Accelerating India’s Movement up the Energy Ladder:

The Potential for Pairing Dirty Subsidy Reform with Clean

Energy Interventions

Christopher Bennett
Submitted in fulfillment of the requirements for Interdisciplinary Honors
Goldman Interschool Program in Environmental Science, Technology, and Policy
Stanford University, CA, May 2010
Read by:
Donald Kennedy, President and Professor Emeritus, Woods Institute for the
Environment, and Senior Fellow, Freeman Spogli Institute for International Studies

Stephen Schneider, Professor, Departments of Biology, Woods, and Civil &

Environmental Engineering

Walter Falcon, Professor Emeritus and Senior Fellow, Freeman Spogli Institute for
International Studies and Woods Institute

Julie Kennedy, Senior Lecturer, School of Earth Sciences, Earth Systems Program

Acknowledgements:
I’d like to acknowledge Narasimha Rao, Ph.D. candidate in IPER for all of his help, and
thank him for the invitation to help with conducting household surveys in India during
the summer of 2008. This experience was critical to my deep interest in issues of energy
poverty and the policies that might help alleviate it, because seeing the issues first hand
has been essential to my ongoing intellectual excitement on the topic. The School of
Earth Sciences helped to fund this experience, and I am grateful for their generosity. I’d
like to thank Professors Steve Schneider and John Weyant, co-advisors on this project,
for their direction and feedback. The Earth Systems Program, and especially Julie
Kennedy, has been a wonderful source of academic encouragement and direction, both in
motivating me to apply to this thesis experience, and in helping me to gain all of the
different threads of interdisciplinary expertise that would be so invaluable in conducting
this research. I’d want to acknowledge Don Kennedy for his consistently wonderful
advice. He has been a fantastic resource- intellectually, personally and academically-
throughout my entire senior year. I’d like to thank the other students in the Goldman
Program students, who have given me excellent perspective throughout the course of the
year- and especially Sabine Bergmann, Johnny Bartz, and Eugene Nho- who
accompanied me to the 15th Conference of the Parties in Copenhagen this last December.
Finally, on a personal note, I’d like to thank my dorm mates, Andrew Lawrence and
Dorian Bertsch, for embodying the words of Johann Wolfgang von Goethe- “correction
does much, but encouragement does more.” Finally, I acknowledge my parents Pat and
Terry, who have given me a rare gift- an appreciation of adventure, and the tremendous
support to make those journeys happen.

2
Abstract:
Energy poverty- or the deprivation of modern energy- is a serious condition that afflicts
nearly 3 billion worldwide and seriously hinders human development. The condition also
generates significant health and environmental externalities via the combustion of indoor
fuels. This study focuses on India’s energy poverty, and it examines how two types of
public policies- dirty energy subsidies and clean energy interventions- can accelerate
movement up the energy ladder towards more efficient and clean fuels. I first ask whether
Indian energy subsidies- specifically, those that lower the price of existing dirty fuels like
electricity, kerosene, and liquid petroleum gas- are a candidate for reform, and I use
efficiency, equity, and externalities as criteria. I find that reform creates an all-India
welfare gain of $1.68 billion, a net gain of $471 million, satisfying the Kaldor-Hicks
efficiency test. Reform also improves equity by eliminating a regressive distribution, and
reduces emissions by 7 million tons of CO2 and health exposures by 1.13 million
DALYs- a non-market value of $1.25 billion. Among the three subsidies, kerosene
elimination results in the largest welfare gain and co-benefits. While these results are
encouraging, reform is not feasible on its own; household losses are substantial and
concentrated, and those who benefit most from the subsidy will vigorously oppose its
removal. I therefore consider how reform might also be paired with clean energy
interventions that allow households in energy poverty to leapfrog out of that condition. I
conclude by describing and quantifying the co-benefit of three such options: kerosene
reform with solar home systems, LPG reform with efficient cook stoves, and electrical
reform with demand-side interventions. All of these interventions produce significant co-
benefits, but cook stoves produces the most- at nearly $6 billion dollars worth of averted
carbon emissions and exposure to disease from indoor air pollution.

Table of Contents
Acknowledgements: .............................................................2
Abstract:..............................................................................3
Table of Contents.................................................................. 3
Introduction.........................................................................5
The Earth at Night............................................................................................5
India................................................................................................................. 7
Moving up the Energy Ladder .........................................................................8
The Importance of Pricing Energy .................................................................10
Extending the Energy Ladder.........................................................................11
2. Research Questions.........................................................13
3. Energy Poverty’s Triple Threat.........................................16
Development .................................................................................................16
Health.............................................................................................................19
Environment...................................................................................................20
Quantifying Impact.........................................................................................23
4. Dirty Energy Subsidies.....................................................25
A Survey of Global Energy Subsidies .............................................................25

