Modelling and assessment of economic effects of subsidy policy change in Ukrainian natural gas market

Maksym H. Chepeliev


In Ukraine natural gas consumption subsidies are widely used as an economic policy measure. According to the IEA estimates in 2012 they amounted to 4,5% of GDP or 16% of Central government budget. And while in general such policy options should address crucial socio-economic issues, in practice they fail to do that. Natural gas subsidies in Ukraine not only create a severe pressure on the public finances but also preferentially allocate money to the high-income households. In particular, households of the richest (X-th decile) receive three times more heat subsidies than the poorest 10% (I-st decile) of public users. In addition this policy distorts market pricing, leads to the inefficient resources allocation, negative environmental effects and energy security decrease.Considering this issue Ukrainian government has initiated a tariff reform in the energy sector. Within the fist stage (2014), residential heat tariffs would be increased by 40%, while average natural gas price for households would rise by 56%. Although this step is of great significance, it generates a lot of practical questions in terms of reform implementation. They include, among others, valuation of the proposed compensation measures efficiency and their influence on the payment discipline, effective distribution of the additionally received funds, and search for the compensation costs recovery sources, etc.To explore these issues the paper adopts a static computable general equilibrium model with heterogeneous households and extended energy sector. Within this modelling tool, apart from government, final consumers are divided into ten groups according to the income level, producers are represented via 40 economic activities, and separate treatment is given to the investors, retirement and social security funds.As modeling results show, while in the long term subsidies elimination leads to the moderate positive macroeconomic effects, in the short term households face sensible real income decrease (0,8%- 2,2%), which is additionally amplified against the background of existing economic and political predicament.Progressive taxation proved to be the most effective among the compensation costs recovery options studied. Firstly, it does not adversely influence the government budget. Secondly, it induces positive macroeconomic effects. Finally, it serves as a damper for tariff reform regressive consequences and income inequality.In the context of mid- and long-term economic growth perspectives and Ukrainian energy security, at least moderated tariff increase for natural gas producers should be a foreground issue, especially considering the opportunities of gas production volumes increase.


subsidy reform; natural gas; heat; residential consumers; compensation measures; computable general equilibrium model

Full Text:



International Energy Agency (2012). Energy Policies Beyond IEA Countries. Ukraine 2012. Executive Summary. Retrieved from .

The World Bank (2013). The question that needs special attention: tariffs for gas and district heating for the population in Ukraine. Retrieved from [in Ukrainian].

Sukhodolya, O.M. & Smenkovs'kyy, A.Yu. (2013). The energy sector of Ukraine: the prospect of reform or stagnation? Strategic priorities, 2 (27), 74-80 [in Ukrainian].

Ogarenko, I. & Hubacek, K. (2013). Eliminating Indirect Energy Subsidies in Ukraine: Estimation of Environmental and Socioeconomic Effects Using Input–Output Modeling. Journal of Economic Structures, 2-7. Retrieved from http://www.jour¬ content/pdf/2193-2409-2-7.pdf.

Stock market infrastructure development agency of Ukraine(SMIDA) (2014). Quarterly financial statements of the issuer. Retrieved from db/emitent/kv/xml/showform/18936/108/templ [in Ukrainian].

The State Treasury Service of Ukraine (2014). Execution of the State Budget. Retrieved from¬log/list?currDir=146477 [in Ukrainian].

State statistics service of Ukraine (2014). Export and import of certain goods by countries. Retrieved from http://ukr¬stat. [in Ukrainian].

The Energy National Regulatory Commission, Ukraine (2014). Resolution On approval of the Activity Report of the Energy National Regulatory Commission in 2013 of March, 03 2014 No. 348. Retrieved from [in Ukrainian].

Gazizullin, I. & Lazovyy, L. (2011). Ukraine's gas market: Europeanization and the Russian factor. Kyiv: International Center for Policy Studies [in Ukrainian].

National Bank of Ukraine (2014). The official rate of hryvnia against foreign currencies (period average). Retrieved from [in Ukrainian].

Tochylin, V.O. (2009). Markets of real economy Ukraine: structural and institutional analysis. Kyiv: NAS of Ukraine, Institute for economics and forecasting [in Ukrainian].

Ministry of Energy and Coal Industry of Ukraine (2014). Statistical information for January-December 2013. Retrieved from [in Ukrainian].

