Disadvantages of Fuel Subsidy Removal in Nigeria Increased Cost Of Living: With the price of premium motor spirit (PMS) increased; the economy will face a sudden surge of inflation. Increase in transport cost: Transportation cost has gone up as much as 300 per cent since the N145/litre increase.
- Where that is true, fuel subsidy policies constitute a net drain on the budgets of the rich. Second, fuel subsidies have side effects that directly reduce the quality of life for people of all income levels. Traffic congestion and air pollution are two of the most striking.
What are the disadvantages of subsidies?
Subsidies have disadvantages, including the possibility of shortages of goods. One of the advantages of subsidies is the greater supply of goods. Due to lowered prices, a sudden increase in demand can be difficult for many producers to meet, resulting in a sudden rise in prices.
Why subsidies should not be given?
But in case of subsidized items, people do not feel the heat of prices going up. The demand of those items continues to grow without control. When demand grows price will also grow. Subsidies defeat the concept of demand-supply balance.
What are the effects of subsidies?
When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services. This increases the overall supply of that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.
What happens when a subsidy is removed?
Subsidy removal, without spending of the associated savings, would increase the national poverty level. This is due to the consequent rise in inputs’ costs which is higher than the rise in selling prices of most firms and farms. An increase in transfers to households reduces the poverty effects.
What are the advantages and disadvantages of subsidy?
Some advantages of subsidies include inflation control and moderation of supply and demand, while disadvantages include a potential increase in taxes on citizens in subsidizing countries.
How do subsidies affect consumers?
A subsidy increases both consumer and producer surplus. A subsidy reduces the price that consumers have to pay for the product. This increases the difference between the price paid by consumers and the price that they are willing to pay, thus resulting in an increase in consumer surplus.
Are government subsidies bad?
Most economists consider a subsidy a failure if it fails to improve the overall economy. Policymakers, however, might still consider it a success if it helps achieve a different objective. Most subsidies are long-term failures in the economic sense but still achieve cultural or political goals.
What are advantages of subsidies?
Advantages of subsidies Enables greater social efficiency. Consumers end up paying the socially efficient price which includes the external benefit. If you subsidise public transport, it will encourage people to drive less, and reduce their negative externalities.
What are the main arguments in Favour of subsidy?
Arguments in favour of Subsidy: It encourages farmers to adopt intensive cultivation which ensures increase in food grain Production. The number of small and marginal farmers in a country is large who are unable to buy high price inputs. therefore subsidy on inputs is necessery.
Do subsidies cause inflation?
Subsidies have to be financed by the government, and therefore they may cause larger deficits, thus contributing to the inflationary process.
How do subsidies affect trade?
Subsidies make those goods cheaper to produce than in foreign markets. This results in a lower domestic price. Both tariffs and subsidies raise the price of foreign goods relative to domestic goods, which reduces imports.
How does subsidy affect equilibrium?
A subsidy will shift the supply curve to the right and therefore lower the equilibrium price in a market. The aim of the subsidy is to encourage production of the good and it has the effect of shifting the supply curve to the right (shifting it vertically downwards by the amount of the subsidy).
Are subsidies taxable?
No. The subsidies (both premium assistance tax credits and cost-sharing) are not considered income and are not taxed.
What are the types of subsidies?
There are different types of subsidies offered by the government; some of them are:
- Food Subsidy.
- Education Subsidy.
- Export/Import Subsidy.
- Housing Subsidy.
- Oil & Fuel Subsidy.
- Tax Subsidy.
- Transport Subsidy.
Fuel Subsidy Removal And the Nigerian Economy; Advantages And Disadvantages
The Removal of Fuel Subsidies and the Nigerian Economy: Benefits and Drawbacks Nigerians came to the streets on Monday, January 2, 2012, to demonstrate their opposition to the elimination of gasoline subsidies by the former Federal Government, led by President Goodluck Jonathan. This resulted in a 32-cent increase in the pump price from 65 cents to 97 cents; nevertheless, the disagreement was settled when the PMS pump price was fixed at 86 cents per litre. The pump price in Nigeria was increased by 59.3 percent to N145 in May 2016, under the leadership of President Muhammadu Buhari.
An business that benefits residents or members through a subsidy is one that receives funding from the government or a public body in order to keep the price of a product or service reasonable.
Fuel subsidy refers to the financial assistance provided by the Nigerian government to Nigerians in order to enable them to use fuel at a lower cost, put a stop to erratic supplies, and maintain the stability of the domestic fuel price.
