THE ongoing Russia-Ukraine conflict has led to significant disruptions in the global oil and gas supply chain, further increasing the already elevated energy prices worldwide.
In light of this recent event, Finance Minister Datuk Seri Tengku Zafrul Tengku Abdul Aziz raised the need to reform the current fuel subsidy regime as the government would risk losing RM2.8 billion this year otherwise.
Energy subsidy reform represents an issue that must be addressed sooner than later.
Abundant research and empirical evidence have continuously reaffirmed the fact that the current subsidy regime is benefiting the rich more than the poor.
Nevertheless, current energy subsidy regime reforms, while urgently needed, will result in financial impacts to the consumers, potentially leading to a significant cost burden to those already struggling to make a living amid the ongoing pandemic.
Also, abruptly removing the current blanket subsidy regime could result in a sudden price shock that leads to a greater financial burden on the B40 group.
This is because while the M40 and T20 group enjoy a greater proportion of the subsidy, an increase in fuel price can have a greater impact to the B40 group as energy-related bills account for a greater proportion of their low household income.
As such, simply removing or reducing fossil fuel subsidies would not only create further hardships to the vulnerable communities, but the increasing living costs could also spark public outrage.
The fact that energy prices are generally seen as a direct reflection of living costs further complicates the case for subsidy reform.
To mitigate this, policy recommendations must ensure vulnerable communities are taken care of, and that reform is equitable for all.
As such, parallel policies such as direct cash transfer, increased investments in the social safety nets, and expenditures on public services that have direct financial benefits to the B40 group should be implemented alongside the reform.
In the short run, this strategy can be readily implemented as such efforts to protect the most impacted households can be integrated into the government's wider Covid-19 relief plans aimed at supporting the poor and the vulnerable.
Consequently, this progressive first step in fuel subsidy reform would set up a clear agenda in steering the government's commitments in ensuring an equitable transition towards a low-carbon future.
Subsidy reform requires commitments across administrations, which can only be achieved when a strong, clear, and logical long-term plan is in place.
Wanting to achieve such ambitious transformation hastily would do more harm than good and risks the government reverting all progress made when there is another spike in oil prices.
What the government needs is a plan to gradually reduce the economically illogical subsidy as it provides consumers the time to adapt and go through progressive lifestyle changes.
A greater subsidy removal should be performed in the time of low global oil prices, while a lesser or no subsidy removal should happen when global prices hike.
This approach softens the impact on consumers as subsidies are gradually removed, freeing up more financial resources to the national budget with a less significant burden on the people.
Yet, the framework needs to be transparent and well communicated to the people as such transformation would inevitably face backlash if public confidence is not gained.
More importantly, how and where the removed subsidy will be diverted to must be clear.
To build on the earlier point, research from the International Institute for Sustainable Development argues for earmarking fossil fuel subsidy reform revenue for specific purposes, especially low carbon energy-related investments.
This would likely be more acceptable, which will be translated into greater public support.
To that end, comprehensive plans to make use of financial resources generated through subsidy reductions are crucial.
More specifically, these plans should incorporate an extent of investments towards energy efficiencies and renewable energy deployments.
This is because having less energy wastage and more low-cost energy generation in the future would ultimately benefit the people by reducing the cost of living in the long run and making them less exposed to a shock in global fossil fuel prices.
In conclusion, while a fuel subsidy reform is needed in Malaysia, an equitable, transparent and progressive long-term plan must be provided to ensure success.
The writer an Energy Market Analyst at a leading consulting firm in London and holds an MSc degree in Energy Systems from the University of Oxford
