A report detailing results of fossil fuel subsidy programs in Ghana, France, and Senegal shows obstacles for fossil fuel subsidies, but could also signal the way to proper implementation for the alternative/renewable energy sector.
Global Studies Initiative (GSI), a part of the International Institute for Sustainable Development (IISD), released a report “Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France, and Senegal” analyzing the countries’ experiences after reforming their fossil-fuel subsidies.
Subsidies can be helpful in economic markets, but poorly planned and executed removal of subsidies can cause an unfavorable reaction. The report indicates that successful subsidy reform requires the “permanent removal of subsidies, while reducing the short-term impacts of de-subsidization.” While reform is still incomplete in Ghana and Senegal, the study maintains that important lessons can still be learned from the African countries.
Ghana had deregulated its petroleum markets, but with high oil prices in 2007 and 2008, it reversed this practice. The West African nation had begun trying to deregulate its petroleum market in 2001 and another failed attempt in 2003. Finally by February 2005, the government made its third attempt, implementing several strategies to improve the chances of success like preliminary research, a communications campaign, mechanisms to reduce political interference, and policies to assist the poor.
Although there were short-term benefits to Ghana’s deregulation (from 2005-2007), the hike in oil prices forced the country to abandon its policy of tracking domestic with international prices. Freezing its price cap between May and November 2008, the government continued to subsidize fuel, cross-subsidizing other fuels with revenues from taxes on gasoline, and supplementing the cross-subsidies with additional funds. These practices heightened Ghana’s fiscal deficit.
The report said: “The policies employed to ease the removal of subsidies were only partially and temporarily successful. The price-setting regime proved to be only as robust as the political will behind it, demonstrating that governments will be tempted to intervene in fuel pricing for political reasons. A completely independent pricing board is difficult to achieve. Governments can always override the regulator’s decisions and laws can be changed. Automatic linking of domestic and international prices, without subsequent cross-subsidization, is necessary to prevent ongoing politicization of fuel prices.”
Meanwhile, Senegal has had LPG subsidies in places for over 30 years resulting in new patterns of energy consumption. Instead of charcoal stoves, the LPG subsidy program has seen a rise in LPG stoves. The subsidies created incentives for residents to switch from charcoal to LPG, which yielded large environmental benefits. However, the report said the subsidies led to unsustainable fiscal burdens as benefits weren’t distributed evenly with the wealthier population receiving more.
The report noted: “Ghana demonstrates that a reform strategy will only be as robust as the political will to carry it through and uphold it. The Senegalese government appears to have the will for reform but could potentially benefit from a more systematic and comprehensive set of policies to support de-subsidization.”
And although this is discussing fossil fuels, the same solution and/or problem can be found when trying to apply subsidies (feed-in tariff systems) to renewable and alternative energy projects. For instance, Suani Teixerira Coelho, the Executive Secretary of the Centro Brasilero de Referencia en Biomasa (CENBIO), said at the World Future Energy Summit in January in response to Brazil’s biofuels program that subsidies should be offered in start-up countries initially to get the program off the ground. However, with time a step-down program should be implemented to become solely sufficient and independent. Coelho noted that in the beginning, Brazil did have subsidies in order to create an investor-friendly atmosphere, but now subsidies have been taken out of the country’s program altogether.
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