Low world oil prices: A chance to reform fuel subsidies and promote public transport? A case study for South Africa
Since the fall in world oil prices in June 2014, the economic and political settings for fossil fuel subsidy reforms have changed. As in many developing economies, in South Africa oil price subsidies are criticized as an inefficient policy instrument because they hamper economic growth, contradict objectives of climate change mitigation and mainly benefit high income households which can afford to own a car. Public transportation services are the mobility option for poorer South African households, but are often unavailable and unaffordable due to insufficient governmental subsidization. Thus, the inefficient fuel subsidies and the insufficient subsidies for public transportation have complementary adverse effects on inequity with respect to the welfare of poor households and their mobility. In this study, a computable general equilibrium model simulates the decrease in world oil prices, the reduction in fuel subsidies and two options for reallocation of these subsidies to support the transport sector: either as consumer price support or as subsidies to production in the passenger transport sector. The simulations indicate improved affordability and availability of public transportation services and clearly show positive impacts for the economy, unemployment and household income. They also give some clues on how to improve the transport system in South Africa to pre-empt the situation when oil prices pick up again.