Estimating the Size of External Effects of Energy Subsidies

45 Pages Posted: 7 Mar 2015

See all articles by Simon John Commander

Simon John Commander

London Business School; IZA Institute of Labor Economics

Zlatko Nikoloski

University College London

Maria Vagliasindi

European Bank for Reconstruction and Development (EBRD)

Abstract

It is widely accepted that the costs of under-pricing energy are large, whether in advanced or developing countries. This paper explores how large these costs can be by focussing on the size of the external effects that energy subsidies in particular generate in two important sectors – transport and agriculture – in two MENA countries, Egypt (transport) and Yemen (agriculture). Our focus is mainly on the costs associated with congestion and pollution as well the impact of under-priced energy for depletion of scarce water resources including through crop selection. Quantifying the size of external effects in developing countries has received relatively little analytical attention, although there is a significant body of literature for the advanced world. By building on earlier research, as well as employing the UN ForFITS model we are able to provide indicative estimates of the external costs of energy subsidies, as manifested in congestion and pollution. Our estimates using simulations indicate that these costs could be materially reduced by elimination or reduction of energy subsidies. We are also able to describe the impact of energy subsidies on water consumption in a region where water resources are particularly limited. As such, our findings provide further evidence of the adverse and significant consequences of subsidising energy.

Keywords: energy subsidies, pollution, congestion, health effects of energy subsidies

JEL Classification: O13, R41, Q41, Q53, I15

Suggested Citation

Commander, Simon John and Nikoloski, Zlatko and Vagliasindi, Maria, Estimating the Size of External Effects of Energy Subsidies. IZA Discussion Paper No. 8865. Available at SSRN: https://ssrn.com/abstract=2575045

Simon John Commander (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Zlatko Nikoloski

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Maria Vagliasindi

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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