Euromonitor International (2014). Country Reports. Retrieved from

Eurostat (2014). Energy Database. Retrieved from¬tal/ener¬gy/data/database.

Federal tariff service (2014). Reference and Analytical Information. Retrieved from [in Russian].

Eurostat (2014). Statistics. Retrieved from

The World Bank (2014). Official Exchange Rate (LCU per US$, period average). Retrieved from

Cenral Bank of the republic of Uzbekistan (2014). Currency Rates. Retrieved from ¬ [in Russian].

Riarating (2014). Rating of the countries of Europe for the cost of natural gas for the population. Retrieved from [in Russian].

International Energy Agency (2012). Natural gas information. Retrieved from

Ministry of Finance of the Republic of Uzbekistan (2014). Tariffs for fuel and energy resources. Retrieved from [in Russian].

Tariff (price) Council of Azerbaijan Republic (2014). Processing, transportation, wholesale and retail tariffs of natural gas. Retrieved from ¬

National Agency for Energy Regulation of the Republic of Moldova (2011). Resolution on tariffs for natural gas of September, 29 2011 No. 425. Retrieved from [in Russian].

U.S. Environmental Protection Agency (2012). China’s Energy Markets: Anhui, Chongqing, Henan, Inner Mongolia, and Guizhou Provinces. Retrieved from

International Monetary Fund (2014). World Economic Outlook Database. Retrieved from ¬

Ministry of Economy of the Republic of Belarus (2011). Resolution on prices for natural gas for legal entities and individual entrepreneurs of December 28, 2011 No. 207 (registration No. 8/24619 of December 29, 2011). Rjespublika.

Gazeta Soveta mіnіstrov Respublіkі Belarus. Retrieved from ¬ [in Russian].

National Bureau of Statistics of the Republic of Moldova (2013). Fuel and energy balance of the Republic of Moldova. Retrieved from [in Russian].

National Statistical Committeeof the Republic of Belarus (2014). Power engineering. Retrieved from ¬¬¬ [in Russian].

Chinadaily USA (2013). Industry to pay 15% more for natural gas. Retrieved from

Central Intelligence Agency (2013). The World Factbook. Retrieved from

Koplow, D. (2009). Measuring Energy Subsidies Using the Price-Gap Approach: What does it leave out? Retrieved from

United Nations Statistics Division (2013). Commodity Trade Statistics Database. Retrieved from

UN comtrade (2013). United Nations Commodity Trade Statistics Database. Retrieved from

Agency for the Cooperation of Energy Regu¬lators and the Council of European Energy Regulators (2012). Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2011. Retrieved from

United Nations Statistics Division (2011). International Recommendations for Energy Statistics. Retrieved from

China Energy Fund Committee (2013). China Energy Focus. Natural Gas 2013. Retrieved from

Rzayeva, G. (2014). Natural Gas in the Turkish Domestic Energy Market: Policies and Challenges. OIES Paper: NG 82. Retrieved from ¬

Granic, G., Zeljko, M., & Moranjkic, I. (2008) Module 10 - Natural gas (2013). Energy Report. Retrieved from ¬

Stempin, A. (2014). Will Angela Merkel support Tusk's energy union? Germany has some other plans. Retrieved from ¬,114871,15865955,Czy_Angela_Merkel_poprze_unie_energetyczna_Tuska_.html [in Polish].

Ukrainian State Inspection on Price Control (2013). Information about tariffs for housing and communal services as of June, 27 2013. Retrieved from ¬ [in Ukrainian].

NAS of Ukraine, Institute for economics and forecasting (2012). Implementation of strategic planning in the energy sector in the state of socio-economic development: report. No. of state registration 0112U004433. Kyiv: NAS of Ukraine, Institute for economics and forecasting [in Ukrainian].

Kapustyan, V.O. & Chepelyev, M.H. (2014). Economic modeling of energy subsidies: the principle of adequacy. Ekonomichnyy analiz, 15(1), 86-100 [in Ukrainian].

Ellis, J. (2010). The Effectsof Fossil-Fuel Subsidy Reform: Are view of modelling and empirical studies. Retrieved from

United Nations Foundation(2003). Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms. Retrieved from ¬

Wing, I.S. (2009). Computable General Equilibrium Models for the Analysis of Energy and Climate Policies. Retrieved from


  • There are currently no refbacks.