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India’s Energy Subsidies ................................................................................27
Kerosene and Liquid Petroleum Gas ..........................................................28
Electrical Cross-Subsidies ..........................................................................32
5. Methods.........................................................................35
Pilot Survey Methodology...............................................................................35
Economic Methodology .................................................................................38
Measuring Efficiency ..................................................................................38
Household Welfare Changes.......................................................................39
Equity............................................................................................................. 42
Quantifying Externalities ...............................................................................43
Indoor Air Pollution.....................................................................................43
Emissions....................................................................................................46
Scoping.......................................................................................................48
6. Data...............................................................................48
Reference Price and Subsidy Data.................................................................49
2. Pilot Survey Data .......................................................................................51
2. National Sample Survey Data.....................................................................53
7. Results...........................................................................54
Efficiency........................................................................................................54
Equity ............................................................................................................ 57
Externalities................................................................................................... 60
8. Discussion ...................................................................... 62
The Case for Reform ......................................................................................62
Barriers to Reform..........................................................................................64
New Reform Strategies ..................................................................................66
Limitations in Analysis....................................................................................67
9. India’s Window of Opportunity.........................................68
A Developmental Crisis .................................................................................69
Let There Be Light..........................................................................................71
10. Climbing the Energy Ladder...........................................75
Kerosene & Home Solar Systems...................................................................75
Implementation .........................................................................................76
Estimation of Co-Benefits...........................................................................78
LPG & Efficient Cook Stoves ..........................................................................79
Implementation .........................................................................................79
Estimation of Co-Benefits...........................................................................81
Electricity & Demand Interventions ...............................................................82
Implementation .........................................................................................84
Estimation of Co-Benefits...........................................................................85
11. Conclusion....................................................................85
Final Recommendations.................................................................................85
Implications & Further Study..........................................................................86
Works Cited........................................................................87

4
Introduction
The Earth at Night
Sir Fred Hoyle, British astronomer, cosmologist, and author, predicted in 1948

that “once a photograph of the Earth, taken from the outside, is available- once the sheer

isolation of the Earth becomes known- a new idea as powerful as any in history will be

let loose.” These photographs first arrived during the Mercury missions of the early

1960s. Over the next few decades, astronauts confirmed the singular experience of Earth

as a ‘pale blue dot.’ This planetary view offers insights as well as a powerful new frame

of reference. Consider for a moment an inversion of that iconic photograph- a view of the

Earth at night (“APOD: 2000 November 27 - Earth at Night”).

Figure 1: A View of the Earth at Night. Source: C. Mayhew & R. Simmon

NASA/GSFC Digital Archive

The only lights visible at night are artificial, and they come from light pollution in

electrified areas. Your eyes will be drawn towards the light, but observe the darker areas

for a moment. Africa is shrouded in darkness, and the most populous areas in the world-

India and China- are dim compared to North America and Europe. In short, the earth at

night is far dimmer than it should be in. Globally, some 1.6 billion people lack access to

5
electricity and thus cannot spend time after dark studying or working with a dependable

and clean source of light (International Energy Agency, 2009). Electrification is the more

visible aspect of energy deprivation, but it is not the most prevalent. Half of humanity-

more than 3 billion people- still rely on traditional biomass fuels like firewood, animal

dung, crop residues, and charcoal to cook their meals (United Nations Development

Program, 2005). The International Energy Agency has coined a term for this status-

energy poverty – precisely because the lack of access to modern energy is a hallmark of

deep-seated poverty. (International Energy Agency, 2002). In a seminal 1996 report,

Barnes, et al. makes the intuitive and empirical claim that “without efficient, clean

energy, people are undermined in their efforts to engage effectively in productive

activities or to improve the quality of their lives” (Barnes and Floor, 1996). To

paraphrase, energy poverty is a fundamental prerequisite to human development. Chapter

3, Energy Poverty’s Triple Threat, contains a more detailed and quantitative account of

energy poverty’s impact along the economic, health, and the environmental dimensions

of human development.

6
India

Figure 2: Electricity Deprivation by region (millions). Source: IEA, 2004

This paper focuses on Indian energy poverty because more people in India are

affected by energy poverty than any other country in the world. While India accounts for

only 5% of the world’s current energy use, it contains nearly 1.2 billion people; that’s

more than 17% of Earth’s population. Because population growth is far ahead of

infrastructure, energy does not reach a significant proportion of the population. The 2009

World Energy Outlook’s Access to Electricity section reports that only 64.5% of India’s

total population has access, and that percentage falls to merely 52.5% amongst rural

households (International Energy Agency, 2009). In total, some 404.5 million citizens are

left in the dark- one-quarter of the global total. These trends are visible in Figure 2 above;

among all regions, south Asia is most significantly afflicted by electrical deprivation, and

India composes the lion’s share of that total. The 2004 edition of the World Energy

Outlook confirms that India is similarly plagued by a reliance on traditional biomass for

cooking, heating, and occasionally lighting. As of 2002, some 595 million citizens-

almost exactly half of the total population and around 20% of the global total- fall into

7
this category (International Energy Agency, 2004). Alarmingly, that number is projected

to increase by 100 million over the next 20 years as a result of population growth; this

trend is visible in the purple circles in Figure 2.