In February 2015, the four refineries had a total production capacity of 445,000 barrels/day and a daily crude output of 2.44 million barrels/day, according to the Organization of the Petroleum Exporting Countries.
Recently, as a result of new foreign exchange policies, the dollar has become scarce, and access to open letter of credit has been restricted, forcing marketers to halt product importation and place an over 90 percent supply on the Nigerian National Petroleum Corporation (NNPC), in contrast to previous periods, resulting in prolonged fuel scarcity.
I’ve also included some more resources.
Advantages of Fuel Subsidy Removal in Nigeria
- Hopefully, the introduction of this new pump price will help to alleviate the repeated fuel shortage situation by assuring the supply of products because merchants will now be allowed to import product in large quantities without being restricted by government regulations. It will also aid in the reduction of hoarding, smuggling, and diversion of petroleum products, as well as the maintenance of product prices and free market stability, thanks to the engagement of the private sector. Because of additional investments in private refineries and oil retailing, as well as the loss of surplus crude through gas flaring, it will help to stabilize the labor market, allowing for job growth. It will ensure that there is competition in the industry and market forces that, as has been seen in the telecoms sector, will bring down the price of gasoline in the long term. Improvements in the electricity sector: The present fuel price will stimulate the search for less expensive power generating options, which will, over time, lessen the over-reliance on distribution companies, enhance competition, and aid in the development of economic activity. Increased government involvement in other sectors: The elimination of subsidies will provide the government with greater access to finances for the development of other sectors such as education, health, employment, transportation, and so on.
However, there will inevitably be drawbacks, particularly in terms of the economy’s other sectors, and this is inevitable.
Disadvantages of Fuel Subsidy Removal in Nigeria
- Increased Cost of Living: As a result of the increase in the price of premium motor spirit (PMS), the economy will see an unexpected spike in inflation. As stated by the Federal Reserve, inflation is defined as a broad and gradual increase in the prices of goods and services. As the inflation rate rises, more Naira will be spent on fewer products, resulting in a decrease in the value of the Naira. Recently, a loaf of bread for N300 has increased in price to N450, a small container of rice at N70 has increased in price to N100, and so on. Hike in transportation costs: Since the N145/litre increase, the cost of transportation has increased by as much as 300 percent. In turn, this rise has had a knock-on effect on other sectors of the economy that are reliant on transportation. An increase in the cost of small-scale company services: These firms rely on government-subsidized fuel to provide services since the public energy supply from the PHCN is unreliable and has become increasingly expensive
- Manufacturers and industries whose operations are reliant on petroleum products and goods transportation may have difficulties and may be forced to raise their production costs in order to keep up with market demand. Customer exploitation: A monopoly in the free market might result in customer rip-off, since marketers can choose to set the price of gasoline products at their discretion, just as they do in the telecommunications industry. In order to combat such abuses, the government must empower the regulatory organizations to do so.
The removal of fuel subsidies is a tough topic to discuss, especially with the general public. The majority of people do not comprehend the implications of such severe economic concerns, and they must be taught on the advantages and disadvantages of such decisions.
Economy-friendly policies are urgently required in Nigeria in order for it to maintain and strengthen its position as a leading African economy. I sincerely hope it proves to be worthwhile and fruitful in the long term.
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A subsidy is a financial or tax benefit provided by the government to individuals or enterprises in the form of cash, grants, or tax breaks, among other things. Direct Taxes A direct tax is a form of tax that an individual pays to the government that is paid directly to the government. Examples of direct taxes include income tax, poll tax, property tax, and tax credits that help to increase the supply of specific goods and services. Subsidies enable customers to obtain lower-priced goods and services by reducing competition.
Externality An externality is a cost or benefit of an economic activity that is experienced by a third party that is not involved in the economic activity.
Fiscal Policy is a term that is used to refer to a set of rules that govern how money is spent.
Essentially, subsidies are financial assistance provided by the government to certain businesses with the goal of keeping the prices of goods and services low so that consumers can afford them while simultaneously encouraging the production and use of such goods and services.
Types of Subsidies
This form of subsidy is offered in order to stimulate the development of a certain product or service. In order for manufacturers to raise their production output, the government pays them for some of the costs associated with doing so. This allows them to reduce their costs while simultaneously raising their output. As a consequence, both output and consumption increase, but the price remains stable or slightly higher. The disadvantage of such an incentive is that it has the potential to encourage overproduction.
2. Consumption subsidy
This occurs when the government provides financial assistance to cover the costs of food, education, healthcare, and water.
