Distributional and Health Co-Benefits of Fossil Fuel Subsidy Reforms — Evidence from 35 Countries

Christoph Michael Klaiber, Jun Erik Maruyama Rentschler and Ira Irina Dorband

No 10398, Policy Research Working Paper Series from The World Bank

Abstract: Governments around the world continue to subsidize fossil fuel use, incentivizing unsustainable consumption levels with consequences for the global climate and human health. However, governments have proven reluctant to reform fossil fuel subsidies (FFS). This is mainly due to concerns over potential adverse effects on poverty and equity; the positive effects on air quality and health are often overlooked. This study offers new insights on the distributional consumption incidence of FFS reforms and expected benefits through improved air quality and health outcomes. Using the World Bank-International Monetary Fund Climate Policy Assessment Tool, we conduct country-level analyses of a complete removal of domestic FFS, considering 19 countries for the distributional consumption analysis, and 25 countries for the health benefits analysis. Our findings suggest that across countries, the absolute consumption burden of FFS reform on the richest decile would be 13 times larger than on the lowest-income decile, supporting evidence that FFS are an extremely inefficient way of supporting lower-income groups. In relative terms, however, the disparity is much smaller, with the richest decile bearing a relative consumption burden that is just 1.1 times larger than that borne by the lowest-income decile. In terms of positive health effects, removing FFS in 25 countries could save a total of 360,000 lives by 2035. The magnitude of the health effect depends on country-specific factors, such as the size of initial subsidy programs, and the extent to which these cover the most polluting fuels. FFS reforms can be a first step in improving air quality and reducing the burden of disease associated with air pollution.

Date: 2023-04-07
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