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Evan Mills

Global Kerosene Subsidies: An Obstacle to Energy Efficiency and Development

Kerosene subsidies are slowing the progress of market and policy mechanisms already delivering more efficient and less polluting energy systems that are also safer, more reliable, and more economical than kerosene in the long term.

While energy services are a key to quality of life, particularly in developing countries, the cost of energy also fuels poverty. Energy subsidies are typically employed to encourage the use of particular fuels or energy supply technologies, protect consumers from energy price volatility, or provide a safety net for low-income populations. In isolated cases an additional goal is steering users toward less polluting and environmentally damaging alternatives, although the reverse effect has historically been more common due to a diluted price-demand response. Yet, the cost of even subsidized energy used inefficiently can be unaffordable, and underwriting subsidy costs can be a major expense for governments in comparison with other social programs. For these reasons, subsidies can work at cross-purposes to development objectives.

Subsidies arise from differences between actual direct pricespaid by consumers and true supply costs including transportation, distribution, retail operations and profits, as well as taxesand a host of indirect un-priced externalities.

It is widely agreed that energy subsidies impede the efficient functioning of markets. The resulting distortions in prices work at odds with policies to improve energy efficiency and reduce the cost of energy services and associated externalities such as health and environmental damages.

The analysis developed in this article finds that kerosene is used in 173 countries, at a cost to consumers of $43.4B/y, $60.3B/y including direct economic subsidies, and $77.2B/y including certain externalities. Despite low world oil prices, direct economic subsidies for kerosene were $18.4B in 2013, and $34.7B including environmental externalities.

These values correspond to 72% and 56% of total kerosene costs being passed through to consumers, respectively. When excluding advanced economies, the pass-through values fall to 40% and 35%. Approximately 52% of the global kerosene supply receives direct subsidy, or 63% when externality costs are considered. The cooking end use receives $2.0B/y in direct kerosene subsidies, lighting $7.1B/y, and heating and other residual uses $9.3B/y, or $76 per over all households each year.

Defining subsidies at this level of granularity is useful for pinpointing policy issues and opportunities. Promoting a transition to energy efficient off-grid energy services is one of the most cost-effective ways of reducing dependency on subsidies.

However, the very presence of subsidies undercuts this process by diluting market price signals and rendering energy efficiency investments less cost-effective, while competing with other social and development-focused budgetary needs.

Kerosene subsidies are additionally counterproductive because the emerging technologies they impede (e.g., improved lighting and cook stoves) also improve productivity, safety, and quality of life.

Forty-five countries—many in the developing world—have priced kerosene such that there are no direct subsidies, and twenty-two have done so even when accounting for environmental externalities, suggesting the practice is economically and politically feasible.

 

Excerpt of a new study, published in World Development.