3. Export subsidy
A well-known truth is that a country or state makes money from its exports, and that exports contribute to the overall health of the economy. As a result, the government subsidizes the cost of exports in order to encourage them. However, this may be readily misused, particularly by exporters who inflate the cost of their goods in order to earn a higher incentive, so increasing their profits at the expense of taxpayers and ultimately rising their overall profits.
4. Employment subsidy
This tax credit is provided by the government to businesses and organizations in order to encourage them to create additional job possibilities for their employees.
Advantages of Subsidies
They are particularly useful in the area of production cost inputs such as fuel costs, which is particularly relevant at a time when global crude oil prices are on the rise. Fuel expenses are heavily subsidized in many nations in order to keep prices from skyrocketing.
2. Preventing the long-term decline of industries
There are several businesses that should be maintained alive and functional, such as fishing and farming, because they are critical to the survival of a society’s inhabitants. Many emerging and rapidly expanding sectors may also benefit from government support.
3. A greater supply of goods
Governments strive to expand the availability of goods and services to its citizens, such as water, food, and education, among other things. The incentive they give might be in the shape of a tax credit or even in the form of cash directly to the customer. Markets with positive externalities are those that are profitable. Externality An externality is a cost or benefit of an economic activity that is experienced by a third party that is not involved in the economic activity. Those who do not bear the external cost or advantage are typically the ones who profit from such benefits.
Disadvantages of Subsidies
Despite the fact that one of the benefits of subsidies is an increased supply of products, a scarcity of items can also emerge as a result of subsidies. This is due to the fact that decreased pricing might result in a rapid increase in demand, which many companies may find extremely difficult to satisfy. In the end, it might result in a significant increase in demand, which in turn produces a rise in prices.
2. Difficulty in measuring success
Most of the time, subsidies are useful and beneficial.
However, if the government were to publish a report on the success it has had in utilizing subsidies, the story would be quite different. This is due to the fact that it is difficult to assess the effectiveness of subsidies.
3. Higher taxes
What methods will the government employ to raise revenue for the purpose of supporting industries? Of course, this will be accomplished by increasing taxes. The general public and companies are therefore responsible for providing the resources necessary to allow the government to support industries.
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The pros and cons of gas and electricity subsidies
Fuel and energy prices in Trinidad and Tobago are subsidized, which means that customers pay less for their purchases. This implies that money is provided by the government in order to keep the price of energy and gasoline as low as possible and to keep the market competitive. In order to lower the cost of manufacturing while also encouraging suppliers to boost output, it is necessary to do so without causing significant price inflation. I’m not sure how this applies to Trinidad and Tobago. The following are the rates we pay for fuel and electricity in Trinidad and Tobago: (per Kilowatt-hour of electricity consumed) = TT $0.27 *Super fuel (per litre) costs TT$4.79, whereas premium gasoline (per litre) costs TT$5.75.
- In terms of power tariffs, Trinidad and Tobago now boasts the cheapest rate in the Caribbean and one of the cheapest rates in the Western Hemisphere.
- There are several clear advantages to receiving these subsidies, some of which are as follows: The artificially low rates of electricity and fuel have made these commodities more accessible and cheap for the general public.
- Lower fuel prices translate into lower public transit fares.
- Lower electricity prices translate into lower electricity costs.
- The government is pushing people to transition from traditional fuel to compressed natural gas (CNG) by subsidizing the cost of CNG, which is seen as the “cleaner alternative fuel.” This, of course, has the effect of lowering carbon dioxide emissions.
- The government will incur a significant financial burden.
- In Trinidad & Tobago, around 4.12 billion TT$ was spent on subsidies and transfers in the year 2014.
A market price that is significantly lower than the international price is achieved by selling commodities to the local market, namely to NP and Unipet.
TTEITI Report No.
Because of the present economic situation, the government may be forced to hike taxes in order to preserve gasoline and electricity subsidies.
Commodity waste is a problem.
The National Gas Company (NGC) purchases natural gas from the Trinidad and Tobago Energy Commission (TTEC) at a price that is much lower than the average market price because to the government’s electricity subsidies.
Therefore, NGC forfeits the amount of money they might have made by selling the natural gas at the current market price.
In this case, wastage is connected to the prior point.
The cost of traditional fuel and power generated by fossil fuels is so low that people are not driven to convert from them.
Inequity is number six.
The higher class usually comes out on top since they are able to purchase more gasoline and electricity than the lower classes, and as a result, they obtain a greater share of the subsidies because they use more despite paying the same subsidised rates as the lower classes.
