Fossil fuel subsidy reforms and their impacts on firms

• Published in: Energy policy Vol. 108; pp. 617 - 623
• Main Authors: Rentschler, Jun, Kornejew, Martin, Bazilian, Morgan
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.09.2017; Elsevier Science Ltd
• Subjects: Companies; Competition; Competitiveness; Econometrics; Energy; Energy policy; Firms; Fossil fuel subsidies; Fossil fuels; Fuels; Government subsidies; Households; Price increases; Prices; Profits; Reform; Reforms; Response measures; Side effects; Small business; Subsidies; Fossil fuel subsidies; Response measures; Reform; Firms; Competitiveness
• ISSN: 0301-4215; 1873-6777; 1873-6777
• DOI: 10.1016/j.enpol.2017.06.036

While the potential adverse effects of fossil fuel subsidy reform are well documented for households, the literature has largely ignored the effect of subsidy reform on firms’ competitiveness. This paper discusses how firms are affected by, and respond to, energy price increases caused by subsidy reforms. It highlights that cost increases (both direct and indirect) do not necessarily reflect competitiveness losses, since firms have various ways to mitigate and pass on price shocks. This paper presents and discusses direct and indirect transmission channels for price shocks, and firms’ response measures: absorbing cost shocks into profits, inter-fuel substitution, increasing energy and material efficiency, and passing on price increases. It argues that further micro-econometric studies using enterprise surveys are essential for quantifying the role of these mechanisms, and for designing policy measures that ensure that competitiveness losses due to subsidy reforms are minimised. •Concerns about competitiveness can be a key political obstacle to subsidy reform.•Net impacts are determined by (in-)direct price shocks, and four response measures.•Policy makers need to understand impacts on firms to design effective reforms.•Enterprise surveys are key for understanding and quantifying impacts on firms.