Cash Transfers in the Context of Energy Subsidy Reform

Energy subsidies, which have a long history of use by governments around the world, have been rising in recent years after a brief period of decline. Despite their significant wider costs, subsidies are used by governments for various policy, and political, reasons. Faced with recent external shocks, governments around the world have had to manage difficult tradeoffs between the need to protect their citizens against substantial increases in the cost of living and the fiscal risks that greater and continued subsidies impose. General consumption subsidies, such as universal price subsidies for fossil fuels, tend to be regressive. Over the past several decades, as part of the evolving understanding of energy subsidy reforms, there has been growing recognition of the potential of targeted cash transfers to support the poor and vulnerable to help governments achieve desired policy outcomes at lower fiscal cost and in a sustainable manner. The use of cash transfers to mitigate the impact of price increases from an energy subsidy reform puts a country’s social protection framework in the spotlight, along with the role social protection can play in bolstering national commitments to reduce greenhouse gas (GHG) emissions. While getting prices right is important in eliminating distortions and incentivizing efficient use of energy, cash transfers can help countries mitigate and adapt to climate change and make the transition to a green economy by smoothing the adjustment to changing energy costs.