Consumers may consider this move to be irrational, which is why it may be prudent to put the following precautions in place: improvements and new investments in public transportation and transportation planning; cheaper alternatives to gasoline and diesel as transportation fuels, with compressed natural gas (CNG) being a viable option; investments and promotion of renewable energy use in homes and businesses; public education on the advantages and disadvantages of subsidies and how they affect the economy; and transparency with regard to where the money saved from subsidies will be used in the future.
*Note: This is not a comprehensive list.
The price of super gas was raised from $3.58 per litre to $3.79 per litre in the 2017/2018 budget.
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Why Fuel Subsidies are Bad for Everyone
Energy underpricing in the United States has been a regular topic of discussion (most recently in a three-part series that begins here) on this blog, but we are not the only ones who do so. Many nations across the world subsidize consumer energy prices in methods that bring them down to levels that are even lower than what consumers in the United States are forced to endure. These policies place a burden on both the affluent and the poor, both in wealthy nations such as Saudi Arabia and impoverished ones such as Egypt, as well as within each country’s own population, which includes both wealthy and impoverished inhabitants.
- Fuel costs are subsidized in a number of nations throughout the world.
- When energy prices fall below the world price after transportation expenses are taken into account, pre-tax subsidies are provided to customers to keep their costs of energy lower than the world price.
- In this context, post-tax subsidies refer to any measures that keep the after-tax price of energy below the level that is consistent with effective taxation.
- With the exception of a brief comment towards the conclusion, this piece is mostly focused with pre-tax subsidies.
- According to the IMF report, the following table, which is an excerpt from Appendix Table 2, illustrates pre-tax subsidies for a representative sample of countries.
- Oil exporters are particularly prominent on the list, however there are also importers included on the same page.
- While some big exporters, such as Russia and the United Arab Emirates, get little or no government assistance, others, such as China, receive substantial assistance.
Subsidies for net importers, particularly former exporters, are sometimes motivated by a desire to protect individuals from the effects of sudden increases in oil prices.
The negative impact of subsidies on the poor Consumers benefit from fuel subsidies, but they also suffer as a result of them.
Subsidies make fuels more inexpensive, which makes them more accessible.
Individual families may find the price savings to be quite beneficial.
Articles that are related to this one: As oil reserves are depleted, GDP growth will have to slow.
Consumption in the richest 20% of the population receives a total advantage from fuel subsidies that is six times more than the benefit received by consumers in the poorest 20% of the population on average.
In developing nations, for example, because car ownership is rare among impoverished people, a fall in gasoline costs has minimal immediate impact on their lives and well-being.
The following graphic from the IMF research offers estimates of the distribution of subsidy benefits for four key fuels, as depicted in the accompanying table.
Fuel subsidies account for around 14 percent of the total government budget in Indonesia and Saudi Arabia.
The same dollars that are currently being spent on fuel subsidies might be utilized to increase public expenditure on education, health, and other programs that are more effectively aimed at the poor and working class.
How gasoline subsidies are detrimental to the wealthy Due to the fact that policies that keep gasoline costs below global market levels benefit mostly upper-income customers, we may assume that they would be the primary beneficiaries of subsidy programs.
Several pathways exist via which subsidies might be detrimental to both the wealthy and the impoverished at the same time.
Individual income taxes and value-added taxes (VAT) are small in certain exporting nations, such as Saudi Arabia.
This is because the progressivity of the tax structure in these nations more than compensates for the regressive nature of the gasoline subsidies itself.
Second, fuel subsidies have unintended consequences that have a direct negative impact on the quality of life of individuals of all socioeconomic backgrounds.
Consider, for example, a recent horror tale in The New York Times about traffic problems in Jakarta, which is considered to be the world’s largest metropolis without a fast transit system.
Things aren’t much better for people who can afford automobiles, on the other hand.
Because low fuel prices have prompted tens of thousands of more automobiles and motorcycles to join the fray, traffic has backed up everywhere, including into purportedly designated bus lanes, causing gridlock.
A reduction in the number of automobiles on the road would also be achieved by this measure.
A slower rate of economic growth is the third route via which energy subsidies are detrimental to both the affluent and the poor alike.
It’s possible that’s true in the near term.
Another method is to distort the structure of international trade.
When the fuel in issue is derived from domestic sources, it is preferable to export it directly rather than utilizing it in wasteful domestic manufacturing processes.
How to put a stop to government subsidies Unfortunately, once fuel subsidies become established policy, it is quite difficult to get rid of them.
