Cost reflective

Are our energy prices cost-reflective? In many countries where low energy tariffs are results of subsidy, there is not cost reflection. Government continues to mask the subsidy by controlling prices. It is not clear if this is good but besides the fact that market signal is not properly expressed, it is also not a very equitable way of spending taxpayers money.

Subsidies on goods and services like energy and water often are regressive because the rich tend to use more of these resources. By keeping prices low, those who can afford to consume more takes a lion share of the subsidy. When fuel is subsidised, those who have more cars and can drive more miles will receive more “funding” than those who do not even drive. The ones who have large houses with lots of appliances consuming lots of electricity and water will get more of that subsidy through low prices than poorer households.

Making sure even the strategic and essential goods are cost reflective helps to ensure transparency of subsidies and also allocate subsidies to the right group of people, those who needs them.