How to fix energy subsidies in developing countries

The authors argue that direct government control of energy prices in developing countries creates fiscal volatility and crowds out essential public spending. They propose the adoption of automatic pricing mechanisms with smoothing bands to manage international price volatility while transitioning toward full deregulation.

• Energy subsidies create significant economic and environmental burdens; IMF estimates from 2011 indicate post-tax energy subsidies reached $2.0 trillion, representing over 2.9% of global GDP. These subsidies primarily benefit higher-income groups and divert funding from public infrastructure, health, and education.
• In developing countries, the core issue is direct government involvement in energy pricing. When international prices rise, governments often fail to pass these costs to consumers, leading to escalating subsidies that disrupt budget planning. For example, during a period of rising prices in the mid-2000s, over half of developing countries saw the combined annualised fiscal cost of gasoline, diesel, and kerosene subsidies exceed 3% of their GDP.
• While some countries like India have moved toward deregulation—specifically liberalising gasoline prices in 2010 and announcing diesel deregulation—others such as Egypt, Indonesia, and Iran have implemented price increases without addressing the fundamental problem of government price-fixing.
• An effective interim strategy for countries reluctant to fully deregulate is the adoption of automatic pricing mechanisms with built-in smoothing bands. This approach, already used in Chile, Peru, Mauritius, and several sub-Saharan African nations, caps price changes to protect consumers from sudden spikes while ensuring international price movements are passed through over the medium term.

APA

Coady, D., & Shang, B. (2015). How to fix energy subsidies in developing countries. World Economic Forum. https://www.weforum.org/stories/energy-transition/how-to-fix-energy-subsidies-in-developing-countries/

Chicago

Coady, David, and Baoping Shang. How to fix energy subsidies in developing countries. World Economic Forum, 2015. https://www.weforum.org/stories/energy-transition/how-to-fix-energy-subsidies-in-developing-countries/.

Wikipedia

{{cite report |last1=Coady |first1=David |last2=Shang |first2=Baoping |title=How to fix energy subsidies in developing countries |publisher=World Economic Forum |date=14 January 2015 |url=https://www.weforum.org/stories/energy-transition/how-to-fix-energy-subsidies-in-developing-countries/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{coady2015how, author = {Coady, David and Shang, Baoping}, title = {{How to fix energy subsidies in developing countries}}, institution = {World Economic Forum}, year = {2015}, month = jan, url = {https://www.weforum.org/stories/energy-transition/how-to-fix-energy-subsidies-in-developing-countries/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }