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Policy Brief
Reference Guide for Energy
Subsidies in Abu Dhabi
March 2016
Issue 03-24022016

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Policy Brief
Reference Guide for Energy Subsidies in Abu Dhabi

Contents
Context and importance of the problem 

Critique of policy options 

Policy recommendations

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Abu Dhabi Chamber of Commerce & Industry,
P.O. Box 662, Abu Dhabi, U.A.E.
Ohan S Balian, Ph.D.
Chief Economist Abu Dhabi Chamber
of Commerce & Industry
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Executive summary
Abu Dhabi has been a leader of subsidy reform

growth. Total energy subsidies for the United Arab

among Gulf Cooperation Council (GCC) countries.

Emirates (UAE) equaled 6.5% of GDP, with natural

Energy prices are closer to production costs

gas accounting for the bulk share. Higher prices for

compared with most of Abu Dhabis peers in the

natural gas would likely be affordable, even though

region. However, energy-subsidy reform remains

higher gas costs would feed through on electricity

high on the agenda because the ballooning

costs to some extent. Higher electricity prices for

deficit begs a lower fiscal burden from subsidies.

residents are likely affordable if accompanied by

Meanwhile, maintaining energy affordability for

mitigating measures, while prices for industrial

residents, commercial users, and industry is a valid

consumers are already relatively high in comparison

policy goal, too. Finding the right balance between

with Abu Dhabis regional peers yet still competitive

fiscal requirements, affordability, conservation, and

on a global scale.

the preservation of competitiveness is critical for

reform success and both sustained and sustainable

Context and importance of the

problem

Energy subsidies have been a focal point of policy

reform in Abu Dhabi in recent years. The prime
motivation to use subsidies usually is to reduce
the market price of a commodity for the consumer.
This is one of the shortest definitions for a subsidy,
regardless of whether it is an explicit subsidy
(e.g., a payment to the producer or the consumer)
or an implicit subsidy (such as a mandate for a
government-owned commodity producer to sell
below market prices). Any activity or decision that
leads to a reduction of a price below market level
may be regarded as a subsidy.
The motivation to subsidize energy usually depends
on which consumer group policy intends to support.
In the case of residential households, the prime
motivation is to make energy more affordable as
it is a basic service and prerequisite to enjoy the

benefits of other household goods and amenities of

modern life.
In the case of commercial, and especially industrial
consumers, energy costs can be a critical factor
of competitiveness. In fact, energy is a key
production factor for several industries, such as
steel, chemicals, paper, and of course, the mining
industry. For firms in these industries, energy costs
are a key factor influencing boardroom decisionmaking on large-scale investment plans.
Subsidies also have drawbacks, though, and they
are contentious for two primary reasons. First, since
subsidies lower the actual price paid by consumers,
subsidies encourage higher-than-normal demand
for a commodity. This can lead to inefficient
utilization and a waste of natural resources. Second,
subsidies have an impact on government budgets.
Most explicit subsidies increase government

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Reference Guide for Energy Subsidies in Abu Dhabi

4%

While total post-tax energy subsidies have been

relatively low for the UAE at just above 6.5% of
GDP in 2015 (compared with 8.9% for Oman or
13.2% for Saudi Arabia) and have been reduced
in recent years, on a per capita basis, the UAEs
post-tax subsidies rank fifth highest in the Middle
Eastern subsidy league, surpassed only by Qatar,
Saudi Arabia, Kuwait, and Bahrain.

Gas subsidies account for four out of every

100 dirhams of average income
spending, while most implicit subsidies dampen
revenues.
Fiscal aspects of subsidy reform have gathered
more attention recently, in Abu Dhabi and
elsewhere in the GCC. It is particularly relevant for
countries with a large and swelling budget deficit
and a high ratio of subsidies to GDP. (see chart 1)
The oil-producing countries of the Middle East
face a window of opportunity to pare down these
drawbacks, given todays era of low oil prices,
global commitments to decreasing greenhouse
gas emissions, and increasing natural-resource
constraints. This opportunity is particularly relevant
for Abu Dhabi, which has committed to both
sustained and sustainable growth while spending a
significant share of its annual budget on fossil-fuel
energy subsidies.

