Can government transfers make energy subsidy reform socially acceptable? A case study on Ecuador. (February 2020)

• Record Type: Journal Article
• Authors: Schaffitzel, Filip; Jakob, Michael; Soria, Rafael; Vogt-Schilb, Adrien; Ward, Hauke
• Is Part Of: Energy policy. Volume 137(2020)
• Publication Date: 2020-02
• Subjects: Energy subsidy reform -- Input-output analysis -- Distributional impacts -- Revenue recycling -- Political feasibility -- Ecuador; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2019.111120
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Energy subsidies cost Ecuador 7% of its public budget, or two thirds of the fiscal deficit. Removing these subsidies would yield local economic and environmental benefits and help implement climate targets set in the Paris Agreement. However, adverse effects on vulnerable households can make subsidy reforms politically difficult. To inform policy design, we assess the distributional impacts of energy subsidy reform using Ecuadorian household data and an augmented input-output table. We find that subsidy removal without compensation would be regressive for diesel and LPG, progressive for gasoline, and approximately neutral for electricity. We then analyze how freed up public revenues could fund in-kind and in-cash compensation schemes to mitigate income losses for poor households. Our results indicate that removing all energy subsidies and increasing the cash transfer program, Bono de Desarrollo Humano (BDH), by nearly US$ 50 per month would increase the real income of the poorest quintile by 10% while leaving more than US$ 1.3 billion for the public budget. Finally, we conduct interviews with local policy makers and experts to identify two reform options that are progressive and considered feasible: eliminating subsidies on gasoline while increasing the BDH and replacing universal LPG subsidies with targeted LPG vouchers. Highlights: Distributional impacts of energy subsidy removal vary across energy types. Regressive for diesel and LPG; progressive for gasoline; neutral for electricity. Two energy reform options would benefit the poorest 40% and are considered feasible. Removing gasoline subsidies and increasing the existing social protection program. Replacing universal LPG subsidies with targeted LPG vouchers.