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Balancing Act: Cutting Energy Subsidies While Protecting Affordability

Description

The cost of energy in Eastern Europe and Central Asia, as elsewhere, is an important policy issue, as shown by the concerns for energy affordability during the past harsh winter. Governments try to moderate the burden of energy expenditures that is experienced by households through subsidies to the energy providers, so that households pay tariffs below the cost recovery level for the energy they use. Balancing competing claims- fiscal and environmental concerns which will push for raising energy tariffs on the one hand and affordability and political economy concerns which push for keeping tariffs artificially low on the other is a task that policy makers in the region are increasingly unable to put off. While challenging, the reforms needed for this balancing act can build on much that has been learned in the last decade about improving the effectiveness of social assistance systems and increasing energy efficiency. This is the first report to assess, at the micro level for the whole region, the distributional impact of raising energy tariffs to cost recovery levels and to simulate policy options to cushion these impacts. The analysis relies on a unique database of standardized household surveys that covers the majority of countries in the region. This report adopts broad country groupings to identify commonalities across sub regions. This report focuses on two main sources of energy used by households: electricity and gas.