Subsidies for natural gas have the highest financial

impact by far, accounting for USD1,900 on a per
capita basis. In other words, 4 out of every 100
dirhams of the average Emirati income would be
curtailed if gas subsidies were abandoned. (see
charts 2 and 3)
In a recent paper, Boersma and Griffiths report a
30% decline, or USD12.6 billion, of total energy
subsidies between 2013 and 2015 based on
calculations from the National Bank of Dubai
(NBD). Based on the data, the subsidy ratio to
GDP was reduced to slightly less than 3% of GDP
at the same time, which is less than half of the
International Monetary Fund (IMF) estimate.
A leader in subsidy reform among Middle Eastern
countries, the UAE has electricity prices that are

Chart 1: Energy Subsidies in the MENA Region

2015 Fiscal Balance as a percent of GDP

Qatar
0

Jordan

Kuwait

10

15

20

25

Iran

30

Lebanon

-5

Bahrain
-10

United Arab Emirates

Saudi Arabia

Oman

-15

Bubble-size= post-tax
subsidies in US$
billions (nominal)

Iraq
-20

Yemen

-25

Post-tax subsidies as a percent of GDP

Source: IMF, IHS

March 2016

among the highest of the GCC, although rates

vary considerably between Emiratis and foreign
residents. Electricity prices in Abu Dhabi are lower
on average compared with Dubai, but are still
higher compared with Oman, Qatar, Saudi Arabia,
Bahrain, and Kuwait. Electricity prices for nationals
are less than one-third of the price for expatriates,
though. Moreover, while tariffs for expatriates
were lifted at the beginning of 2015, they were left
unchanged for nationals. UAE energy prices are
still significantly below those in the United States
and Europe and do not always cover production or
opportunity costs.
For industrial consumers, the average price level is
highly competitive compared with that on a global
basis, although in Abu Dhabi, household electricity
prices (for national residents at least) are lower
compared with industrial consumers. This is the
opposite of the price structure in Europe, where
industry users pay a much lower price on average
than residential households.
Further, despite the major electricity, water, and
gasoline subsidy-reform measures made in 2015
in Abu Dhabi, subsidies for natural gas amount to
roughly 50% of all subsidies in the UAE and have

Abu Dhabi industry prices competitive globally,

though above GCC levels

not yet been addressed. Part of the subsidy effect

on electricity comes from cheap natural gas, which
is used as a feedstock for electricity generation.
Gas is priced far below global market levels, partly
because gas is regarded as being a mere byproduct of oil production.
In times of weakening fiscal revenues and
ballooning deficits, subsidy reform is obviously
ranking higher among governments priorities,
with Kuwait, Bahrain, Saudi Arabia, Oman, and
others all commencing activity to pare down energy
subsidies in 2015. With continued low oil prices and
an increasingly competitive economic environment,
phasing out fossil-fuel energy subsidies will no
doubt continue to be an option for the UAE and
Abu Dhabi to increase revenues and pare down
spending.

Critique of policy options

There is no one policy or mitigation approach

that serves as a best practice for energy-subsidy

11.23

10.32

8.90

7.78

6.57

6.37

13.23

30

26.01

Chart 2: Total energy subsidies % of GDP, 2015

Bahrain

Lebanon

Oman

Kuwait

UAE

Qatar

25
20
15
10
5
0

Iran

Saudi Arabia

Source: IMF

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Reference Guide for Energy Subsidies in Abu Dhabi

may be harder to achieve in tandem, at least in the

short term.

