Energy subsidies are widely used across the globe. The International Monetary Fund (IMF) estimates that energy subsidies cost trillions of dollars each year as they are increasingly used due to fiscal constraints, peaks in fuel prices, and the misalignment of incentives with climate change efforts. In addition to the heavy burden, they place on government budgets, non-focalized subsidies do not always improve affordability for the most vulnerable. Nonetheless, citizens are often against energy subsidy reforms.
To address this contradiction, the IDB developed an experimental study to examine which strategies governments should use to better communicate energy reforms to their citizens. The research examined behavior economics and communication strategies that may increase public support for reforms. The IDB investigated people’s knowledge and normative views about subsidies based on an experimental study conducted across 11 Latin American and Caribbean (LAC) countries. Several interventions – specifically designed to increase the acceptance of energy subsidy reforms – were tested.
In the survey, the interviewees answered some general questions that evaluated their awareness and perception of existing energy subsidies and possible future reforms.
Those questions provided evidence that:
- People display a significant lack of knowledge about energy subsidies, especially those applied to fuels. Approximately 44% of participants either did not know or reported not having electricity subsidies in their countries, and 64% of participants either did not know or reported not having fuel subsidies. In general, citizens showed an interest in increasing subsidies in their respective countries.
- Adequate communication can increase people’s willingness towards energy subsidy reforms. In the experiment’s control condition, where no communication was used, there was an overwhelming unwillingness across all population subgroups to remove subsidies. However, the willingness for energy subsidy reforms significantly increased when some communication strategies were used.
- Communication strategies that focused on the negative impacts of subsidies on public finances, the environment, or distributive justice were particularly effective. Emphasizing future benefits of the removal of energy subsidies, such as using the same funding to support focalized welfare programs, investments in healthcare, education, and public safety, did not work as effectively. Therefore, showing the negative impacts of energy subsidies seems to inspire more positive attitudes toward energy reforms; highlighting potential alternative uses of financial resources did not sway opinions. According to behavioral sciences literature, people are more responsive to negative versus positive information.
- A broader explanation of the impact of energy subsidies is important. Our results revealed that providing complete information led to more positive results than offering summaries. These effects were consistent across different energy subsidies and countries.Two communication strategies were tested. In the first, all information on the negative consequences of non-focalized subsidies and possible future benefits of the energy subsidy reform was provided to citizens. This strategy produced very positive effects. In the second, all information was summarized and the effectiveness was reduced. Although evidence in behavioral sciences shows that the amount of information can be detrimental to decision making, as it might impose an overwhelming cognitive burden on stakeholders, more information had a greater impact in this case.
Non-focalized energy subsidies can have a high cost. Externalities do not necessarily improve affordability of energy services for the most vulnerable households – a key issue in LAC. Energy subsidy reforms are needed, and policymakers typically encounter significant resistance. And yet, people usually do not know or understand what it means socially.
The IDB report provides tangible orientations for policymakers to improve communication about energy subsidy reforms, increasing consumer comprehension and support in specific countries and contexts. It is possible to increase people’s willingness to removing subsidies with an adequate communication strategy that provides clear and complete information on the reform.
Take a look at our study “Increasing the Acceptance of Energy Subsidy Reforms: Behavioral Insights for Latin America and the Caribbean” for more details and insights into how communication strategies can improve acceptance of energy subsidy reforms, based on the literature review and the IDB’s experiment results.