Economic, social and environmental impacts of fuel subsidies: A revisit of Malaysia

Subsidising energy has been widely used but is economically unfavourable. The Malaysian government has shown strong intention to reduce energy subsidies recently, but faces challenges to prepare policy instruments to manage the impact. This study develops a Computable General Equilibrium (CGE) model with breakdown of households by income level to evaluate the potential impacts of removing energy subsidies on the Malaysian economy. It is shown that removing petroleum and gas subsidy would improve economic efficiency and increase GDP up to 0.65%. Budget deficit would be largely reduced after removing the petroleum subsidies, especially when the saved subsidy cost is not budgeted for other expenditure. Households would be worse off in most scenarios due to higher price levels, but some compensation policy could make the lowest income group no worse than the baseline, without harm to the economy. The reduction in carbon emissions ranges 1.84–6.63% in different scenarios. The simulation results suggest Malaysia to completely remove all fuel subsidies and use the saved funding to cut budget deficit or spend on education, health and other service sector. It is also necessary to set a compensation scheme to minimize public resistance and make sure such a scheme is affordable.

Note: This article will be published in Energy Policy, Volume 110, November 2017, 51-61. Read the article online here, available without a subscription until September 28 2017.

Authors: Yingzhu Li, Energy Studies Institute, National University of Singapore; Xunpeng Shi, Principal Research Fellow, Australia-China Relations Institute, University of Technology Sydney; Bin Su, Energy Studies Institute, National University of Singapore, Singapore