Incidence and Impact – A Disaggregated Poverty Analysis of Fossil Fuel Subsidy Reform

This study uses household expenditure data from Nigeria to understand energy consumption patterns with respect to income levels, different energy goods, urban and rural livelihoods, and geographical distribution. Using the empirical subsidy simulation model by Araar & Verme (2012), this paper simulates 50% and 100% reductions of subsidies on petrol, electricity and kerosene. It presents the estimated effects of such reforms on consumption, poverty, and government revenue. This analysis also determines the minimum level of universal cash transfer that is required to achieve “poverty neutrality” of subsidy removal; i.e. the threshold at which direct cash compensation offsets increasing energy prices, such that the national poverty headcount rate is unchanged after the subsidy removal. By disaggregating this analysis to the state level, it is shown that poverty effects (and thus the required poverty neutral cash compensation) can vary significantly across states. Understanding these differences in vulnerability, and designing adequate compensation and social protection policies is critical for ensuring public and political support for subsidy reforms.

By: Jun Rentschler

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