Although the advantages of terminating them are immediate and obvious, they are not assured.
People on the street express strong opposition to the elimination of subsidies, whereas policymakers, academics, and development consultants express a more intellectual and restricted support for the move.
The country of Nigeria is a large supplier of crude oil, but it has limited domestic refining capability as a result of corruption and poor management.
Petrol cost 65 naira a liter at the end of 2011, which equated to about $1.50 per gallon at the time due to the then-current currency conversion rates.
Nigerians in their millions swiftly put aside their various differences to demonstrate their opposition to the price hikes.
Christians and Muslims stood shoulder to shoulder to block roadways, spurred up by the leadership of their respective religions.
Despite the government’s protests, few people believed them when they claimed that it required the money collected by pricing changes to support human development and infrastructural projects that would benefit all Nigerians.
Instead, dishonest officials had taken the oil money and used it to enrich themselves.
The price rise was cut in half, resulting in gasoline costing around $2.25 per gallon, which the government contended still necessitated a substantial subsidy from the federal government.
Based on a comparison of successful and unsuccessful changes, the International Monetary Fund (IMF) has identified numerous factors that increase the likelihood of success in the elimination of gasoline subsidies.
Subsidies should be replaced by policies that are specifically intended to help the poor.
In order to avoid gasoline price hikes from escalating into self-sustaining inflation, sound macroeconomic and monetary policies must be implemented.
The implications for the United States are as follows: According to the International Monetary Fund, the United States offers very small pre-tax subsidies for petroleum products and other fossil fuels, as seen by the first graphic in this post.
policy at first glance might suggest that the issue has little relevance to American policy, but this is not true for two reasons.
According to the sources cited in the IMF study, ending pre-tax fuel subsidies in all non-OECD countries would result in an 8 percent reduction in world oil prices and a 13 percent reduction in natural gas prices.
For this reason, if for no other reason, the United States should support efforts to eliminate fuel subsidies throughout the world by using all available economic and diplomatic channels.
According to the International Monetary Fund, the United States’ post-tax subsidies for petroleum goods alone amount to 2.42 percent of GDP.
These post-tax subsidies are possible because the United States government, in contrast to other nations, taxes gasoline, natural gas, and coal at rates that are far lower than the rates necessary to pay for negative externalities in these industries.
When it comes to climate change externalities, the study assigns a monetary value of just $25 per ton of CO2, a figure that falls between the low and medium range of estimates used in debates of optimal carbon pricing.
It will be necessary for the federal government to follow the same guidelines that the International Monetary Fund (IMF) has identified for the removal of pre-tax subsidies in developing countries if it is ever to succeed in implementing appropriate corrective taxes, as I have repeatedly urged.
They will also necessitate the implementation of suitable regulations to compensate low-income households while while retaining incentives to compensate for energy use.
The bottom line is that underpricing of energy places a burden on both the rich and the poor alike.
Also distorting resource allocation are subsidies that encourage excessive energy use, artificially promote capital-intensive businesses, reduce incentives for investment in renewable energy sources, and hasten the degradation of natural resources.
The majority of subsidy advantages are reaped by higher-income households, thereby entrenching economic disparity. Both Saudi Arabia, Egypt, and Indonesia are examples of countries where these words are equally applicable as the United States. Ed Dolan contributed to this article.
Indonesia: the pros and cons of cutting fuel subsidies
Get free Susilo Bambang Yudhoyono information sent directly to your inbox. The newest Susilo Bambang Yudhoyono news will be delivered to your inbox every morning via an email from AmyFT Daily Digestemail. If the government follows through on plans discussed by ministers this week, the price of subsidized gasoline in Indonesia might jump by as much as a third. However, while cutting subsidies in an age of high oil prices would allow the government to spend more money on infrastructure – which the country urgently requires – the cuts would not be without consequences.
- The magnitude of the price increases has not yet been established, although ministers and economists have predicted that prices might climb by as much as Rp1,500 ($0.17) per litre, or around 33% more than current, subsidized rates.
- A land reform bill was passed last year, which will allow the government to acquire land more easily for public projects.
- However, the bill must still be executed, and funds must be granted to new initiatives.
- Approximately 20% of total government spending in 2011 was devoted to energy subsidies, according to her estimates.
- According to Citi, the government would eliminate $4.5 billion from its budget if the price of gasoline rose by Rp1,000 a litre, and $6.7 billion from its budget if the price rose by Rp1,500 a litre (the highest potential increase the energy minister has mentioned).