Moving up the Energy Ladder

So how are we to confront this significant- and growing- problem? Fortunately,

energy poverty is not static, but dynamic. The economic development literature has

formalized this dynamic with a simple but powerful concept- the “energy ladder.” The

energy ladder principle is the household level (microeconomic) corollary of a macro-

level trend: that per-capita income and the increasing use of modern (technologically

sophisticated) fuels is unequivocally correlated. Empirically, when a country's per capita

income is less than US$300 per day, approximately 90 percent of the population uses

fuel-wood or dung for cooking. Once incomes have exceeded US$1000 per capita,

however, they switch to modern fuels and substitution is nearly complete (Barnes and

Floor, 1996). The household version of this dynamic is actually a “stylized extension of

the economic theory of the consumer”, because it confirms that as income rises,

households consume not only more of the same goods, but also higher quality goods

(Hosier and Dowd, 1987).

The fuel mixes involved at various rungs of the energy ladder are surprisingly

constant. The vary from the dirtiest fuels- biomass derivatives, to intermediate fuels- like

kerosene, charcoal, and liquid petroleum gas (LPG), and finally to modern fuels- like

electricity and natural gas. This continuum of increasingly efficient fuel use traces the

prosperity of the household (World Health Organization, 2006). This makes sense

because as families take steps ‘up the ladder’, they exit the vicious cycle of energy

8
poverty that saps them of time and economic resources, and enter a virtuous cycle that

compounds initial investments of the time and resources they save. This continuum of

fuel mix is visible in Figure 3, which segments the trend by income group.

Figure 3: The Energy Ladder. Source: WHO, 2006

Although this trend is well established, the shift from traditional to modern energy

sources is not a smooth one. Each step up the ladder implies substitution from one fuel

type to another, and if the change occurs slowly, it can seriously damage the welfare of

households that are often sustaining themselves from meal to meal with the help of

existing fuels. Because movement up the energy ladder is dynamic, we possess the

opportunity to alter the trajectory of energy poverty. But the question remains: how?

Barnes, et. al. argue that substitutions can be smoothed and their pace accelerated

through “policies and investments that emphasize both affordability and efficiency” of

existing energy options (Barnes and Floor, 1996). These policies and investments do not

have to be large and immediate- they can take place through small incremental steps that

9
are appropriate to households at various levels of income. What unifies these strategies is

the understanding that fuel choices are made within the existing matrix of possibilities,

and that broadening and cheapening that range of choices increases access to all

households. There are many of these strategies; the rest of this section will introduce a

typical strategy, price subsidies, before describing a more novel one, clean energy

interventions.

The Importance of Pricing Energy

Energy prices are the clearest economic signal that governs the consumption and

use of fuel types, and therefore one of the most potent mechanisms in altering the energy

choices of individual households. These signals are especially acute for poor urban

households, who often spend as much as 15-20% of their monthly income on energy

inputs, and because prices often prevent poor rural households from affording more

efficient energy options (Barnes and Floor, 1996). Governments in developing countries

often resort to the simplest tool available- price subsidies- to ease fuel consumption for

these households. Price subsidies- or government financial assistance that “influences

energy market outcomes by… lowering the price paid by energy consumers”- are so

attractive because they make the existing fuels cheaper for everyone (United Nations

Environment Program, 2008). However, they usually prove inefficient and costly, and

fail to benefit the poor urban and rural household for whom they were instituted (Barnes

and Floor, 1996). These dirty energy subsidies artificially lower the cost of the

inefficient, carbon intensive, and dangerous fuels already in use- such as kerosene or

coal- rather than actually driving movement up the ladder. In “Reforming Energy

Subsidies,” the United Nations estimates that the world’s dirty energy subsidies amount

to some $300 billion per year; this amounts to some 0.7% of the world’s GDP (United

10
Nations Environment Program, 2008). Chapter 4 provides a more complete introduction

to their prevalence, both globally and India, as well as the specific price subsidies this

paper addresses.

In economics, subsidies are justifiable when they correct market failure. Dirty

subsidies, however, represent the worst of both worlds- they promote consumption that

entails substantial negative externalities and therefore contribute to an existing market

failure. When energy subsidies also harm the environment, bring few social benefits, and

carry large economic costs, they represent an obvious candidate for subsidy elimination,

and their removal represents an opportunity for “triple-win policy reform,” (United

Nations Environment Program, 2008).

