies, although not yet accompanied by comprehensive price decontrol, nevertheless represents an important milestone in the reform of energy pricing in India, and provides policy-makers with a useful case study of successful fossil fuel subsidy reform. This report investigates lessons learned. 

The End of Coal: Ontario's Coal Phase-Out

煤炭终结:加拿大安大略省的“煤炭淘汰政策” (PDF - 15.5 MB)

Ontario has successfully implemented its policy to put an end to coal use in 2014. What lessons can be learned from Ontario’s coal phase-out experience? How can its success be replicated in other parts of the globe? This paper explores this question for all those around the world, informed by a comprehensive review of existing literature and semi-structured interviews with high-level experts from Canadian political and academic circles, industry and civil society. See also the summary infographic and recording of the launch webinar.

Lessons Learned: Malaysia's 2013 Fuel Subsidy Reform

On 2 September 2013, Malaysia's Prime Minister Datuk Seri Najib Razak announced that the price of diesel and RON95 gasoline would increase by 20 sen (US$ 0.06) overnight, and that cash transfers would be increased to mitigate the impact on the poor. Subsidies for sugar were reduced at the same time. This case study provides an overview of this partial reform to Malaysia's fuel subsidies, summarizing the context that surrounded the decision and three different aspects of the reform: its changes to Malaysia's pricing system for fuel; the impacts that reform had on the economy and households; and how the reform was communicated and perceived. It concludes with a set of lessons that other countries might learn from these experiences.

Recent Developments in Sudan's Fuel Subsidy Reform Process

Recent Developments in Sudan's Fuel Price Reform Process (PDF - 355 KB)

In September 2013 Sudan introduced the third and most dramatic in a series of fuel subsidy cuts, raising prices of petrol, diesel and liquefied petroleum gas (LPG) by 65 to 75 per cent each. This came in a context of high economic pressure, following the loss of oil revenue from South Sudan after July 2011. That resulted in significant structural imbalances in the fiscal and current accounts, sending the black market exchange rate out of control and requiring the Central Bank to print money to finance excessive government spending.

The overall pricing system was not changed by the subsidy cuts, and no explicit linkage to the market was introduced, meaning that further reforms are likely to be required. However, that may be politically difficult, given the highly negative public reaction (with the worst riots seen in the capital city for at least two decades) and the lack of support for the reforms among the media and other political forces—including sections of the ruling party itself. Internal disunity appears to have been one of the main factors preventing the government from launching an effective communications strategy and broader consultations.

Recent Developments in Iran's Energy Subsidy Reforms

In 2009, the International Energy Agency estimated that Iran’s subsidies for fossil-fuel consumption were US$66 billion, the highest of any country. In 2010, it took bold economic reforms to phase out energy subsidies with the aim of preventing wasteful consumption, equitably distributing national wealth, strengthening the competitiveness of key industries and increasing the country’s export capacity. The reform plan has been praised by international organizations, including the International Monetary Fund, for its well-designed mitigating measures, including a substantive cash transfer scheme. 

Almost two years into the reforms and within the context of harsh economic conditions mostly resulting from international sanctions, questions have arisen as to the success or failure of the reform plan. A soaring inflation rate, dramatic volatility in the foreign exchange market and rising commodity prices have significantly undermined the price reforms and the value of cash handouts which have been paid on a nationwide scale to compensate for the higher energy prices.

This policy brief outlines recent developments since the reforms were implemented and sheds some light on the impacts that the reforms – once referred to as the country’s “grand economic surgery” – have had.

Case Study: Lessons Learned From Indonesia's Attempts to Reform Fossil-Fuel Subsidies

This report examines Indonesia's attempts to reform fossil-fuel subsidies. It reviews the history of fossil-fuel subsidies in the country and focuses on the performance of two policies that have been used to support reform. The first is the Bantuan Langsun Tunai, an unconditional cash transfer program used to help cushion low-income households from price increases in 2005 and 2008. The second program, begun in 2007, aims to make low-income households use liquefied petroleum gas (LPG) instead of kerosene, as it is cheaper to subsidize, cleaner and more efficient. The report concludes that both these policies appear to have achieved the Indonesian government's objectives.

Case Study: Brazil's Experience With Fossil-Fuel Subsidies and Their Reform

This paper examines how Brazilian governments have tried to justify fossil-fuel subsidies and looks at the interest groups who have benefitted from them and tried to maintain them. The Brazilian experience is useful for understanding the rationale for subsidies in countries with large regional and social disparities. The lessons learnt from liberalizing Brazil's energy market focus on how governments have tried to address the reasons used by interest groups to lobby for the continuation of existing subsidies.

Case Study: Attempts to Reform India's Kerosene Subsidy

This report examines attempts to reform India's long-standing subsidy on residential kerosene. At least one third of the subsidized kerosene is diverted to the black market for use as a transport fuel - a lucrative business for corrupt fuel distributors who, in turn, bribe government officials to obtain licenses to distribute or blend the fuel and to maintain the subsidy.

Case Study: Restructuring Poland's Coal-Mining Industry

This report examines the reform process in the context of Polish coal mining. Soon after the economic transition began in 1989, demand for coal declined but controls on coal prices remained in place. A reform program endorsed by the Solidarity trade union, and backed by substantial public funds for closing mines and providing social benefits, was at least a partial success. Today, coal companies have nearly achieved long-term viability and the process of privatization has commenced.

Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons From Ghana, France and Senegal

This paper draws on case studies the GSI has commissioned on fossil-fuel subsidy reform in Brazil, France, Ghana, India, Indonesia, Poland and Senegal. It identifies six stages that improve the chance that a reform process will lead to lasting change: research of subsidy costs, benefits and reform impacts; establishment of clear reform objectives and parameters; construction of a coherent reform policy, including a timeframe, complementary policies to offset unwanted secondary impacts and a communications strategy; effective implementation; monitoring evaluation and adjustment; and finally institutional measures to prevent back-sliding.