Cutting Energy Subsidies While Protecting

In Eastern Europe and Central Asia, there are signifi cant pressures for residential energy tariffs to rise, as government budgets are increasingly stretched and cannot afford to pay large energy subsidies. Further pressures for tariffs to rise come from environmental concerns, as the tariff levels that households now face do not cover the social costs of energy production. Because reforms that would increase energy tariffs are likely to affect signifi cantly the poor and the middle class, their political feasibility may be questioned unless appropriate ways of cushioning the impacts can be devised. Balancing these competing claims—fi scal and environmental concerns on the one hand, affordability and political economy concerns on the other—is a task that policy makers in the region are increasingly unable to put off. Balancing Act: Cutting Energy Subsidies While Protecting Affordability examines, at the microlevel for the entire region, the distributional impact of raising energy tariffs to cost recovery levels and alternative policy options to cushion these impacts. While challenging, the reforms needed for this balancing act can build on much that has been learned in the last decade in terms of improving the effectiveness of social assistance systems and increasing energy effi ciency. The authors suggest that a policy agenda that focuses on cutting subsidies to the energy sector, while investing in energy effi ciency and supporting households at the bottom of the distribution, amounts to a new wave of policy reforms for th