Fossil Fuel Subsidy Reforms, Spatial Market Integration, and Welfare: Evidence from a Natural Experiment in Ethiopia

Abstract

Abstract In light of climate change and tight fiscal conditions after the 2008 crises, fuel subsidy reform has become a popular policy. The G20 leaders, in their Pittsburgh, Pennsylvania meeting in 2009, committed to phase out inefficient fuel subsidies. However, little is known about the implications of removing subsidies on food prices and welfare. I study the welfare effects of such reforms through their impacts on the spatial dispersion of food prices using a “natural experiment” from Ethiopia. I employ time‐regression discontinuity design using a highly disaggregated monthly grain price data (1996–2013) from 300 locations. I find the following: ( a ) the reform substantially increased grain price dispersion; ( b ) there are notable spatial heterogeneities in the treatment effect; ( c ) even if the reform has had no impact on overall price levels, it increased cross‐sectional spatial price differences; and ( d ) net‐sellers of grain in remote districts and some urban households experienced welfare losses.