Tiered pricing incentivizes consumers to save energy

reform, and the success of subsidy-reform policies or
initiatives cannot be measured entirely by the nearterm difference in energy prices or overall demand
pre- and post-reform. Rather, successful subsidy
reductions can only be evaluated relative to the
underlying goals of reform, which include not only
the countrys economic prosperity, but also longterm social well-being and environmental health.
To truly measure the impact of reform, results
must be monitored over time and distilled from
other confounding variables (e.g., climate, season,
macroeconomic situation, public awareness
of environmental issues, etc.), which influence
consumers overall energy demand as well as
the price elasticity of demand, or the percentage
decrease in demand associated with each percent
of price increase.
For example, while the dual goals of decreasing
national budget deficits and reducing carbon
emissions can be achieved simultaneously by
lowering fossil-fuel energy subsidies, others, such
as reducing government spending while improving
the overall well-being of low-income households,

Among the menu of policy options used by other

countries, a few general factors stand out for their
ability to contribute to the overall success of a
subsidy-reduction program. These include:

Comprehensive and well-planned

communications campaigns: By utilizing
multiple communication channels and choosing
messages that resonate with local stakeholders,
governments can avoid much-feared public
backlash, or, worse, violent protests or social
uprisings. By including information on the amount
of subsidy and a comparison with the national
average on customers energy bills, the smart
bills required by the Abu Dhabi Regulation
and Supervision Bureau (RSB) in 2012 took a
first step toward educating residents about the
actual cost of electricity. Meanwhile, in previous
subsidy-reform efforts undertaken in both Dubai
and Abu Dhabi, the government organized
extensive information campaigns explaining
the new tariff changes and played to residents
concerns about the value of sustainability and
resource conservation.
Investment in technology, infrastructure, or

Chart 3: Post-Tax Subsidies in the UAE

Subsidies per capita by product, USD

Subsidies by product, US$ billion

6.99

730.0

0.52

54.29

18.22

1,901.53

3.23

337.03

Petroleum Coal Natural gas Electricity

March 2016

Source: IMF

programs that increase energy efficiency:

Any number of measures to improve energy
efficiency (e.g., improved public-transportation
networks, appliance standards, timedifferentiated pricing, smart meters, etc.) can both
decrease consumers burden from energy price
increases while meeting governments emissionsreduction and fiscal-spending objectives. The
tiered pricing system introduced by the Dubai
Electricity and Water Authority (DEWA) in 2008
provides one such example: with costs rising
in accordance with usage levels, the system
rewards the most efficient users. The RSBs 2010
smart-meter pilot program, which has installed
400 smart meters in volunteers homes to monitor
and better understand energy-consumption
patterns, provides another example.
Carefully designed, complementary
mitigation approaches: By determining who the
energy price increases will impact most and how,
subsidy-reform efforts can include measures
to compensate adversely affected households
for the financial impact they will experience. In
countries such as India, Brazil, and Iran, targeted
cash transfers to the countrys poorest were
chosen as a direct and visible way to offset
the burden of higher energy prices, but other
countries have considered and/or implemented
a range of mitigation options, from coordinating
increases in fuel prices with improvements in
public transport to providing technical assistance
to vulnerable industries or businesses.
Meanwhile, although some tactics such as dual
pricing based on socioeconomic class have
proven challenging for national governments to
implement successfully (because of the high costs
of administration, management, and enforcement
in identifying the correct recipients and preventing
illegal sales through black markets), they have
worked thus far in the UAE, perhaps because of the
countrys unique demographics.
In both Dubai and Abu Dhabi, electricity prices for
residential expatriates have increased, while prices

100%

is the percentage total electricity prices were

lifted by Abu Dhabi
stayed the same for UAE nationals. Similarly, while
also more complicated than a blanket price hike,
Abu Dhabi has successfully implemented sectorspecific electricity price reforms: following the
2015 reforms, electricity subsidies for government
entities were removed, a 7% price increase was
introduced for commercial and industrial users
under 1 megawatt (MW), and industrial customers
using more than 1 MW experienced a 100%
increase during summer peak hours.

Policy recommendations

Phasing out subsidies has the potential to support

Abu Dhabis dual policy goals of sustained and
sustainable economic growth in principle. Although
Abu Dhabi has been a leader in subsidy reform
among the GCC, a further reduction of subsidies
seems affordable for virtually all consumer groups
and could be achieved without affecting Abu
Dhabis economic competitiveness.
However, as Abu Dhabi considers its path
forward, it should acknowledge there is no overall
best practice to follow as nowhere else has
a similar geopolitical context, natural-resource
base, economic status, industrial portfolio, and
demographic composition. Rather, policymakers
must articulate the goals of subsidy reform up front
and understand that achieving these goals will
require tradeoffs.
Based on successful subsidy-reform efforts in other
parts of the world and approaches used historically
in the UAE, as Abu Dhabi continues its efforts to
reform energy pricing, four considerations should
remain at the forefront:

