Where to begin solving the energy subsidy reform puzzle

An introduction to the ESMAP-ESRF Energy Subsidy Reform Assessment Framework (ESRAF)

In a “first” for a major climate agreement, the Conference of the Parties (COP 26) made explicit references to fossil fuels in the Glasgow Climate Pact and called for accelerated action to phase out inefficient fossil fuel subsidies. This is a noteworthy achievement (perhaps Frankie the Dino may have even played a part!). 

Now, picture this: 

You are a Ministry of Energy civil servant in a developing country. Your Minister, energized and motivated by the recent COP, returns from a meeting with the Ministry of Finance and comes to you, the technical expert, asking you to help develop a roadmap to reform fossil fuel subsidies in your country. 

Or you are a macroeconomist, social protection, or energy specialist at the World Bank or another multilateral development agency. Your counterpart in the Ministry tells you that at a recent Cabinet meeting, energy subsidies were highlighted as a reform priority, as it became evident that subsidies are draining fiscal resources, while failing to adequately benefit the poorest citizens and leading to fuel shortages. Your counterpart informs you that the Government is forming an inter-agency steering committee to assess the full magnitude and impact of existing energy subsidies, and options for reforming them, while ensuring poor households are protected. They are asking you for advice. 

Where do you start?

As any practitioner will tell you, reforming energy subsidies is a complex, multi-dimensional, and politically sensitive process. It is often compared to a marathon, rather than a sprint.  Too often, countries embarking on energy subsidy reform have seen their efforts fail or reversed after initial success. After observing implementation challenges, political impact, or outright reversals elsewhere, other governments may be discouraged from even initiating such reforms. 

International experience in this field demonstrates that reforming energy subsidies requires a comprehensive approach that draws on a clear understanding of economic, financial, social, and political factors, all of which can have an impact on the potential success and sustainability of reform . While there is no one-size-fits-all approach to reform, a practical toolkit outlining key steps and success factors of reform does exist: the Energy Subsidy Reform Assessment Framework (ESRAF). Developed by the ESMAP Energy Subsidy Reform Facility (ESRF) and written by experts and practitioners from diverse backgrounds, ESRAF draws on lessons from relevant country experience and analytical work. 

It comprises a set of issue-specific Guidance Notes, which cover fundamental elements of a comprehensive approach, including:

•  Identifying and quantifying energy subsidies,
•  Assessing the fiscal cost of subsidies and fiscal impact of reform,
• Analyzing the incidence of consumer price subsidies and the impact of reform on households,
• Assessing the readiness of social safety nets to mitigate the impact of reform,
• Modeling macroeconomic impacts and global externalities,
•  Understanding air pollution and health impacts of energy price subsidies, and 
• Assessing the political economy context and designing effective communication approaches.

ESRAF: Understanding Energy Subsidies, Impacts, and the Context of Reform

To illustrate how ESRAF is applied in practice, we reached out to our colleague, Tu Chi Nguyen, who is a Senior Energy Economist at the World Bank, to share her experience. Tu Chi and her team used the ESRAF to support the Government of Tunisia in its energy subsidy reform efforts. She shared: “They were very committed to reforming energy subsidies but wanted to ensure that removing subsidies on electricity and gas would not harm the poor and the economy. They also wanted to effectively communicate the objectives and scope of the reforms and facilitate their public acceptance.” In their work with the Ministry of Energy and the inter-ministerial task force on energy subsidy reform, the World Bank team used ESRAF as a guiding framework, which they report finding very useful to inform the design and implementation of the assessments and advice to their Government counterparts. “The toolkit helped the government consider social protection, poverty and public awareness in its assessment of the reforms’ impact,” added Tu Chi. The step-by-step approach followed in Tunisia is documented in a recent Impact Story. 

To date, the framework has helped inform technical assistance and policy design to reform energy subsidies in several World Bank client countries, including Egypt, Ukraine, Sudan and the Kyrgyz Republic. As a living tool, ESRAF will continue to be updated over time, to incorporate emerging lessons and insights from recent experience. 

If you’d like to learn more, you can access ESRAF here. Have an insight to share? Please join the discussion with a comment.

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RELATED

• Energy Subsidy Reform Facility: Generates Knowledge to Support Governments to Design and Implement Sustainable Energy Subsidy Reforms while Safeguarding the Welfare of the Poor
• ESMAP landing page for ESRAF
• Download individual ESRAF notes
• Energy Sector Management Assistance Program (ESMAP)
• The World Bank and Energy