Distributional effects of reducing energy subsidies: Evidence from recent policy reform in Argentina

Abstract We analyze the distributional effects of the reduction in energy subsidies in Argentina since 2016. As the policy reform also includes the introduction of a scheme to protect less well-off families (social tariff), we also review how well the targeting mechanism works. We apply traditional benefit-incidence analysis using household surveys and administrative data, focusing on residential subsidies to piped natural gas and electricity in the Buenos Aires Metropolitan Area. We find that the social tariff is relatively pro-poor, with significantly higher coverage among the poorest households. There are some exclusion errors in the low-income deciles and large inclusion errors in the medium- and high-income deciles. The distributive incidence of subsidies does not appear to have changed substantially. Energy subsidies in Argentina (lower in aggregate terms) continue to be, although progressive, pro-rich. This is in large part due to the prevalence of the general flat subsidy rate mechanism over the social tariff mechanism. Regarding energy budget shares, monthly spending on electricity has increased from 1.1% of total household income to 3.4%. Monthly spending on piped natural gas rose from 1.3% to 3.3%. These shares are in line with many other countries in the region. Naturally, there has been a convergence of tariffs towards service provision costs, which becomes central in order to incentive sectoral investment and stimulate a good provision of services.