East and North Africa, by Economy, 2016 and 2018 B3.7.1 Diesel Sulfur Limits in the Middle East and North

FIGURE 3.19

Average Gasoline Pump Prices Per Liter in the Middle East and North Africa, by Economy, 2016 and 2018

150

ice per liter (US cents) Pr 100

50

0 AlgeriaBahrainDjiboutiIran, Islamic Rep.Egypt, Arab Rep. IraqJordanKuwaitLebanonLibyaMaltaMoroccoOmanSaudi Arabia Qatar West Bank and Gaza Tunisia United Arab EmiratesYemen, Rep.

2016 2018

Source: Based on GIZ 2019. Note: The orange line denotes the 2018 world average price. Data for the Syrian Arab Republic are unavailable.

that gradually phases out fossil fuel subsidies while incentivizing investments in renewables could induce a switch in the energy mix away from fossil-fuel-based energy and toward renewable sources, including the use of electric cars. It would also help foster a switch to public transportation.

Moreover, increasing fuel prices improves air quality. For example, fuel subsidy reforms in Egypt led to price increases that in turn reduced PM10 concentrations in the Greater Cairo area by almost 4 percent (Heger, Zens, and Meisner 2019).24 Similarly, in the Islamic Republic of Iran, removing fuel subsidies led to improvements in Tehran’s air quality (Kheiravar 2019). Both maximum and average daily concentrations of major pollutants were reduced significantly, and the policies were found to be generally effective. A scientific study also investigated the effects of an increase in energy prices, including gasoline, in the Islamic Republic of Iran. It showed that the average Iranian household would reduce its energy consumption by 2 percent, 16 percent, 29 percent, 38 percent, and 45 percent if energy prices were hiked by 10 percent, 50 percent, 100 percent, 150 percent, and 200 percent, respectively (Khatibi et al. 2020). These consumption reductions would lead to decreasing emissions of various pollutants like CO2, NOX, SOX, and PM.

These results are promising examples of how the reduction or removal of distortive fuel price subsidies and resulting price increases can contribute to cleaner skies in the Middle East and North Africa. However, it is also important to note that the effectiveness of such measures could vary across the region and should be assessed by regular, objective evaluations to guide policy makers in an evidence-based manner.

In addition to reducing carbon emissions, phasing out fossil fuel subsidies frees up government funds for other purposes. Globally, removing fossil fuel subsidies and efficiently pricing fuel could have decreased carbon emissions by 21 percent and reduced the number of deaths related to fossil-fuel-induced air pollution by a staggering 55 percent in 2013, while raising government revenue and social welfare (Coady et al. 2017). An updated study found similar results for 2015, associating the hypothetical removal of fossil fuel subsidies with an estimated reduction of 28 percent in global carbon emissions and 46 percent fewer deaths related to fossil-fuel-related air pollution (Coady et al. 2019).

The COVID-19 pandemic has shown that constrained public budgets can be an impediment to meeting the needs of the public at times of unexpected shocks to the health system, the economic system, or both. Hence, restructuring the social transfer system away from unsustainable fossil fuel subsidies and toward sectors and programs that especially benefit the poor and vulnerable in society would be desirable. In a similar vein, a reduction in fuel subsidies could also be accompanied by income tax reductions that would help relieve the tax burden on workers, in the sense of an “eco-social” tax reform. However, given the high share of informality in some Middle East and North Africa economies, such a plan could benefit only a certain portion of the public.

Implementing subsidy reform. To cushion some of the side effects of fuel subsidy reforms, especially on the poor, such reforms should be accompanied by measures to support households during the transition away from subsidies. Although fuel and energy subsidy reform is desirable from the perspective of lowering the fiscal burden and enabling green growth, increased fuel prices can also cause hardship for beneficiaries, especially low-income households.

Fuel and energy subsidies protect domestic households from volatile prices for these goods in international markets (IMF 2017). However, the bulk of these subsidies are often captured primarily by the richest households in the Middle East and North Africa because of their higher consumption (Fattouh and El-Katiri 2015). Therefore, if the intent is to protect low-income households from volatile prices or to reduce the cost of their basket of elementary goods, this can be achieved much more cost-effectively than through fuel subsidies, which predominantly benefit wealthier households.