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Faculty of Economics

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Newbery, D. M.

Pricing electricity and supporting renewables in Heavily Energy Subsidized Economies

CWPE1638

Abstract: Heavily Energy Subsidized Economies, defined as having budgetary subsidies above 1.5% of GDP, on average in 2014 spent 4% of GDP on subsidizing energy. Resource rents permit administratively undemanding transfers to citizens to maintain political support. Once in place, benefitting groups will resist their removal, despite the resulting inefficient consumption and the lock-in risk caused by sustained low energy prices. Collapsing energy prices that deliver severe fiscal shocks combined with growing concerns over climate change damage make carefully designed reforms both urgent and politically more acceptable. Understanding their political logic suggests designing reforms that compensate the most vocal interest groups and there is evidence that this is increasingly recognized. The paper presents evidence on the magnitude and impacts of oil gas and electricity subsidies, and discusses how the electricity sector can be weaned of subsidies while reducing its carbon emissions.

Keywords: Energy subsidies, interest group politics, reforming electricity tariffs, PV

JEL Codes: H23 h53 Q41 Q48 Q54

Author links: David Newbery  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1638.pdf

EPRG Paper Link: 1618

Open Access Link: https://doi.org/10.17863/CAM.1076