Fossil Fuel Subsidy Reform

Fossil Fuel Subsidy Reform

Published on 27 August 2021

Overview

Several measures included in country NDCs, such as energy efficiency, renewables, nature-based solutions and others, potentially deliver socio-economic benefits as well such as economic growth, job creation, reduced air pollution, public health benefits and enhanced energy security and access.

Fossil fuel subsidies make up a large percentage of the GDP of many low- and middle-income countries. That is why fossil fuel subsidy reform presents a viable avenue for governments to create fiscal space which can be channeled into green investment, correcting environmental externalities, and enhancing social protection programs, especially in the light of the impacts of the COVID-19 pandemic. Reallocating fossil fuel subsidies could also free up resources to accelerate progress on the Sustainable Development Goals (SDGs).

However, the success of fossil fuel subsidy reform requires detailed analysis of potential consequences and ensuring that economically disadvantaged groups and fossil fuel dependent sectors of the economy are not disproportionately affected. With this interactive simulator users can explore different scenarios of fossil fuel subsidy reforms and their impacts.

Countries spend hugely on Fossil Fuel Subsidies. But utilising a small % of it on other areas of development can bring a great impact. 

Simulate the reallocation of a percentage of a country’s fossil fuel subsidy

towards Temporary Basic Income (TBI), as well as other outcomes such as education, health, and renewable energy and its impact on vulnerable people and welfare.

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Reallocating % of the subsidy to Temporary Base Income

WELFARE ANALYSIS As fossil fuel subsidies are reformed, total household expenditure will increase if not accompanied by social protection such as cash transfers to offset the negative impacts of the price increases. Welfare analysis is critical to evaluate the impact on households and the level of compensation needed for the household to maintain the same level of expenditure before the reform.

Impact on Vulnerable People

Total population
Vulnerable population

Data not available.

Beneficiaries covered by reallocation

Data not available.

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Impact on welfare

Result of Fossil Fuel Subsidy Reform against Indicators

To carry out the welfare analysis, UNDP is developing The Socio-Economic Analysis of Subsidies (SEAS) tool. It is a simulation program designed by the United Nations Development Programme (UNDP) in partnership with the Partnership for Economic Policy (PEP).

This simulator is an effective tool to simulate the impact of price reform on household welfare and government revenues. This tool helps users understand the welfare implications of the fossil fuel subsidy removal on households and provide real-time response to governments interested in understanding the economic impact of price changes. This is critical now, especially with growing fiscal pressure due to the COVID-19 pandemic and the volatility of fossil fuel prices.

The tool simulates two alternate ways to reform fossil fuel subsidies.

  • In the first scenario, fossil fuel subsidies are completely removed without any compensation to households (uncompensated subsidy reform) and
  • In the second scenario (a government revenue neutral approach), the fossil fuel subsidies are removed. However, the fiscal savings from the reforms are fully transferred to households (compensated subsidy reform)

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