5. SHOULD ENERGY BE SUBSIDIZED?

a. Critically analyze the issue of energy subsidies and their impact on an economy. Who are the ultimate beneficiaries of such subsidies? Energy subsidies are fundamentally country-specific and are related to national circumstances. Most countries rely on a range of mechanisms to introduce energy subsidy. These include direct financial transfers, preferential tax treatments and trade restrictions, regulation of the energy sector, Depletion Allowance etc. Generally the ultimate beneficiaries of energy subsidies are energy producers and energy consumers. These two categories have very different economic impacts. Consumer subsidies through low energy prices encourage overuse and waste, hence cause pollution. Underpricing also hurts energy producers, whose revenues and profits are insufficient for replacing and modernizing existing equipment that causes enormous waste of energy between production and consumption points. Producer subsidies, on the other hand, encourage overproduction since they artificially reduce production costs. Producer subsidies are usually accompanied by protection and quantity regulations, which along with external costs generate further distortions in the domestic economy. However there are arguments both for and against energy subsidies. Energy subsidies are useful (i) Security of supply: subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies. (ii) Environmental improvement: subsidies are used to reduce pollution, including different emissions, as in the case of renewable energy and to fulfill international obligations. (iii) Economic benefits: subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries. (iv) Employment and social benefits: Energy subsidies are used to maintain employment, especially in periods of economic transition. Energy subsidies are wasteful (i) Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, increase the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow and undermine private and public investment in the energy sector. (ii) Impede the expansion of distribution networks and the development of more environmentally progressive energy technologies, and do not always help the people that need them most.

Conclusion However, it is reasonable to use subsidies to promote accession of energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources but not to cover operating costs of companies. b. Do you think giving subsidies to the energy sector is essential? Give reason. Would you distinguish between different energy sources when providing subsidies? Energy subsidy comprises a wide variety of government financial assistance to cover losses of mining communities or domestic purchase obligations for coal, tax breaks for energy users, price control to support low income households to purchase fuels for heating and cooling or allow public energy producers to earn lower than market rate of return and support of R&D programs. Most countries introduce energy subsidies in order to secure domestic energy supply, to provide energy access to the poorest parts of the population, or to adjust for international energy prices in national contexts. Therefore, energy subsidies are considered necessary to avoid possible barriers to growth. Many types of subsidies, especially those that encourage the production and use of fossil fuel, and other non-renewable forms of energy, are harmful to the environment. They can also have high financial burden and economic costs, and often only bring few benefits to the people for whom they are intended. Subsidy also makes beneficiaries economically dependent on support. Removing, reducing or restructuring such energy subsidies is helpful for the environment and the economy at the same time. But the removal of subsidy on non-renewable energy will increase its price as well as the price of production for the dependable goods and services. Potential social costs in terms of employment in the conventional energy industry or reduced access to energy could be addressed by re-directing the money erstwhile spent on subsidies to income support, health, environment, education or regional development programs. As a result, both producers and consumers will start using more renewable energy. Energy subsidy should benefit the society as a hole and in the long run. Although high start-up cost, renewable energy has the potential to meet the significant proportion of the energy needs of the world. Many countries have promoteed renewable forms of energy through subsidies in the form of feed-in tariffs, national targets and quotas, capital grants, investments or other tax credits, tax exemptions and energy-production payments. Conclusion Subsidies present a challenge for governments seeking to promote optimal competitive outcomes. Properly used, subsidies can preserve and enhance a competitive marketplace by correcting critical market failures and help efficient firms to survive and thrive (beneficiaries). Improperly used, they can lead the balance of competition toward inefficient firms in order to promote trade protectionism as well as nationalistic and political objectives at the expense of efficiency and innovation.