Understanding who benefits from fuel price subsidies and the welfare impact of increasing fuel prices is key to designing, and gaining public support for, subsidy reform. This paper updates evidence for developing countries on the magnitude of the welfare impact of subsidy reform and its distribution across income groups, incorporating more recent studies and expanding the number of countries. These studies confirm that a very large share of benefits from price subsidies goes to high-income households, further reinforcing existing income inequalities.
A lack of access to modern energy services continues to be a major contributing factor to poverty and human suffering throughout the world. The International Energy Agency estimates 1.3 billion people have no access to electricity, most of whom are located in rural areas. Roughly 2.6 billion people have no access to clean cooking fuels; too often the search for biomass cooking fuels puts the poor, particularly women, at great safety risk as well.
Government subsidies to energy producers, transporters, and consumers are widespread throughout the world and represent a large public investment in the energy sector. In theory, this investment could be funding a variety of social goals such as providing the poor with access to basic energy services and addressing common environmental problems linked to energy extraction and consumption.
Although some subsidies do address these types of concerns, most either do not, or do not do so effectively.