Resource information
It is widely accepted that the costs of
underpricing energy are large, whether in advanced or
developing countries. This paper explores how large these
costs can be by focussing on the size of the external
effects that energy subsidies in particular generate in two
important sectors—transport and agriculture—in two countries
in the Middle East and North Africa, the Arab Republic of
Egypt (transport) and the Republic of Yemen (agriculture).
The focus is mainly on the costs associated with congestion
and pollution, as well as the impact of underpriced energy
for depletion of scarce water resources, including through
crop selection. Quantifying the size of external effects in
developing countries has received relatively little
analytical attention, although there is a significant body
of literature for developed countries. By building on
earlier research, as well as employing the United Nations
ForFITS model, the paper provides indicative estimates of
the external costs of energy subsidies, as manifested in
congestion and pollution. The estimates using simulations
indicate that these costs could be materially reduced by
elimination or reduction of energy subsidies. The paper also
describes the impact of energy subsidies on water
consumption in a region where water resources are
particularly limited. The findings provide further evidence
of the adverse and significant consequences of subsidizing energy.
