Raising household energy prices in Poland : who gains? who loses?
Freund and Wallich examine the welfare effects of increasing household energy prices in Poland. Their main finding is that the policy of subsidizing household energy prices, common in the transition economies of Eastern Europe and the former Soviet Union, is regressive.
Such programs do help the poor by providing them with lower cost energy, but they are more useful to the rich, who consume more energy.
What is surprising is the extent to which Poland's non poor have benefited from lower energy prices. Not only do the wealthy consume more energy in absolute terms than the poor, but they also spend a larger portion of their income on energy.
Their analysis allowed Friend and Wallet to rule out the oft used social welfare argument for delaying increases in household energy prices, but they do not try to recommend a dynamically efficient pricing path.
The first best response would be to raise energy prices while targeting cash relief to the poor through a social assistance program. This is far more efficient than the present go slow price adjustment policies, which imply energy subsidies that provide across the board relief to all consumers.
But if governments want to provide some relief for consumers to ease the adjustment, several options are available: in kind transfers to the poor, vouchers, cash transfers, and lifeline pricing for a small block of electricity combined with significant price increases.
Simulations show that if raising prices to efficient levels for all consumers is not now politically feasible, it may be socially better to use lifeline pricing and a large price increase rather than an overall (but smaller) price increase. Lifeline pricing for electricity in combination with an 80 percent price increase has better distributional effects than a 50 percent across the board price increase.
Ideally, the public utility would be compensated from the budget for any reduced price sales, rather than having to finance them through internal cross subsidies. In kind transfers to poor households are also effective in terms of efficiency, but may be harder to administer in some countries than lifeline pricing.
This paper, a product of Europe and Central Asia, Country Department II, Office of the Director, is part of a larger effort in the region to better understand the impact of cost recovery on the poor. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Gemma Langton, room H11075, telephone 2024738392, fax 2024771034, Internet address glangton@worldbank. org. (50 pages)
The full report is available on the World Bank FTP server