Extending the Energy Ladder

Before presenting my two research questions, I will tie together the two themes of

my investigation – dirty energy subsidies and clean energy interventions- with a visual

metaphor that is simply an extension of the energy ladder framework displayed earlier in

Figure 3. Recall that the energy spectrum represents the path out of poverty. In the status

quo, policy interventions encourage substitution from one dirty fuel- such as wood- to

another, such as kerosene. Although these interventions do smooth the transition that

Barnes et al. described earlier, they have the perverse effect of encouraging the use of

fuels that are still carbon intensive, dangerous, and inefficient- in effect, of amplifying an

existing market failure. In Figure 4, these existing dirty energy subsidies are represented

as two red lines. If traditional policy interventions are no longer tenable, what other

options do we have? I propose that we look into clean energy interventions, which are

represented as the green line on the new figure that connects the lowest rung of the

11
energy ladder with its highest tier. Just as the figure differentiates between solid and non-

solid fuels, consider a third tier: carbon-light fuels such as solar or clean burning stoves.

Figure 4: A Re-imagined Energy Ladder. Additions are the author’s.

These are the most clean and efficient of any fuel options, and sit at the top rung.

The red lines simply connect one dirty fuel to another. The green line represents the

possibility that those at the lowest levels of the energy ladder, with strategic interventions

on behalf of government and industry, might leapfrog to the highest level of the ladder,

bringing enormous benefit to society at multiple levels of impact. In short, this paper

considers accelerating movement up the energy ladder by moving from dirty subsidies to

clean energy- and uses India’s complex case to evaluate the opportunity. This concept

guides the two questions I ask- one on the red line and one on the green- and informs the

approach that follows.

12
2. Research Questions

My central research question is fundamentally one of environmental policy: does

the elimination of India’s dirty household energy subsidies- those on kerosene,

liquid petroleum gas (LPG), and electricity- represent a ‘triple-win policy reform

opportunity’? I will test each of the three components- economic efficiency, equitable

distribution, and externalities- in turn. For efficiency, I will examine whether the

elimination of the existing subsidy regimes passes a Kaldor-Hicks efficiency test, a more

formalized version of a cost-benefit analysis (Coleman, 1980). I will estimate the costs to

welfare of households who will no longer received subsidized (cheaper) energy inputs,

and weigh that against the benefits that will come as inefficient and expensive

government programs are phased out. This test will highlight the overall suitability for

subsidy reform, as well as reveal the groups that might gain lose the most. For equity, I

examine how well distributed these household subsidies are relative to their goal of

helping the poor gain access to cleaner fuels. In this part I gauge whether the subsidy is

regressive, and how benefit varies among various levels of income and amongst urban

and rural populations. In order to measure externalities, I will measure the total carbon

footprint (measured in tons of CO2) and health impact (measured in disability affected

life-years- or DALYs) of the existing regime, and calculate how externalities might

decrease following a repeal of these subsidies. I hypothesize that although subsidy

removal will meet all three of these criteria and thus qualifies as a reform opportunity

with triple co-benefits, subsidy removal would significantly hurt the poor- those whom

are already most disadvantaged in the status quo.

If this seems untenable, recall that subsidy removal only considers two conditions:

13
allocation A, or the dirty subsidy regime, and allocation B, its elimination. In the second

half of my paper, I delve into the realm of environmental technology and explore a more

open-ended question: how can the elimination of dirty energy subsidies best be paired

with a commensurate investment in clean energy interventions? In other words,

which interventions- those green lines in Figure 4- will best accelerate movement up the

energy ladder? I frame this second section within the opportunities of India’s pivot

towards clean energy, and especially an ambitious new energy policy, the Jawaharlal

Nehru National Solar Mission (NSM). But despite the allure of mass distribution of solar

energy to Indian households under NSM, there are other compelling options. It will

require a whole portfolio of technological interventions- not just solar- and a wide range

of funding to realize the potential for clean energy. A triple-win reform with

simultaneous improvements in welfare, equity, and environmental outcomes is possible,

but it will require a creative pairing of subsidy reform and clean energy options. These

two questions are intimately related; clean energy interventions can only do so much

when bad energy policies stand in the way of movement up the energy ladder, and

likewise, subsidy elimination on its own is unlikely to succeed.

The first question requires specific household information and a model to broaden

the implications of that economic data. Household information comes only from the

Indian state of Maharashtra in order to increase resolution, and draws on two sources.

This first source is Indian government census data from the National Sample Survey

Organization (NSSO)- some 3,192 household surveys representative of the state as a

whole. The second source is a set of 164 household interviews conducted by the author in

urban Mumbai and surrounding rural areas as part of a pilot survey in the summer of

14
2008. An economic model will estimate changes in household expenditures as a result of

changing subsidy regimes, measure distribution of subsidy benefit, and gauge

externalities using IPCC and WHO methodology. The second question is both

quantitative and qualitative; it employs a review of the existing literature on appropriate

clean energy interventions, and uses scoping techniques to estimate the mitigation and

health benefits of development projects (Smith & Haigler, 2008).

The rest of this paper is divided into three sections. Chapters 3-4 are additional

introduction, and they explain energy poverty and energy subsidies in more detail.