- The central bank of Indonesia is considered to be one of the more dovish in the area.
- According to experts, increasing gasoline prices might, ahem, feed higher inflation, and the central bank has stated that it is keeping an eye on the situation.
According to a statement released in conjunction with the bank’s rate drop this month, “Bank Indonesia will remain watchful over the effects of government policy on energy, which may boost pressure on inflation.” It is unclear how the government will handle the trade-off between inflation and subsidy reform; nevertheless, as Citi’s analysts point out, the historical record shows that investors may expect a reduction in subsidies.
According to the analysts, stocks rose after previous gasoline price increases in 2005 and 2008 because investors were confident that the government would utilize the savings to fund infrastructure-related investment.
Related reading: The Financial Times expresses concern over a slowing in Indonesian stocks. debt managers urge on rating agencies to reevaluate Indonesian creditworthiness. FT According to the Financial Times, Indonesia is receptive to infrastructure funding.
Does subsidy removal hurt The poor? The case of fuel subsidies in Nigeria
29th of June, 2007 | A spike in the price of gasoline is never welcomed by the general public. But in Nigeria, where gasoline prices are regulated, the government has allowed the price of refined petroleum products to climb recently, and it is willing to allow this to happen in the future as well. The Nigerian government frequently buys petroleum and sells these imports on the local market at a discount to cost in order to maintain prices as low as possible. Subsidies on imported petroleum products amounted to more than 1 percent of Nigeria’s gross domestic product in 2003, according to official figures.
- It will also encourage both local and inbound foreign investment – including the construction of new refineries – into the domestic petroleum sector.
- Although efforts to examine the economic consequences of increasing gasoline costs have recently focused on poverty repercussions, this has not been the case in the past.
- With almost half of the people in Nigeria living on less than one US dollar per day, it is critical to analyze measures that may increase poverty levels in a nation like Nigeria.
- Fuel shortages have a negative impact on both the affluent and the poor.
- While PMS is mostly used by the wealthy to power their automobiles, it is also a fundamental fuel for the transportation sector, which is primarily utilized by the poor.
- Thus, the government’s importation of these items in the past has helped both of these organizations.
- This made it possible to do specific poverty evaluations by including information on households obtained from a nationwide household survey into the model.
It was discovered that removing subsidies without spending the funds generated would result in an increase in the degree of national poverty.
The refined petroleum products, which are the most important commodities to see nominal output growth, are produced by a very small number of families and hence give an incredibly little amount of revenue.
For example, a conservative fiscal policy reaction to the elimination of subsidies can significantly limit the inflation that results from the removal of subsidies.
If the government’s primary objective is to avoid the inflationary effect, it will want to maintain expenditure as low as possible while concentrating on areas that will boost the country’s productive potential.
The reason for this is that urban families earn the majority of their incomes from input-intensive industries, whereas rural households are more likely to create inputs.
In terms of poverty reduction, a non-inflationary expansionary policy aimed at increasing transfers to households would have the least detrimental impact.
It is important to avoid wasting money on initiatives that do not contribute significantly to the country’s productive potential.
Price reductions in the economy would result from investments in transportation infrastructure since transportation costs would be lowered.
At the moment, many businesses are severely hampered by a scarcity of electric power for manufacturing purposes.
Short-term, boosting payments to families would have a significant positive impact on reducing the negative consequences of the gasoline subsidy change.
After this time period has passed, the good impacts of the prudent investments recommended above should begin to manifest themselves.
In the telecommunications business, greater competition resulted in SIM card costs being decreased by more than 90 percent, resulting in a significant reduction in overall expenses.
The findings of the research presented in this article are based on the studyDoes Subsidy Removal Hurt the Poor?, which can be found online at.
Manson Nwafor is an Associate Fellow at the African Institute for Applied Economics in Enugu, Nigeria, where he teaches economics. His primary area of interest is the impact of policies on poverty at the macroeconomic level. He may be reached at the following address:
Unpacking Canada’s Fossil Fuel Subsidies
What are fossil-fuel subsidies, and how do they work? What is the total amount of fossil fuel subsidies that Canada provides? What do fossil fuels cost me in terms of money? As a result, subsidies are expensive, and they result in a financial loss for me. Is this the source of their problems? Is the government taking any action to address this issue? What should the Government of Canada do? What are some typical misconceptions about government subsidies? Can you tell me more about the subsidies you’ve mentioned?
If these subsidies continue, Canada may find itself on the outside looking in in a world that is turning to sustainable energy.
