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Dayna Rodriguez

Teresa Iverson

English 1005

10th November 2016

Fossil Fuel Subsidies Removal and its Implications in Developing Countries

One day after Christmas, on December 26th 2010, Alvaro Garcia Linera vice-president of Bolivia

enacted Supreme Decree 748 that established the immediate increment of oil prices that almost

doubled the initial ones. The week after that unfortunate Sunday, long lines of cars could be seen

in petrol stations, public transportation raised their fares by 100%, there was a price increase in

daily consumed products, the population, social organizations and neighborhood councils

massively turned to the streets, and the Bolivian Workers’ Union announced an indefinite strike.

Everything happened when the two-time democratically elected President Evo Morales was

outside the country, making his popularity and acceptance from the Bolivian population drop

drastically. The imminent threaten to the economic and political stability of the country, made

President Morales reconsider the government’s decision, and finally, he annulled the Supreme

Decree 748 on New Year’s Eve of that year.

The Bolivian government enacted Supreme Decree 748 mainly to even the international prices of

oil with those of the country, since the financial burden of subsidies at that time represented a

considerable amount of 3% of national income (BBC World - News - The End of Gasoline

Inflation Returns the Calm to Bolivia). It is important to clarify that fossil fuel subsidies is

money that is paid by a government to keep the price of oil and its refined products low in order

to reduce the impact of high oil prices in the economy of the population. Unintendedly, fossil
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fuel subsidies are economically inefficient since countries around the world spend approximately

$500 billion per year (Hale, Tom et.al. 169). Furthermore, fossil fuel subsidies increase the

overconsumption of oil and the environmental pollution, and encourage smuggling of fossil

fuels. That being said, fossil fuel subsidies should be removed in developing countries to

improve quality of living conditions of the population, reduce excessive consumption of fossil

fuels, and avoid its trafficking.

If fossil fuel subsidies were eliminated, greater accomplishments will take place in developing

countries. Money that is spent in subsidies could be invested on public infrastructure, that is

schools, hospitals, water sanitation, electricity, telecommunication and pave roads. Access to

these services need to be highly improved in many developing countries in Africa, South Asia

and some countries in Latin America. In Bolivia, for example, the government has estimated that

the expenditure in fossil fuel subsidies has reached to USD 300 MM in 2015 (La Razon,

Bolivian Journal). During the same year, studies made by the World Bank reflected that 33% of

the Bolivian population lacks access to electricity, and approximately 50% do not have access to

internet (World Bank), which leads to the conclusion that money spent on fossil fuel subsidies

has to be redirected towards more important and urgent necessities in the country. Definitely,

linking infrastructure investment with fossil fuel removal policies will promote living conditions

development, especially in developing countries (Jakob, M, et al.).

By eliminating fossil fuel subsidies, governments can prevent the rapid growth of energy demand

and its negative consequences. Lower fuel domestic prices lead to its overconsumption, which

generates volatile international oil prices and excessive energy usage. At the same time,

increment in fossil fuel consumption worsens pollution and contributes to global warming.
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According to research conducted by the World Bank, “eliminating subsidies for fossil fuels could

avoid up to 2.6 gigatonnes of Green House Gasses emissions per year” (Besada, et al. 81).

Other negative consequences of fossil fuel subsidies policies is the encouragement of smuggling

and fuel alteration, if subsidies were eliminated, the frequency at which this problem occurs

would decrease. A developing country is more susceptible to suffer from this problem since it

aggravates the cost-burden in its economy. As an illustration, illegal trade of Bolivian fuels to

neighboring countries like Peru, Brazil, Chile and Argentina, where prices are much higher, had

risen to US $ 350 million by 2014, according to the government.

There is however important opposition to subsidies removal. It is a fact that the elimination of

subsidies means the direct rise in energy prices, and an indirect increase in dairy products and

public transportation, having an important impact on the poorest segments of populations.

Subsidies removal can promote increased poverty, according to Baseda in his article “Fossil Fuel

Subsidies and Sustainable Energy for all: The Governance Reform Debate, 2015”, it has been

estimated that a $0.25 per liter increase of oil would reduce the consumption of households by

approximately 5.5%. Hence, some experts argue that subsidies are not an effective way

mechanism to distribute wealth in a country and that it has always benefited the upper-income

groups. Studies made by the World Bank in 20 developing countries claims that only 15-20% of

the subsidies benefitted the lower-income groups (Dennis 598). Other sources, such as studies

made in developing countries and reviewed by the International Monetary Fund (IMF) state that

the richest 20% of the population take advantage of as much as six times in subsidies compared

with the poorest 20%.

