Rebalancing Subsidies in Market-Based Energy Sectors: Synergies and Obstacles in Developing and Transition Economies

Governments have faced increasing pressure for energy policy to converge around efficiency, sustainability, affordability, and access in recent years. However, separate “silos” rather than an integrated policy framework have addressed these objectives, widening the policy trade-offs. The emergence of market-based reforms and renewable energy technologies has created potential synergies to achieve the objectives. We develop a simple analytical framework based on economic efficiency and welfare arguments for the purposeful reallocation of subsidies from fossil fuels to renewable energy. The need to remove poorly targeted fossil fuel subsidies, which generate greater environmental costs, also facilitates this reallocation. Our focus is on utilizing the synergies between market-based reforms and renewables as the electricity sector lies at the confluence of these multiple objectives. We illustrate our framework using experiences from four emerging economies, drawing lessons for policy makers pursuing supply diversification through renewables.

WORKING PAPER NO: 1200