March 16, 2015 Print

Energy companies around the world benefit from government subsidies, which are often passed with the justification that they may reduce costs for consumers and producers. This argument is especially prominent in developing countries, where government officials are expected to stimulate the economy and make the lives of their poor easier. These subsidies may seem beneficial on the surface, but they have negative unintended consequences.

Mexico-based Atlas Network partner Centro de Investigacion para el Desarollo, A.C. (CIDAC), seeks to explain these consequences in its recent study, “Es Posible Reestructurar Los Subsidios Energeticos” (“It is Possible to Restructure Energy Subsidies”). The study examines the negative effects that have resulted from energy subsidies in Mexico and around the world, and finds that subsidies hurt the poor more than anybody else by effectively serving as a regressive tax.

For example, despite paying of the subsidies through their taxes, low-income individuals only receive 1 percent of the benefits of electricity subsidies in Mexico. The subsidies also fail to stimulate the economy as intended by stifling innovation and continuing to contribute to social costs such as vehicular transit, pollution, and respiratory disease. Ultimately, richer individuals disproportionately use the energy and poorer individuals do not, although all individuals have to pay for the subsidies.

Reducing energy subsidies is a challenge in any country because the public tends to fear price shocks, and because the problem of concentrated interests and diffuse costs means that the beneficiaries of subsidies will fight to keep them in place while the non-beneficiaries barely have an incentive to notice.

By evaluating case studies of subsidy reductions in many other countries, CIDAC proposes a strategy for subsidy reductions in Mexico, which includes identifying the parties that are opposed to the removal of subsidies and providing short-term compensation to them as well as the poor while the government phases out the subsidies. It advocates a clear and concentrated campaign strategy to show the public how the economy will prosper in the long term.

CIDAC’s study can be used as a model for all countries with seeking to eliminate energy subsidies, reduce poverty and inequality, mitigate negative environmental impact, and scale back corporate welfare. You can find the study here.

Read the full CIDAC study, “Es Posible Reestructurar Los Subsidios Energeticos” (“It is Possible to Restructure Energy Subsidies”)