Chapters 5-8 detail the methodology, data and results of this paper’s central question

before recapping and discussing the case for reform. Chapters 9-10 answer the second

research question by examining India’s opportunity for clean energy development, and

then presenting and quantifying the benefits of a portfolio of options. Chapter 11

concludes with some final recommendations and future directions.

15
3. Energy Poverty’s Triple Threat

This section poses and answers two questions in turn. First: why should we care

about energy poverty? And second: how do we know that successful movement up the

energy ladder (clean energy interventions) will actually generate impact? To answer the

first question, we delve into more detail and quantitative depth on the triple threat that

energy poverty poses along three crucial components of human development: economic

growth, health, and environment. All three of these dimensions will serve as metrics

throughout the course of the paper and the analysis. To answer the second question, we

develop a theoretical and empirical understanding of how clean energy interventions

increase the welfare of households affected by energy poverty and compound those

returns on a societal level.

Development
There is an unambiguous relationship between energy poverty and economic

development, and this section provides evidence for this in a microeconomic and

macroeconomic context. Let’s begin with macro-level evidence. There is long-standing

appreciation of the fact that primary energy access, while not sufficient for development,

is a necessary factor of economic growth. This makes sense: how could you run a factory,

raise crops, or transport goods without a reliable energy infrastructure? Empirical

analysis reveals that energy development actually drives growth in addition to being a

prerequisite. This analysis employs a slight variant of the neoclassical (or Cobb-Douglas)

production function that is visible below. The equation simply adds primary energy use

as a factor in addition to the standard factor productivities of labor (L) and capital (K).1

1
In its original formulation, the Cobb-Douglas function represents total economic
production- Y- as a function of A, a technical multiplier, K or capital, and L or Labor,

16
 Equation 1: Yt= At ×(Kt)α(Lt)1-β(Et)1-α-β
Analysis conducted by the IEA using this formulation reveals a large variation in the

contributing percentage of GDP growth. In some countries, like India, the factor is only

responsible for 13% of growth, while in Brazil it represents some 77% (International

Energy Agency , 2004). In all cases, thought, it is at least 10%, a significant number.

Growth rates are only one piece of social development; a slightly broader lens of

analysis considers the relationship between the level of energy development and human

development, more broadly construed. The IEA creates a national index for the first of

these two variables with the following component variables:

• Per capita commercial energy use

• Share of commercial energy in total final energy use

• Share of population with access to electricity

This yields a composite EDI score between 0-1 for all developing countries. India scores

a 0.332, coming in at 53rd on a list of 75 countries (International Energy Agency , 2004).

This composite energy index is then regressed with a composite index of human

development, the most comprehensive of which is the United Nations Development

Program’s Human Development Index (HDI). The results, visible below in Figure 5, are

statistically and visually compelling.

over some function (t) of time. See (Collins, Bosworth, and Rodrik) for a traditional
treatment of this topic. The addition of primary energy access as a factor of
production is fairly exotic and not usually seen in the economic literature.

17
 Figure 5: HDI and EDI in Developing Countries. Source: UNDP Data, EIA
Analysis

At the microeconomic or household level, energy poverty’s impacts are more

discrete. The most obvious symptom is that those affected are literally in the dark; this

matters because they are then without the illumination needed to study or work at night.

Moreover, energy poverty limits telecommunication, refrigeration, and diminishes the

possibilities for home or cottage-based enterprises (Vera and Langlois, 2007). Energy

poverty is a vicious cycle, as it reinforces existing dirty fuel use. If they can afford it,

families must light their homes with dirty fuels like kerosene. Vera and Langlois report a

strong inverse correlation between income (a proxy for energy access), and energy

expenditures as a share of income. At the lowest income level, access issues are most

severe, and energy expenditure represents some 14% total monthly income (Vera and

Langlois). This is seven times the percentage in the highest income group. When families

are forced to spend a large share of discretionary income on inefficient energy use, they

cannot spend income on essentials like food or invest for the future. Finally, the

collection of this biomass for burning, especially by women, consumes time that could be

18
used for other economic and family activity (International Energy Agency, 2002).

Health
Indoor fuel combustion for use in cooking and lighting is not just inefficient- it is

also a major public health risk. Combustion creates indoor air pollution, which raises the

risk of chronic and acute pulmonary disease as well as acute respiratory infections in the

women and children exposed to it everyday (Bruce, 2000). This pollution has also been

associated with increased infant mortality, tuberculosis, several cancers, cataracts, and

asthma. This list of diseases is extensive and research must approximate total health

impact through disability adjusted life years (DALYs), so there are several estimates. The

World Health Organization confirms that indoor air pollution causes nearly 2 million

excess deaths in the developing world each year, some 4% of the global burden of disease

(Bruce, 2000). This pollution affects women and small children disproportionately,

because women spend 3 to 7 hours a day cooking by the fire, and children often cannot

leave the house (United Nations Development Program, 2005). Smith, et. al. applies

equivalent methods to the impact of indoor air pollution in India. They find that indoor

pollution causes 400,000-550,000 premature infant deaths a year, and a slightly higher

proportion of the national burden of disease than the global average, at 4-6% (Kirk R.

