Introduction
subsidy received by the lowest-income group. Such disparities were less pronounced for subsidies of other energy products that are more disproportionately used by the poor, such as kerosene and LPG (UNEP 2003). Following this logic, some countries have tried to make energy consumption subsidies more efficient by improving how they are allocated. In South Africa, for example, a system of targeted electricity subsidies has led some locales to try to allocate costly subsidies just to the poorest households (Christensen et al. 2015; Davidson and Mwakasonda 2009; Howells et al. 2006; Vagliasindi 2012; Winkler 2006). Other countries have created smart card systems for allocation (Vagliasindi 2012). The best practices, however, lie with direct income transfers. For instance, in the Dominican Republic, a system of smart cards and strong central administration was in place in 2008, enabling the government to reform its LPG subsidy by targeting direct cash transfers to roughly the poorest 40 percent of the population (see chapter 2). Improved social policy goes hand in hand with policies designed to make markets more effective in allocating resources within the society. These four country studies confirm what has long been known in the study of subsidies: below-market costs encourage overconsumption of subsidized products as well as distortionary efforts by consumers to switch toward subsidized products. In Indonesia, for example, large differences in fuel costs affected motorists’ choice of vehicles (chapter 4, figure 4.8). More generally, the literature has noted that below-market energy prices can lead to excessive energy intensity in an economy and can harm productivity (Cornillie and Fankhauser 2004; Hang and Tu 2007). They can also lead to higher emissions of energy-related pollutants, which is why many studies identify energy subsidy reform as a strategy for controlling emissions that often has large “co-benefits” for societies (Fattouh and El-Katiri 2012; UNEP 2008; Victor 2011). Interestingly, when economic and social policy analysts write about energy subsidies, they usually start their discussion with this last of the three major motivations for subsidy reform. They focus on the potential for much better social policy by retargeting subsidies to worthier purposes and through greater use of market forces to allocate resources within society. Yet when a history of energy subsidy reform is viewed through the lens of political economy, the order is reversed: the main drivers are the impacts that are more immediate to government leaders, starting with the need to address fiscal crises. These problems generate more powerful forces for reform because they are harder for political leaders to ignore: they directly implicate the functioning of government and generate greater political accountability for leaders.
What Is Subsidy Reform? What is our dependent variable—reform—when it comes to energy subsidies? Most of the literature on energy subsidies and reform answers this question narrowly: reform is a policy that changes the size and allocation of a subsidy. The Political Economy of Energy Subsidy Reform • http://dx.doi.org/10.1596/978-1-4648-1007-7
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