Policy Monitor—Principles for Designing Effective Fossil Fuel Subsidy Reforms

There is mounting evidence that fossil fuel subsidies are detrimental to economic, environmental, and social sustainability, as they tend to drain national budgets, encourage overconsumption of fossil fuels, and aggravate inequality. Despite strong incentives for subsidy reform, the record of success of past reforms has been mixed. Governments have typically focused on managing the downside risks of reform, while falling short of maximizing the development potential associated with subsidy reform. Based on a review of case studies of past fossil fuel subsidy reforms, this article distills and presents key principles for designing effective fossil fuel subsidy reforms. In particular, the article highlights that fossil fuel subsidy reform is not only about removing subsidies, but also requires thorough preparation and a range of carefully designed and sequenced policy measures, which help to ensure public support and social protection of vulnerable population groups. In addition, complementary measures and prudent reinvestment of reform revenues are necessary to ensure that such reforms provide not only short-term relief in times of fiscal crisis, but also serve as a fully integrated component of a long-term sustainable development strategy.