Smith, 2000). Consider this number within indoor air pollution’s global distribution of

impact, visible in Figure 6. The figure segments risk by WHO sub regions. India is

located within the South Asia sub-region known as SearD; the region contains one of the

highest incidences of mortality of any region at just over 250 deaths per 100,000, which

is less only than West Asia and Africa.

19
 Figure 6: Deaths per 100,000 by Sub region. Source: WHO

Indoor fuels, especially kerosene, are often extremely flammable. This poses a

risk for serious accidents, destruction of shelters (especially those made out of wood or

biomass), and even death. Besides air pollution and safety risks, energy poverty forces

women to carry heavy firewood to and from their homes, and a lack of refrigeration

exposes families to increased food-borne illness.

Environment
Energy poverty generates significant local and global environmental impacts.

Locally, reliance on firewood leads to the depletion of local natural resources, and a

decline in agricultural productivity as biomass is used as energy rather than fertilizer

(International Energy Agency, 2002). In those areas where the pace of deforestation for

fuel outpaces natural re-growth, the carbon balance is lost and energy poverty contributes

to the balance of carbon dioxide in the atmosphere- a global and local effect.

Atmospherically, emissions from the burning of biomass fuels in a state of energy

poverty are significant, and represent a substantial source of both traditional greenhouse

gases as well as more exotic ones. A common assumption is that carbon emissions from

20
the household combustion of biomass are offset by reuptake, and thus that biomass

combustion is carbon-neutral. However, Smith, et al. critically evaluates this assumption

with an India-wide emissions database. He finds that typical biomass combustion is

thermally inefficient and incomplete, which means that it results in a substantial

greenhouse impact with every meal cooked (K. R Smith et al., 2000). The combustion of

wood, crop residues, dung, and kerosene releases carbon dioxide as well as other gases

with more substantial greenhouse warming potentials (GWP) such as methane and carbon

monoxide. Smith estimates the greenhouse contribution of both established (carbon,

methane, and nitrogen dioxide), and additional (carbon monoxide and hydrocarbons)

gases in Figure 7. The more traditional the fuel, the higher the greenhouse gas

implication, but all fuels listed except for biogas have relatively high carbon footprints.

Figure 7: Greenhouse Gas Loads of Various Household Fuels. Source:

Smith, 2000

Yet the most exotic and potentially the most significant emissions are not even

considered in this figure. Energy-related biomass combustion in impoverished

households releases great quantities of soot, or black carbon, a compound with powerful

climate forcing properties. Black carbon only stays in the atmosphere for a few days to a

21
few weeks. Yet during that time it acts as a powerful aerosol, and can absorb and scatter

light and change the thickness of clouds. If it comes to rest on ice or snow, it strongly

reduces reflectivity (albedo) and increases melt (Hansen, 2004). Black carbon exerts a

substantial radiative forcing as a result: 0.9 W m-2, with an uncertainty range of 0.2-1.2 W

m-2. This forcing represents 55% of the total from aggregate carbon dioxide emissions,

and the elimination of these emissions might prevent 20-45% of new warming (Jacobson,

2002). Because of its short atmospheric lifetime, black carbon does not travel far, but

instead exaggerates local climate changes on snow and weather patterns.

These effects are especially dramatic in south Asia, where Ramanathan and

Carmichael confirm that soot is contributing to the retreat of the Himalayan glaciers and

affecting monsoon and precipitation patterns through atmospheric and oceanic heating

and dimming (Ramanathan & Carmichael, 2008).2 Because this evidence is relatively

novel, aerosols like black carbon were not incorporated in the 2007 IPCC summary

report. Yet there is growing recognition that the elimination of soot from dirty stoves

represents a critical ‘low-hanging fruit’ option in hedging against future damages from

local and global climate change. Consider Figure 8, which contrasts the existing effect of

biofuel cooking on Asian black carbon loading with a projection in which those biofuel

sources are eliminated (Ramanathan & Carmichael, 2008).

2
Anthropogenic aerosols affect large-scale change in precipitation through three pathways. First, dimming
from aerosols causes a decrease in evaporation from the Indian Ocean. Second, the aerosols create a
variable warming effect over parts of the Indian Ocean, creating a decrease in the meridional sea surface
temperature that weakens monsoon circulation in the summertime. Third, soot causes an increase in the
atmospheric heating gradient, and this solar heating causes increased precipitation.

22
Figure 8: BC Loading in South Asia with (above) and without (below) biomass
burning. Source: NYT

Quantifying Impact
What impact might clean energy interventions have on household quality of life?

