Politics of energy subsidies

Energy subsidies are often presented as an economic necessity: electricity, gas and fuel must remain affordable to protect households, support industries and contain inflation. Yet subsidies are not merely economic policy tools.

They are also deeply political decisions about who pays, who benefits and who bears the cost of reform.

The politics of energy subsidies has become increasingly important as imported fuel costs, foreign-exchange pressures, fiscal constraints and energy shortages collide with public expectations for affordable electricity and transportation.

The central dilemma is straightforward.

Keeping energy prices artificially low can provide immediate relief, but prolonged subsidies impose substantial fiscal costs and weaken the financial position of state-owned energy enterprises.

Raising prices may improve fiscal sustainability but can intensify inflation and generate public dissatisfaction.

The challenge is therefore not simply to determine the “correct” energy price, but to build a politically credible system in which necessary reforms are perceived as fair.

Bangladesh’s dependence on imported energy makes this political contract especially difficult to sustain.

It relies heavily on imported LNG for electricity generation and industrial production, leaving public finances and foreign-exchange reserves vulnerable to volatility in global energy markets.

Consequently, the government faces a political trade-off between price stability today and fiscal sustainability tomorrow.

The strongest argument for subsidies is social protection.

Poor households should not be forced to choose between electricity, cooking fuel, transportation, and food.

However, generalized energy subsidies are not necessarily the most efficient way to protect the poor.

When energy prices are kept below their economic cost for everyone, higher-consuming households and energy-intensive businesses also benefit.

This raises an important question: should scarce public resources subsidize energy consumption itself, or should the state subsidize vulnerable people so they can afford energy?

The distinction is crucial. A universal subsidy rewards consumption, whereas targeted assistance preserves purchasing power.

The latter can achieve social objectives at a lower fiscal cost. Money spent compensating electricity producers or keeping prices artificially low cannot also be spent on education, healthcare, public transportation, climate adaptation, or targeted social protection.

The politics of energy reform is complicated by the unequal distribution of costs and benefits. A tariff increase imposes an immediate, highly visible cost on consumers.

The benefits, including lower subsidies, healthier SOEs, reduced arrears, and greater fiscal space, are less visible and usually emerge gradually.

Political actors therefore face pressure to oppose or delay price increases.

At the same time, businesses may demand reliable energy even when they resist higher tariffs.

Households may demand affordable electricity while also demanding an uninterrupted supply.

Governments must consequently reconcile three objectives: affordability, reliability, and financial sustainability.

Recent developments underscore the difficulty.

Bangladesh has been facing worsening gas shortages and power constraints, prompting stronger electricity-conservation measures in August 2026.

The problem is therefore no longer only about the price of energy; it is increasingly about the political credibility of promising both affordability and reliability when supply itself is constrained.

The most defensible reform would not be an abrupt withdrawal of energy support.

Rather, it needs to shift from generalized price subsidies toward targeted social protection.

Such an approach could allow tariffs to move gradually toward economically sustainable levels while compensating households that genuinely need assistance.

The advantage is equally important: reform can be presented not as abandonment of the poor but as a transition from inefficient subsidies to better-targeted protection. This requires credible communication.

Citizens need to know how much subsidies cost, who benefits, why prices must change, and how vulnerable households will be protected.

There is another dimension to subsidies: environmental sustainability. Artificially cheap fossil fuels can encourage excessive consumption and discourage investment in energy efficiency and cleaner alternatives.

This is especially significant because energy security and climate policy are increasingly intertwined.

Reducing wasteful subsidies could create fiscal space for renewable energy, energy efficiency, grid modernization, and climate-resilient infrastructure.

The challenge is to ensure that the transition does not impose disproportionate costs on poorer households or on energy-intensive industries that lack immediate alternatives.

The country therefore needs a new energy pricing framework. Such a framework should combine gradual tariff reform, transparent pricing, targeted assistance, improved procurement, and greater investment in domestic and renewable energy.

The objective should not simply be “reduce subsidies.” That formulation is politically and socially incomplete.

A better objective is to ensure that public money is used where it generates the greatest social benefit. Energy subsidies are ultimately a matter of political priorities.

Every taka spent keeping prices artificially low carries an opportunity cost. Every tariff increase carries a social and political cost. Good policy must recognize both.

The country needs to shift from universal energy price suppression to targeted protection for vulnerable citizens, while ensuring energy enterprises are financially viable and improving supply efficiency.

The question is not whether it can afford to reform energy subsidies. It is whether it can afford not to reform them and whether it can design that reform fairly enough for citizens to accept it.

(Writer Dr. Nasim, Ph D in PublicPolicy, Ulstere, UK was a former Additional Secretary to the Government. Currently Associate Professor of Public Policy, Bangladesh Institute of Governance and Management — a constituent institute of the University of Dhaka)