As a consequence to these valid opposing reasons, there have been several policies that have

been suggested to diminish the negative effects of subsidies removal. As stated by Medinacelli in
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his article “Some international good practices to eliminate the energy price subsidies”,

communication, stepping, and cash transfers are some of the strategies that may go hand in hand

with the subsidies removal. The more the government communicates the elimination strategy and

why it is important, the more successful the elimination policy will be. Also, whenever the gap

between the international and the domestic oil prices is large, a step-by-step program is an

optimal strategy for subsidies elimination. As we have seen in the example of Bolivia, sudden oil

prices increases can be catastrophic. Besides, direct cash transfers to the lower-income

population seem to be a good mechanism to compensate for high fossil fuel prices (Medinacelli).

While the main argument against hydrocarbon subsidies elimination focuses on the impact on the

poor, some other experts claim that subsidies removal will have important effects on businesses.

According their statements, the increase in oil prices will reduce the energy demand and

consequently its production. Less production of energy will restrict energy-intensive industries to

be restricted from power supply. Even though this case scenario is possible, it is also moderately

easy to avoid if fuel subsidies removal policies go hand in hand with energy supply and

infrastructure expansion and reform, especially in developing countries.

After analyzing fossil fuel subsidies removal implications and consequences, it is clear that the

appropriate reforms should be applied to eliminate them in developing countries. Now more than

ever, the leaders of the major economies in the world have agreed on working on appropriate

fossil fuel reforms to eliminate them, making this issue as one of the most important topics to be

included and treated with urgency in every developed or developing country. Hence, its

reduction has to be gradual, and has to be accompanied by other policies so that the impact of the

increased fossil fuel prices will not be a shock for the population, especially for the poorest.

However, fossil fuel subsidies have a deep relationship with political issues and its maintenance
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or removal will be dependent of the political status of a country and whose interests are

prioritized.
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Works cited

Bazilian, Morgan, and Ijeoma Onyeji. "Fossil Fuel Subsidy Removal And Inadequate Public

Power Supply: Implications For Businesses." Energy Policy (2012): AGRIS. Web. 10

Nov. 2016.

Besada, Hany Gamil, and Michael Olender. "Fossil Fuel Subsidies And Sustainable Energy For

All: The Governance Reform Debate." Global Governance 21.1 (2015): 79-98. Business

Source Complete. Web. 10 Nov. 2016.

Dennis, Allen. "Household Welfare Implications Of Fossil Fuel Subsidy Reforms In Developing

Countries." Energy Policy 96.(2016): 597-606. EconLit. Web. 10 Nov. 2016.

Hale, Tom, and Pete Ogden. "Investing In Reform: A New Bond Could Beat Our Addiction To

Fossil Fuel Subsidies." Juncture 21.2 (2014): 169-171. Academic Search Complete. Web.

10 Nov. 2016.

Jakob, M, et al. "Development Incentives For Fossil Fuel Subsidy Reform." Nature Climate

Change 5.8 (n.d.): 709-712. Science Citation Index. Web. 10 Nov. 2016.

Medinacelli, Mauricio. "Some International Good Practices to Eliminate the Energy Price

Subsidies." N.p., 27 Jan. 2014. Web. 26 Oct. 2016.

<http://www.mmedinaceli.com/index.php?option=com_content&view=article&id=70:blo

g048&catid=3:contenblog&Itemid=6&lang=en>.

Medinacelli, Mauricio. "Subsidized Prices and International Costs." N.p., 22 Sep. 2012. Web. 26
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Oct. 2016.

<http://www.mmedinaceli.com/index.php?option=com_content&view=article&id=53:blo

g032&catid=3:contenblog&Itemid=6&lang=en>.

"El Fin Del "gasolinazo" Devuelve La Calma a Bolivia." BBC World - News - The End of

Gasoline Inflation Returns the Calm to Bolivia. N.p., 02 Jan. 2011. Web. 22 Nov. 2016.