Reforming fossil fuels subsidy is difficult because it means price rises for most consumers, which has knock-on impacts on jobs and livelihoods across the economy. However, there are ways to manage it.
“As in Indonesia and India, the Vietnamese government can phase out subsidies gradually, while investing in measures to protect the poor and in fuel-efficient alternatives and affordable public transport, such as metros and mass rapid transit buses,” RMIT Lecturer in Finance Dr Dao Le Trang Anh proposes.
“Support for affected industries, tax reductions, and training programs can also help businesses and workers adopt and adapt to more environment-friendly energy and technology,” she adds.
Adjusting environmental taxes to encourage greener energy use while maintaining stable revenue for public services is also crucial, especially since IMF data from 2021-2022 indicates that Vietnam’s retail prices for natural gas and petrol only covered supply expenses, without factoring in the broader costs of global warming and local pollution.
“Higher environmental taxes on fossil fuels can reflect their true social and environmental impact, while the revenue can be reinvested in renewable energy, public transportation, and pollution control, thus aligning with Vietnam’s long-term energy and environmental goals,” Dr Trang Anh says.
Professor Baulch notes that reforms to fossil fuel subsides are often opposed by politically well-connected groups who benefit from these subsidies. Also, reforms can undermine the political consensus – or social contract – that has built-up over time between politicians and citizens.
“However, for the sake of both our planet and the Government budget, reforming Vietnam’s petroleum pricing system should receive much greater policy attention,” he concludes.