How to reduce subsidies, but not hit the poor

Should Abu Dhabi lower water and power use by removing subsidies to the price reflects the true cost?

Should water and power bills reflect their true cost, even though Abu Dhabi residents face stagnant pay rates? Photo: Randi Sokoloff / The National

At a time when many Abu Dhabi residents feel squeezed by rising rents and stagnant wages, it might seem inopportune to initiate a discussion about lowering the subsidies on water and electricity. If prices of utilities more closely resemble the actual cost, it will be felt most keenly by those in the middle and lower income brackets.

But with consumption per person of water and power far higher in the capital than is the norm for developed countries – and with that situation exacerbated further by population growth – reducing or removing subsidies is a proven method of encouraging careful use.

The government has already sought to achieve this goal without changing the level of subsidies but, as The National reported yesterday, an International Monetary Fund official has indicated that this policy is under review by the Government. Despite an ongoing series of education campaigns, including one of displaying on customers' bills whether they are using more or less power and water than the average, consumption has not changed significantly.

The reality is that the wallet is a powerful force when one seeks to change entrenched behaviour. The price of petrol demonstrates this. SUVs are popular on UAE roads because of the modest price of filling the tank but in Europe, where petrol can be more than Dh8 per litre, cars tend to be small and fuel efficient. Few would contend that this was primarily because of Europeans’ commitment to sustainability rather than a reaction to the financial impact.

In Abu Dhabi, this has to be balanced against the unique set of circumstances at play compared to much of the rest of the world. Power consumption rates reflect the climate, with air conditioning essential for roughly half the year, and the fact that all potable water is created through desalination. The range of incomes is also far wider than in many other countries and a price rise could be critical for low or middle income workers.

Given all this, how should the Government proceed? There are a range of options, including retaining a level of subsidy but with surcharges for those who use more than the average. Another is to target other major uses of water, such as that used to keep parks and roadside verges green and lush. But part of the mix will have to be water and electricity more closely reflecting their real cost, knowing that will lower consumption.