The government tried to abolish this subsidy several times but in the face of massive protests it was withdrawn each time – until 2005, when it succeeded to abolish the subsidy without protests from the population, despite a 50 percent increase in fuel prices.
The secret of success was thorough preparation, extensive information, and the introduction of various financial compensations.
Rebel
The measures included an increase in social subsidies, the abolition of tuition fees in state-run primary and secondary schools, an increase in the number of public transport buses, the introduction of a price ceiling for public transport fares, better funding of health care in poor areas, an increase in the minimum wage and investment in electrification in rural areas.
Indonesia also subsidised the use of fuel to the tune of 2.2 per cent to 2.8 per cent of GDP. The government tried to eliminate these subsidies since 1997 but failed each time because of wide protests. It finally succeeded in 2005-2008.
The key to success was an increase in social subsidies (the poorest were given cash), improvements in health care and education, and preferential loans for small businesses.
These measures minimised the number of opponents and boosted the president’s popularity. The fact that the public was thoroughly informed about the reasons for and the aims of the measures greatly facilitated their understanding and acceptance by society.
In Iran, fuel prices were kept extremely low before 2010, with huge state subsidies. In 2010, however, the government abolished the subsidy, which led to an overnight four-fold increase in fuel prices. Not only did the public not rebel, but they were almost unanimous in their support.
Petrol
The secret of success lay in thorough preparation, extensive information, and adequate compensation. Thirty per cent of the proceeds were given to companies to support energy-saving measures and energy efficiency investments.
A further 20 per cent was allocated to the public sector (schools, hospitals, etc.) to offset increased energy costs and improve their energy efficiency. And 50 per cent of the proceeds went to each resident for $40 per month – except for the richest 20 percent of households.
Compensation for higher fuel prices has benefited most families and the reform has increased social equality. The poorest people had got almost no benefit from low fuel prices (they usually did not have cars), while the compensation paid by the government significantly improved their living conditions.
The reform has greatly reduced poverty in Iran, which has resulted in significant moral support for the government. The reform has also boosted domestic demand, contributing to growth in non-energy sectors and reducing unemployment.
In 2008, Switzerland introduced a carbon tax on a significant proportion of fossil energy (although petrol and diesel were not subject to the tax), which gradually increased from an initial 12 to 120 Swiss francs per tonne.
Distributed
The tax is also payable on household fuels, for which all Swiss residents receive equal monthly cash compensation from the state. This means that the less household fuel you use, the better off you are.
In Hungary, in the first half of the 1970s, there was a significant subsidy on meat products, with all the negative consequences that entailed. In 1976, the government abolished the subsidy, which led to a surge in meat prices.
At the same time, all Hungarian residents received a monthly compensation of HUF 60 (a significant amount of money at that time), which benefited the vast majority of the population. Poor people were the happiest, as they consumed much less meat than the average and bought the cheapest meat.
The Hungarian environmental NGO Clean Air Action Group has recently developed proposals, supported by calculations, for mileage-based taxation of cars and trucks and simultaneous compensation of the population. By implementing the proposal, 80 per cent of the population would benefit (only the richest 20 per cent would suffer some losses).
So, instead of the misguided fuel tax cuts and fuel price caps, the amount saved by abolishing these measures should be distributed evenly to the population, except for a certain percentage of the highest-income households.
This Author
András Lukács is the president of Clean Air Action Group, a Hungarian environmental NGO.
