The Economics and Political Economy of Energy Subsidies

by Jon Strand

ISBN: 9780262337472 | Copyright 2016

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Government subsidies to energy are widespread and represent a heavy burden on public budgets in many countries. Both producers and consumers may be subsidized; the most common subsidies are for motor fuel consumption and electricity production and consumption. The subsidies to consumers often prove particularly harmful because they result in increased energy consumption, increased carbon emissions, and distortionary effects on consumer behavior. This book fills a void in the literature by providing a first, broad and diverse, analysis of several aspects of the economic and political economy aspects of government energy subsidies. The contributors take both theoretical and empirical approaches, with most of the focus on subsidies to fuel and electricity in non-OECD countries.

The chapters cover such topics as energy pricing, reelection incentives for politicians that may encourage excessive subsidies; political corruption and “bribing equilibria,” the the “resource curse” in developing countries when the gains from natural resource windfalls are largely wasted, the “entitlement” of energy subsidies in autocracies, and distributional issues when subsidies targeted to the poor are removed in high-income countries. One chapter discusses nonharmful subsidies: the potential economic effects of subsidizing the manufacturing and deployment of renewable energy.

Contributors

Carolyn Fischer, Mads Greaker, Mohammad Habibpour, Michelle Harding, Christina Kolerus, Christos Kotsogiannis, Jim Krane, Alber Touna Mama, Raffaele Miniaci, Marco Pani, Ian Parry, Carlo Perroni, Leonzio Rizzo, Knut Einar Rosendahl, Carlo Scarpa, Neda Seiban, Suphi Sen, Jon Strand, Paola Valbonesi, Herman Vollebergh

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Contents (pg. v)
Series Foreword (pg. vii)
1 Introduction (pg. 1)
Notes (pg. 13)
References (pg. 13)
2 Reforming Energy Prices (pg. 17)
2.1 Introduction (pg. 17)
2.2 Energy Subsidies: A Quick Comparison of Undercharging for Supply Costs and Environmental Costs 2.2.1 Definitions of Energy S (pg. 18)
2.3 Energy-Related Externalities and Fiscal Instruments to Address Them (pg. 21)
2.4 Putting Principle into Practice: Quantifying Corrective Fuel Taxes in Different Countries (pg. 25)
2.5 Corrective Fuel Tax Estimates and Impacts of Reform (pg. 28)
2.6 Moving Reform Forward (pg. 32)
2.7 Conclusion (pg. 35)
Notes (pg. 36)
References (pg. 38)
3 Energy Taxation in OECD Countries: Effective Tax Rates across Countries, Users, and Fuels (pg. 41)
3.1 Introduction (pg. 41)
3.2 The New OECD Database on Effective Tax Rates (pg. 43)
3.3 Descriptive Findings (pg. 45)
3.4 Tax Rate Responsiveness Measured (pg. 52)
3.5 Conclusion (pg. 58)
Notes (pg. 59)
References (pg. 59)
4 Energy Subsidy Reform and Policy Makers’ Reelection Incentives (pg. 61)
4.1 Introduction (pg. 61)
4.2 Energy Subsidies and the Commitment to Reform (pg. 63)
4.3 Subsidy Reform and Reelection Incentives (pg. 75)
4.4 Discussion (pg. 83)
Acknowledgments (pg. 86)
Notes (pg. 86)
References (pg. 89)
5 Model of Noncorrupt versus Corrupt Government in Delivery of Transport Services: The Impact of Energy Subsidies (pg. 93)
5.1 Introduction (pg. 93)
5.2 A Basic Model of Noncorrupt Government (pg. 95)
5.3 Endogenizing Additional Public-Good Supplies (pg. 104)
5.4 Impacts of Corruption (pg. 107)
5.5 Concluding Remarks (pg. 110)
Appendix: Symbols Used in the Chapter (pg. 112)
Notes (pg. 112)
References (pg. 113)
6 Fuel-Price Subsidies and the Control of Corruption: A First Approach (pg. 115)
6.1 Introduction (pg. 115)
6.2 Preliminary Analysis (pg. 116)
6.3 Empirical Analysis (pg. 118)
6.4 Results (pg. 120)
6.5 Robustness Check (pg. 123)
6.6 Concluding Remarks (pg. 126)
Acknowledgments (pg. 126)
Appendix A: Statistical Appendix (pg. 127)
Appendix B: Data Sources and Definitions Gasoline (diesel) subsidy (pg. 130)
Notes (pg. 131)
References (pg. 132)
7 Fuel Subsidies and Governance in Sub-Saharan Africa (pg. 135)
7.1 Introduction (pg. 135)
7.2 Related Literature (pg. 137)
7.3 Case Studies (pg. 138)
7.4 Estimating the Influence of Governance on Fuel Prices (pg. 142)
7.5 Concluding Remarks and Discussion (pg. 153)
Notes (pg. 154)
References (pg. 154)
8 Effects of Releasing Subsidies on the Wage Rates and the Gender Wage Inequality (pg. 157)
8.1 Introduction (pg. 157)
8.2 Data, Methodology, and Results (pg. 162)
8.3 Conclusions (pg. 170)
Appendix (pg. 172)
Notes (pg. 188)
References (pg. 188)
9 The Political Economy of Subsidy Reform in the Persian Gulf Monarchies (pg. 191)
9.1 Introduction (pg. 191)
9.2 Subsidy Reform and the Social Contract (pg. 193)
9.3 Research Design 9.3.1 Hypotheses (pg. 198)
9.4 Results (pg. 203)
9.5 Discussion (pg. 205)
9.6 Conclusion (pg. 211)
Appendix: Details of Public Survey, Coding of Survey Variables, and Demographics (pg. 213)
Notes (pg. 218)
References (pg. 220)
10 Energy Benefits to Vulnerable Consumers: The Eligibility Criterion (pg. 223)
10.1 Introduction (pg. 223)
10.2 Energy Affordability Indicators and Their Measurement (pg. 224)
10.3 Electricity and Gas Benefits in Italy (pg. 228)
10.4 Energy Poverty and Energy Benefits in Italy (pg. 229)
10.5 Conclusions (pg. 247)
Notes (pg. 252)
References (pg. 252)
11 Are Renewable Energy Subsidies in Need of Reform? (pg. 255)
11.1 Introduction (pg. 255)
11.2 Taxing Bads versus Subsidizing Goods (pg. 255)
11.3 Policy Interactions with Renewable Energy Subsidies (pg. 258)
11.4 Market Failures Relevant for Renewable Energy Subsidies 11.4.1 Spillovers from Learning by Doing (pg. 261)
11.5 Implications for Optimal Subsidies (pg. 264)
11.6 Discussion (pg. 267)
Notes (pg. 269)
References (pg. 270)
Contributors (pg. 273)
Index (pg. 275)

Jon Strand

Jon Strand is a Senior Economist at the Inter-American Development Bank is Washington, D.C., and Professor of Economics at the University of Oslo.


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