Should Energy be Subsidized?

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Case Details:

Case Code : ECON021
Case Length : 14 Pages
Period : 1990-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : Energy
Countries : Worldwide

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Energy Subsidies: The Whys and the Hows

Subsidies, a type of government financial assistance which could be in the form of grants, tax breaks/exemptions, or price controls, kept prices below the market level for consumers or kept costs down for producers. Subsidies such as grants and tax breaks had a direct impact on price, while other forms of subsidies like government-sponsored technology or research and development (R&D) affected prices or costs indirectly...

Subsidies, Rising Energy Prices, and The Environment

With rising energy prices, the issue of energy subsidies became important to policy makers. Some environmentalists too began raising the issue due to the damage to the environment caused by faulty energy policies. There were arguments both for and against energy subsidies...

Energy Subsidies are Useful
The supporters of energy subsidies argued that since energy was essential for all economic activities, it needed to be subsidized so that everyone could afford it. In developing countries, it was common for governments to provide subsidized kerosene, LPG, and/or electricity to make them affordable to even poor households...

Energy Subsidies are Wasteful
Energy subsidies came in for criticism from many economists. It was argued that subsidies made energy, especially fossil fuels such as petroleum, coal, and natural gas, cheaper, leading to their increased consumption. Further, it was believed that energy subsidies, especially in the developed world, led to irresponsible usage of energy. For example in the US, the relatively low gasoline price encouraged the use of Sports Utility Vehicles, which were also referred to as gas-guzzlers...

Renewable Energy Subsidies
Renewable energy was considered to be the solution to the problem of growing GHG emissions. Also, countries which were dependent on oil imports could ensure energy security by investing in renewable energy. The renewable energy sector could also generate employment and foreign exchange for the economy...

Future Outlook

A study by the OECD indicated that if all subsidies on fossil fuels used in industry and the power sector were removed everywhere in the world, then global carbon-dioxide emissions would fall by more than 6%, and real income would increase by 0.1% in OECD countries and by 1.6% in non-OECD countries by 2010. A report released by the Intergovernmental Panel on Climate Change (IPCC) in May 2007, listed reduction of fossil fuel subsidies, imposition of taxes or carbon charges on fossil fuels, and extension of producer subsidies and feed-in tariffs for renewable energy technologies as effective policy measures to help control environmental damage...


Exhibit I: A Brief Note on Renewable Energy
Exhibit II: US Energy Subsidies in 2007
Exhibit III: The Inflationary Effect of Reducing Subsidies in Iran in 2000
Exhibit IV: US support to Ethanol and Bio-diesel
Exhibit V: Environmental Impact of Various Energy Sources
Exhibit VI: Direct Support for Renewable Electricity Supply


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