The Millennium Development Goals, objective development targets signed by 147 heads

of state in September 2000 (United Nations Development Program, 2003), will serve as

our yardstick. Successful adoption of more clean and efficient fuels in the energy sector

addresses all eight of the goals, but three in particular.3 First, they meet ‘Goal 1:

Eradicate extreme poverty and hunger.’ This happens directly as households earning less

than $1 (PPP) per day spend less income on fuel and more on food, reducing hunger. It

also happens indirectly, as more reliable energy sources require fewer inputs of time and

money, increasing productivity. They meet ‘Goal 4: Reduce child mortality’ as children

under 5 are no longer exposed to deadly indoor air pollution. Third, they meet two

3
The World Health Organization establishes links between each of the nine Millennium Development
Goals and energy poverty with the understanding that “energy underlies all economic development.” See a
more complete account of the linkages here: http://www.who.int/indoorair/mdg/energymdg/en/

23
components of ‘Goal 7: Ensure environmental sustainability.’ They meet Target 7a:

‘Integrate principles of sustainable development into policies and reverse loss of

resources’, as the use of local biomass is eliminated in favor of financially and temporally

more sustainable technology. They also meet Target 7d, achieving improvement in the

lives of the some 100 million slum dwellers by 2020, because slum-dwellers are

disproportionately use and are thus disproportionately affected by dirty fuel use.

These interventions yield dividends far beyond the household scale. Energy

production and use produces greenhouse gases, air pollution, and safety hazards;

collectively, the sector is “responsible for substantially more environmentally mediated

global mortality and morbidity than any other sector, including clean water and

sanitation” (Smith & Haigler, 2008). By corollary, replacing more inefficient and dirty

energy technologies with cleaner ones- a “clean energy intervention”- reduces those

externalities. For example, replacing kerosene with a cleaner technology that mitigates

carbon emissions and indoor smoke- like solar-powered lanterns- confronts all the

dimensions of energy poverty simultaneously- carbon mitigation, reduction of health-

damaging pollution, and reduction of poverty. The simultaneous benefits of these

interventions represents what is known in the literature as a co-benefit, and what might be

recognized more colloquially as a ‘win-win’ between development and other objectives

like public health or carbon mitigation. This concept is relatively novel to the economic

and public health literature because the legal foundations of greenhouse gas emissions

reductions- or mitigations- have only recently been codified through legal foundation of

the Kyoto protocol (Smith & Haigler, 2008).

24
4. Dirty Energy Subsidies

The next two sections introduce the reader to the global and Indian energy

subsidies- the red lines of partial but often-perverse movement up the energy ladder. The

first section provides a global survey of dirty energy subsidies in developing countries.

The second focuses on India, and surveys the dynamics of the energy sector generally as

well as the three subsidy regimes this paper examines.

A Survey of Global Energy Subsidies

The collapse of Lehman Brothers in New York and the use of kerosene by slum

dwellers in New Delhi to cook their rice appear as disparate phenomena, separated by

continent and culture. Yet a 2008 World Bank report on rising fuel and food prices

suggests that cause and effect is at play in a relatively direct way. The report traces how a

global macroeconomic downturn along with biofuel development has resulted in a spike

in domestic prices of important foods and fuels in developing markets. In turn, price

increases reduce the welfare of households directly and indirectly, as people on the edge

of poverty can no longer pay for food and the fuel needed to cook it, or simply find their

budgets shrinking. It reveals that the number of malnourished individuals worldwide

increased by 44 million in 2008 alone, a dramatic one third of the total increase that has

occurred since 2003 (The World Bank, 2008). There are now some 967 million in this

group, and the trend threatens to plunge an emerging middle class back into poverty and

erase crucial gains towards the Millennium Development Goals. The trend poses a crucial

question: how can developing countries provide a safety net for their citizens?

25
 Energy subsidies are one answer to the dilemma, because they lower the prices that

consumers must face. A report by the International Monetary Fund reveals that price

subsidies are widely adopted among transitioning economies. In 2008, forty-six countries

reported using such subsidies to protect citizens from soaring fuel prices. Yet are these

subsidies effective? Subsidy assistance represents a significant budget cost, equivalent to

1% of these countries’ Gross Domestic Products (GDP) on average (International

Monetary Fund, 2008). These are enormous costs that pose a threat to the financial

stability of fragile governments.

Figure 9: Energy related riots in Indonesia. Source: NYT

In response, developing countries have moved to slash these subsidies with mixed

results. In May 2008, Indonesia announced it would increase fuel prices by 28.7%

(“Indonesia to cut fuel subsidies - The New York Times”). Pakistan- rarely associated

with progressive policy- took the plunge when Finance Minister Naveed Qamar

announced in September 2008 that his country would entirely phase out energy subsidies

on fossil fuels and electricity by June of 2009 (“All fuel subsidies withdrawn -DAWN -

Top Stories; September 20, 2008”). China, the Philippines, and Malaysia have also made

26
significant cuts. But the decisions highly unpopular; acute economic pain has caused

citizens to take to the streets in protest in several of these countries, as in Figure 9.

