Economy and the leeward side of fuel subsidy

Subsidizing consumers of petroleum products has been a common trend in many developed and emerging economies, including Nigeria.

Fuel subsidies generally arise out of a desire to shield consumers, especially poor households, from high and oftenvolatile fuel costs for lighting, cooking, and transportation.

But experts believed that subsidies encourage overconsumption of fuel, delay the adoption of energy-efficient technologies, and crowd out high-priority public spending, including spending on physical infrastructure, education, health and social protection.

The Federal Government, until recently was involved in subsidizing fuel and kerosene with several billions of naira, which experts believed could be used in financing other sector of the economy.

The Minister of Budget and National Planning, Udoma Udoma, while unveiling the Medium Term Expenditure Framework and the government’s N6 trillion budget proposal for 2016, said the government was seriously weighing the options between removing or retaining fuel subsidy this year.

Reacting to the issue of fuel subsidy, Vice Chairman of General Electric (GE) and President and Chief Executive Officer of GE Global Growth Organization, John G. Rice, said when governments subsidize fossil fuels and cap electricity rates, there is underinvestment in fuel production, power generation and distribution.

Rice, in a paper titled: “Opportunities For Global Electricity Access In 2016”, noted that sustained lower oil prices mean governments have the political space to wind down subsidies.

According to him, over the long term, removing subsidies will improve fiscal health and lead to a market mechanism for reallocating resources to produce more reliable, efficient, and fairly priced power — and get it to more people.

He sited Egypt and Indonesia as two countries that have begun to phase out subsidies. “As evidenced by GE’s experience in both countries, energy market reforms are important to expanding electricity. We are investing and building capacity to train up future workforces in both countries. Last year, GE helped add 2.6 GW of power to Egypt’s grid, enough to light 2.5 million homes. In Indonesia we are adding 500 MW of “fast power” with more to come”, he added.

The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, stressed the need to remove fuel subsidy. “The move by the government to remove the fuel subsidy is good. Those people who need the subsidy can receive cash transfer. Fuel subsidies are hard to defend. Subsidies are no longer good. But I hear that it will hurt the poor. 40 per cent of fuel subsidies in rich countries go to rich families. The people do not really need the subsidy. Look at the number of people who stay at stations trying to buy fuel.”

Corroborating lagarde, Executive Director, International Energy Agency (IEA), Fatih Birol, said it does not make sense for governments to promote renewables at the same time as subsidising coal, oil and gas.

Birol described fossil fuel subsidies as “public enemy number one” for the production of sustainable energy.

“On one hand these countries talk about renewable energy, efficiencies and climate change, and at the same time subsidises fossil fuel energy . It does not make sense,” he said. “All the countries and governments of the world need to pay attention to this issue.

“In the presence of these fossil fuel subsidies… we have no chance whatsoever to meet these climate change targets and provide room for renewable energies to compete with coal, oil and gas as they are artificially cheap as a result of those subsidies.”

“My message to governments is that if their policies are as predictable as the availability of wind, we will win this game,” he said.

Also, the International Monetary Fund said that eliminating global energy subsidies could reduce deaths related to fossil-fuel emissions by over 50 percent and fossil-fuel related carbon emissions by over 20 percent.

It added that the revenue gain from eliminating energy subsidies is projected to be US$2.9 trillion (3.6 percent of global GDP) in 2015. This offers huge potential for reducing other taxes or strengthening revenue bases in countries where large informal sector constrains broader fiscal instruments.