Canada agreed to phase out wasteful fossil fuel subsidies 11 years ago, yet even after more than a decade, the country continues to provide substantial subsidies to fossil fuel producers.
Taxes and subsidies are a difficult subject to understand, which is why we built this website to explain federal and provincial subsidies in the United States.
What are fossil fuel subsidies?
Supplied goods and services are financial benefits that are provided by governments, most of the time to a specific enterprise, organization, or sector. Some people argue about the distinction between “subsidy” and the larger word “support,” but that’s a very good plain English meaning of the terms in this context. This is also essentially how the World Trade Organization uses the term—and their meaning is widely recognized around the world.) A direct cash giveaway or a tax cut are the most prevalent ways in which this financial advantage is provided.
Fossil fuel subsidies are given to fossil fuel producers or users, whether they are involved in the extraction of oil, the transportation of natural gas, or the combustion of fossil fuels for energy.
How much does Canada give out in fossil fuel subsidies?
Due to the fact that the federal and provincial governments have not publicly stated how much money they really spend on fossil fuel subsidies, it is difficult to tell how much money they are spending. According to what we do know, the total annual cost is at least CAD4.8 billion. This includes government-sponsored initiatives such as preferential tax breaks and direct financial transfers to fossil-fuel firms, among other things. Below is a list of some of the most significant government subsidies.
Crown royalty reductions in Alberta, worth at an average of CAD 1.16 billion per year, and deep drilling and infrastructure credits in British Columbia, valued at an average of CAD 350 million per year, are two examples of provincial subsidies.
What do fossil fuel subsidies cost me?
The subsidies provided by Canada amount to a substantial sum of money. Take a step back and consider the situation.
- They would cover the costs of roughly 360,000 kids’ education (the average yearly expenditure per K–12 student in Canada is $13,315). This program would provide employment training for 480,000 people (Canada Job Grants grant up to $10,000 to assist workers in gaining the necessary skills)
- Approximately 880,000 people would have their yearly health-care expenditures covered (Canada spends $5,418 per person on health-care expenses each year).
Wouldn’t you rather that this money was used to address issues that are important to Canadians?
So subsidies are expensive and they cost me money. Is that why they are a problem?
Yes, but it gets worse from there. Furthermore, fossil fuel subsidies work against the other climate change initiatives that Canada is doing. For example, the federal government just implemented a carbon pricing system over the whole country. We are more likely to pollute less if we make carbon pollution more expensive, as carbon pricing does. A price on carbon pollution, similar to Canada’s prior success in combating acid rain, is a critical component of the global effort to combat climate change, particularly in developing countries.
- Rather than making pollution more expensive, they are making it less costly.
- Further aggravating the situation, fossil fuel subsidies are detrimental to clean energy since they make it more cost effective to produce or burn fossil fuels.
- Market distortions occur over time as a result of subsidies, which encourage investment in industries that would not have otherwise been feasible.
- Considering the alternative of being sucked into hazardous climate change and harmful pollutants, it sounds like a very good deal!
Is the government doing anything about this?
In a nutshell, despite vows to reform, progress is glacial at best. Subsidy reform has received little attention at the provincial level, despite widespread support. Federal commitments to phase out “inefficient” fossil fuel subsidies began in 2009, as part of the G20’s commitment to reduce greenhouse gas emissions. The goal is to phase them out by 2025, according to the agreement. Despite having committed to phasing out coal, Canada has not taken all of the required steps to fulfill these commitments and, in the aftermath of COVID-19, has provided new subsidies to the coal industry.
As part of its commitment to the G20, the federal government is doing what is known as a “peer review” with the country.
As a whole, the procedure isn’t totally apparent, and it is well behind schedule.
We also don’t know which subsidies will be judged “inefficient” and which will not, nor do we know which subsidies will be examined.
Fortunately, the federal government has begun overhauling certain tax exemptions that serve as subsidies to fossil fuel businesses. This is a welcome development. However, with 2025 just around the horizon, we still have a lot of work to do—and we need to do it quickly.
What should Canada do?
Start by putting a halt to any new subsidies for fossil fuel businesses being introduced by the federal and provincial governments. We should also refrain from extending the duration of any existing subsidies that are set to expire in the near future. As we work our way back from COVID-19, the possibility of fresh subsidies has grown more likely. That is why it is critical that any recovery initiatives proposed by the federal and provincial governments be subject to explicit requirements and standards in order to ensure that expenditure is aligned with climate change objectives.
Transparency must be improved, as well as the measurement of subsidies using internationally agreed-upon terminology and methodology.
