Monday 27 May, 2019

The pros and cons of gas and electricity subsidies

In Trinidad and Tobago, the price consumers pay for both fuel and electricity are subsidised. This means that money is granted by the government to ensure that the price of electricity and fuel remains low and competitive. This is done to decrease the cost of production and encourage suppliers to increase output, without major price inflation occurring. How does this apply to Trinidad and Tobago?

The prices we pay for fuel and electricity in Trinidad are as follows:

Electricity (per Kilowatt/hour) = TT $0.27

Super gasoline (per litre) = TT $4.79*

Premium gasoline (per litre) = TT $5.75

Diesel (per litre) = TT $3.41**

CNG (per litre) = TT $1.00

To show contrast, the price of electricity in the U.S. and Barbados are TT $0.81 and TT $2.36, respectively. Currently, Trinidad and Tobago has the cheapest rate of electricity in the Caribbean and one of the cheapest electricity rates in the western hemisphere.

The question being asked by many is, “Will Trinidad and Tobago be able to continue sustaining these consumer subsidies?”

There are many obvious benefits to having these subsidies, these include:

1.Power and gasoline are now more accessible and affordable to citizens, due to the prices being artificially low.

2. Cheaper fuel costs = Lower public transportation fees.

3. Cheaper electricity rates = Lower electricity bills.

4. By subsidising the cost of Compressed Natural Gas (CNG), the government is encouraging the switch from traditional fuel to CNG which is viewed as the “cleaner alternative fuel”. This of course results in a decrease in carbon emissions.

Along with these advantages, there are just as many (if not more) disadvantages to these subsidies, some of which include:

1. Large expense for the government.

In Trinidad and Tobago, approximately 50% of the country’s revenue goes towards subsidies and transfers. In the year 2014, approximately 4.12 billion TT$ was spent on subsidies and transfer in Trinidad and Tobago. In the case of our fuel subsidy, both the Government and Exploration and Production (E & P) companies share this burden. Petrotrin supplies the commodities to the domestic market, NP and Unipet, at a market price which is well below the international price. The Government and the E&P companies will then compensate Petrotrin for that loss which occurred in the sales.

Source: 2014-215 TTEITI Report

2. Higher Taxes.

Subsidies are commonly referred to as “taxes in reverse”, which means for us to afford these subsidies, taxes must be collected. To maintain fuel and power subsidies in our current economic climate, the government may have to raise taxes.

3. Wastage of commodities.

It can be argued that “people waste electricity because it’s cheap”. If citizens were billed based on the market price for power, they would be more inclined to monitor how much electricity they use in their homes and businesses, and less inclined to “waste it” by leaving their lights on and using their air conditioning units all day.

4. The money…

With the electricity subsidy, the Trinidad and Tobago Electricity Commission buys natural gas from the National Gas Company (NGC) at a price that is significantly lower than the average market price. T&TEC then pays independent power producers, such as Powergen, Trinity Power and Trinidad Generation Unlimited (TGU) to convert the natural gas to electrical energy. This means that NGC forgoes the amount of money they could have gained by selling the natural gas at the market price.

Also, the money being spent by the government on fuel and power subsidies can be used to improve other sectors in Trinidad and Tobago, such as healthcare and education.

5. Climate Change.

This ties in with the previous point of wastage. Low energy prices contribute greatly to carbon emissions. If the costs of traditional fuel and electricity generated by burning fossil fuels are cheap, then citizens would not be motivated to switch to cleaner, more environmentally friendly alternatives which usually have higher initial set-up costs.

6. Inequity.

It can be argued that subsidies tend to benefit the rich more than the poor. The upper class tends to come out on top since they are capable of purchasing more fuel and electricity than the lower classes so in effect they receive more of the subsidies since they consume more while paying the same subsidised rates.

Some recommend that the Government should continue to lessen the fuel subsidy, and maybe eventually phase it out. This move could seem unreasonable to consumers, which is why it may be wise that the following measures are put in place:

a. improvements and new investments in public transportation and transport planning;

b. cheaper alternatives to gasoline and diesel as transport fuels, CNG being a viable option;

c. investments and promotion of renewable energy use in homes and businesses;

d. education of the public on the pros and cons of subsidies and how they affect the economy;

e. transparency with regards to where the money being saved from subsidies is being used in the future.

 

*Editor's note: This article was amended to correct the price of super gasoline to $4.79 per litre, which went into effect on October 1, 2018. Super gas was increased from $3.58 to $3.79 per litre in the 2017/2018 budget. 

**The price of diesel was increased from $2.30 to $3.41 per litre ​​in the 2018 budget.

 

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