2016 Abu Dhabi Chamber of Commerce & Industry

Policy Brief
Reference Guide for Energy Subsidies in Abu Dhabi

Chart 4: Electricity costs in the GCC

25

Residential
Commercial
Industrial

20

15

10

Kuwait
EU
average

Bahrain

Qatar

Saudi
Arabia

Oman

UAE

Dubai

Abu
Dhabi

Kuwait
EU
average

Bahrain

Qatar

Saudi
Arabia

Oman

UAE

Dubai

Abu
Dhabi

Kuwait
EU
average

Bahrain

Qatar

Saudi
Arabia

Oman

UAE

Dubai

Abu
Dhabi

Source: Boersma, Tim and Griffiths, Steve (2016)

The messages and channels used to

communicate with residents regarding the
necessity and value of changes to energy pricing
The timing, frequency, magnitude, and sequencing
of subsidy reductions
Infrastructure, technologies, or standards that can
be used to improve energy efficiency while helping
businesses and residents to maintain economic
performance and lifestyle
Mitigation approaches that protect the regions
most vulnerable households and industries
Specifically, if energy prices are ultimately going to
reflect production costs and global market rates, Abu
Dhabi will need to continue to educate nationals and
expatriate residents alike regarding the true costs of
energy production, value of resource conservation,
and risks of climate change. The government will
want to take advantage of periods when energy
prices are low and reforms can be justified in a
logical and rational manner. The increase of motor
fuel prices in July 2015 is a case in point as fuel
prices dropped again on lower oil after a short-lived
bounce. Further, by introducing measures to improve
energy efficiency among energy-intensive industries,
nationals, and low-income households, Abu Dhabi
can simultaneously decrease energy-subsidy
expenditures, reduce greenhouse gas emissions,
and support the regions populace as it adapts to a
carbon and resource-constrained world.

March 2016

Sources consulted or
recommended

Boersma, Tim and Griffiths, Steve (2016),

Reforming Energy Subsidies: Initial Lessons from
the United Arab Emirates. Brookings Institution &
Masdar Institute. Available at:
http://www.brookings.edu/~/media/research/files/
papers/2016/01/reforming-energy-subsidiesuae/brookings_masdar_reforming _energy _
subsidies_uae_final.pdf
Coady, David, Parry, Ian, Sears, Louis, and
Baoping, Shang (2015), How Large Are Global
Energy Subsidies? IMF Working Paper No. 105,
Washington DC. Available at: https://www.imf.org/
external/pubs/ft/wp/2015/wp15105.pdf
Whitley, Shelagh and van der Burg, Laurie (2015),
Fossil Fuel Subsidy Reform: From Rhetoric to
Reality. New Climate Economy, London and
Washington, DC. Overseas Development Institute.
Available at: http://newclimateeconomy.report/
misc/working-papers
Arab Future Energy Index: Energy Efficiency,
Regional Center for Renewable Energy and
Energy Efficiency (RCREEE), 2015. Available
at: http://www.rcreee.org/sites/default/files/afex_
ee_2015_engish_web_0.pdf

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Contacts

IHS Global GmbH,

Bleichstrasse 1, 60313 Frankfurt, Germany
Ralf Wiegert
Director Consulting IHS Economics & Country Risk
Ralf.Wiegert@ihs.com
+49 (0)69 20973 320
+49 (0)151 42628 143
Matthias Herles
Director Consulting IHS Economics & Country Risk
Matthias.Herles@ihs.com
+49 (0)69 20973 218
+49 (0)174 1946560
Abu Dhabi Chamber of Commerce & Industry,
P.O. Box 662, Abu Dhabi, U.A.E.
Ohan S Balian, Ph.D.
Chief Economist Abu Dhabi Chamber
of Commerce & Industry
o.balian@adcci.gov.ae
www.abudhabichamber.ae
+971 2 617 7470

IHS
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IHS 1959
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