What are common misconceptions on subsidies?
Misconceptions concerning subsidies abound, including those that attempt to exclude certain forms of subsidies, those that advocate for estimating techniques that downplay their amount, and those that mislead about the goals of fossil fuel subsidy reform. These efforts to sway policymakers away from international principles and best practices have resulted in a delay in the implementation of fossil fuel subsidy reform in the United States. In this section, we will dispel several popular myths concerning fossil fuel subsidies in Canada, including:
Misconception: Money to reduces greenhouse gas emissions is not a subsidy. Grants and direct spending that have environmental benefits are not subsidies.
Finally, these subsidies assist fossil fuel firms in competing and lowering their costs of doing business, which is why they are rightly classed as subsidies. When the government allocates money to this form of subsidy rather to alternative renewable energy or emission-reduction measures, there can be a considerable opportunity cost. Grants and direct expenditures are categorically excluded from the definition of subsidies set out by the World Trade Organization.
Misconception: Tax expenditures and royalty relief are not subsidies. Allowing companies to undervalue their assets for tax purposes just levels the playing field for capital-intensive industries.
It should be noted that tax expenditures and royalty relief have the same effect on the economy as gifts. They cut government income while simultaneously decreasing the cost of fossil fuel production, providing them an unfair edge at a time when we need to make a speedy shift to renewable energy sources. These practices are also clearly classified as subsidies under the World Trade Organization’s definition of subsidies, which is defined as “government money forgone or not collected.” This group is included in well accepted subvention methods on a worldwide scale.
Misconception: Canada has already reformed all of its “inefficient” fossil fuel subsidies.
Correction: Canada has only modified a handful of tax policies, and the country contends that those that remain are either not subsidies (as previously said) or are not inefficient (as previously stated). However, Canada has not provided a comprehensive definition of “inefficient,” making it impossible to hold them accountable for their own promises.
As recently as 2019, Canada’s Office of the Auditor General stated that the country’s examination of inefficient fossil-fuel subsidies was insufficient and did not take into consideration the environmental or social consequences of the subsidy program.
Misconception: All subsidies are inherently bad.
Correction: Subsidies, when used appropriately, may help businesses make the transition to a low-carbon economy while avoiding bankruptcies and job losses. A smart use of public funds, for example, may assist workers in making the transition from fossil fuels to clean energy while also supporting a move away from the production and consumption of fossil fuels.
Misconception: Removing fossil fuel subsidies means advocating for job losses and energy insecurity.
Subsidies, when used effectively, may aid in the low-carbon transformation while also reducing the likelihood of bankruptcy and unemployment. A smart use of public funds, for example, may assist workers in making the transition from fossil fuels to clean energy while simultaneously supporting a move away from the production and consumption of fossil fuels. For additional information, please see our study on the application of best practices for fossil fuel subsidy measurement in Canada.
Can you tell me more about these subsidies?
Here is a list of some of the greatest current subsidies being offered in Canada.
|Subsidy name||Who gives it?||Who gets it?||How much is it worth?*|
|LNG Canada investment||Canada||LNG Canada||$275 million|
|Direct spendingbudgetary transfers **||Canada||Oil and gas companies||$318 million|
|Crown royalty reductions||Alberta||Oil and gas companies||$1.136 billion|
|Tax exemptions for certain fuelsuses in industry||Alberta||Industry||$287 million|
|Royalty reductions, including deep drilling and infrastructure credits †||British Columbia||Oil and gas companies||$631 million|
|Reduced tax for aviation fuel ††||Ontario||Aviation Industry||$273.5 million|
|Tax exemption for coloured fuels used in agriculture||Ontario||Agricultural industry||$275 million|
|Fuel tax exemptions and reductions||Quebec||Industry and other consumers||$303.5 million|
In order to avoid discrepancies in the actual amount across years, unless otherwise specified, the figures presented below are annual averages based on OECD estimates for the period 2016–2019, with particular data utilized for all years available and averaged. **Effective from fiscal year 2019/20 onwards, royalty payments will likely to be greater during periods of higher crude oil prices. Please refer to our most current government subsidy report for a complete breakdown. According to the Public Accounts of British Columbia, this is based on the fiscal year 2018/19.
The International Institute for Sustainable Development’s Global Subsidies Initiative has published a plethora of information on fossil fuel subsidies across the world, including in Canada.
If you’re interested in learning more about provincial and territorial subsidies, you may read studies we’ve written on British Columbia, Alberta, Ontario, Quebec, and Nunavut.