0.15 Natural capital: energy  (Page 7/15)

Consider in more detail the experiences of Mexico and Indonesia.

Mexico uses monthly price ceilings to subsidize consumers of gasoline and diesel fuel. This results in a subsidy to gasoline and diesel consumption. The subsidies since 2006 have averaged about 40 cents a gallon (U.S.$) for gasoline and about 59 cents a gallon for diesel.

The Mexican government has maintained that the subsidy is necessary to protect the poor from higher fuel prices. “Getting Prices Right: Mexico’s Fuel Subsidies”, Federal Reserve Bank of Dallas, Southwest Economist , October 2013. The subsidy does not begin to satisfy its objective. According to 2010 Mexican data the poorest 2 deciles in the income distribution had only 3% of gasoline and diesel consumption.

On the other hand. The top two, richest deciles consumed 58.5% of gasoline and diesel. So, nearly 60% of 96% subsidy goes to wealthy households. The subsidy clearly has no earmarks of a pro-poor program.

In Indonesia, in many years over the past 3 decades the subsidy to domestic consumption of fossil fuels has been very high, in other years somewhat lower. The low years were always the years right after Indonesia increased prices of gas and diesel, indicating significantly high price elasticity of demand.

In some recent years, the Indonesian subsidy has amounted to as little as 13% and as much as 20% of government spending: one-fifth of a budget that cannot be spent on human capital formation, infrastructure or poverty reduction. In recognition of the problem, the Indonesian Government in 2014 twice increased fossil fuel prices 44% to cut the annual subsidy bill to $20 billion. Then in November, prices were again increased, by another 30%.

In Venezuela fuel prices are capped at less than U.S. 10 cents per gallon, and the energy subsidy costs 7% of GDP (see Table 15-2).

Worldwide, the International Energy Agency (IEA) estimates that in 2010 government spending on subsidies for consumption of fossil fuels amounted to about $408 billion. Of this amount, only $35 billion of worldwide energy subsidies benefitted the bottom 20% of the income distribution. Thus the poorest two deciles received only 9% of the total subsidy. “Getting Prices Right,” Mexico’s Fuels Subsidies, Dallas Fed, Southwest Economist , October 2013. Other research confirms this pattern. According to the International Monetary Fund (IMF) only 7% of total fuel subsidies go to the poorest 20% of households; while 43% goes to the richest 20%. ^{“Fueling Controvery,” The Economist , January 11, 2014.} The reader should ask:

Is this good income distribution policy?

Is this good resource allocation policy?

Is this good policy for reducing greenhouse gasses?

Is this good environmental policy – does it help reduce air pollution?

The answer to each of these questions is clearly no. If governments are concerned with the effects of fossil fuel purchases on poorer families, the fuel subsidies are decidedly inferior to cash transfers to the poor, to enable them to better shoulder the costs of higher fuel prices, cash subsidies for this purpose have been utilized since 2011 in Uganda and Iran.