Energy Pricing Policies for Inclusive Growth in Latin America and the Caribbean
Government strategies for setting energy prices are not uniform across the Latin America and Caribbean (LAC) region or even across fuels. Instead, they spread across a full spectrum, ranging from discretionary price fixing at one end through to pure market-based approaches at the other. In between, a wide variety of other schemes can be found, including: price stabilization funds; import or export parity price schemes; price smoothing through tax levels; and targeted direct price subsidies or vouchers. Governments in LAC, however, tend to be small as measured by government revenues as a percent of GDP. This implies that limited government resources have to be used wisely and should be better targeted on the poor and vulnerable. Although energy subsidies are an inefficient policy tool to protect the welfare of the poor, energy price increases can have a sizable impact on these households. The study finds that energy subsidies are highly regressive in an absolute sense. That is, the lion's share of every dollar spent on keeping energy prices low will benefit wealthier households. However, subsidies to fuels widely used for cooking and heating--namely liquefied petroleum gas (LPG), natural gas, and kerosene-- as well as electricity, can be relatively neutral or progressive, implying that lower income households capture benefits that are proportionate to their expenditures. In other words, although poorer households receive very little from every dollar spent on energy subsidies, that small amount can represent an important share of their expenditures. It is important then, that governments expand the coverage and depth of their social safety nets as to be able to provide relief for poor households if energy prices were to increase. The report also finds that aggregate price impacts and competitiveness effects of energy price increases are moderate to small, and can be smoothed out through macro policies responses.
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