How is that current subsidies have failed both to protect consumers from price

shocks and yet have proved so difficult to eliminate? In short, they are badly targeted;

existing subsidies encourage consumption of the wrong goods by the wrong consumers,

and in turn generate a chain of perverse effects. Because higher income households

consume a disproportionate share of almost all goods, they also receive a

disproportionate share of the benefit from a price reduction. Energy subsidies are more

likely to favor a wealthy family with air conditioning than actual laborers. A survey

across major emerging economies found that the richest 20% of household received 42%

of the benefit of these subsidies, and poorest 20% only 10% (International Monetary

Fund, 2008). And these rate reductions are difficult to reverse, because so many

households benefit and those that benefit the most are the most economically and

politically influential.

India’s Energy Subsidies

Indian subsidies represent just such a political and economic flashpoint. Many

international bodies have spoken out unequivocally about their negative implications.

The International Energy Association (IEA) comments that energy-pricing policies to

date have created an “economically inefficient fuel mix and distorted allocation of energy

and financial resources” (International Energy Agency, 2007). They advocate that India

follow in the steps of Pakistan and eliminate all existing energy subsidies (“India Journal

- South Asian News for Southern California”). Yet given the inability of citizens to

weather even slight shifts in fuel prices and the substantial backlash caused by past

27
reform efforts, India is taking no such steps to entirely eliminate this subsidy regime.

In 2007, India will spend $17.5 billion USD on energy subsidies, a budget cost

that represents some 2% of the countries’ total GDP (“The Economist Snapshot”).

Collectively, India’s energy subsidies represent a 14.2% energy sector-wide reduction

from market prices. This huge drop in prices poses substantial costs through

microeconomic distortion. Recall that universal price subsidies fundamentally distort

price signals, resulting in over-consumption and downstream losses. Moreover, their

prevalence has not declined over time. In fact, the IMF reports that India’s fuel subsidies

as a percent of GDP have increased by 1.3% over the period of 2006 to 2008

(International Monetary Fund, 2008).

This paper addresses the three most substantial of these Indian subsidies. Two of

them are applied to household petroleum products- kerosene and LPG- and the third is

applied to electricity rates, otherwise known as cross-subsidies. Kerosene and LPG are

derivatives of fossil fuels, and therefore administered under a very different institutional

structure than electrical subsidies. The Government of India’s Ministry of Petroleum &

Natural Gas centrally decides their rate and extent (International Energy Agency, 2007).

The Indian electricity sector, however, does not fall under the administraiton of the

government’s central ministries. Privitization has produced a state-regulated electricity

sector, and electrical subsidies are determined at the state level. (International Energy

Agency, 2007).

Kerosene and Liquid Petroleum Gas

Household subsidies on fuel in India are not a recent development. Kerosene

28
subsidies were introduced as a distribution scheme during shortages in World War II, and

have remained in effect since. Subsidies for liquid petroleum gas (LPG) were introduced

in the 1960 with the goal of further diversifying cheap fuels for households; they required

oil companies to offer the fuel at fixed low prices to consumers (Shenoy). Between 1972

and 2002, petroleum products and their derivatives- including kerosene and LPG- were

administered by a central government Administered Pricing Mechanism (APM) that

guaranteed a minimum level of return to oil companies (Shenoy, 2010). When APM was

dismantled in 2002, it was anticipated that subsidies on LPG and Kerosene follow within

the next four years (International Energy Agency, 2007). Yet despite reform at many

levels of government, they have remained intact over the past eight years.

Besides the immediate benefit that price reduction brings, these fuels were heavily

subsidized with the explicit goal of shifting fuel consumption patterns away from

biomass to cleaner, more efficient fuels (International Energy Agency, 2007). The hope

was that since poor, rural households used these fuels from the lowest rung out of the

energy ladder out of necessity, lowering the price of fossil fuels would encourage further

energy access for the poor.

Today, kerosene and liquid petroleum gas (LPG) are widely used household fuel

sources of cooking and lighting, at 34% and 23% of the population, respectively.

Kerosene is unique in that it serves both as a cooking fuel and a lighting fuel. In poor

rural areas, kerosene mostly serves as a light source; in comparatively electrified urban

areas, the poor often use kerosene as both a lighting and a cooking fuel. Conversely, LPG

is used almost exclusively for cooking among middle and high-income urban consumers

(Thukral and Bhandari). This is partly explained by LPG’s high price relative to other

29
fuel sources, and partly by the fact that LPG canisters are sold at a month’s supply at a

time (Gangopadhyay, Ramaswami, & Wadhwa, 2005). This use of fuel use by urban,

rural, and level of income is detailed in Table 1.

Table 1: Matrix of Fuel Type by Sector and End-Use. Source:

IEA, 2004

The two fuels have different distribution systems. Households receive around

90% of kerosene through a national public distribution system- otherwise know as the

Public Distribution System (PDS). The PDS is a “government controlled retail-marketing

network” that includes both approved local shops as well as official government depots

(Gangopadhyay, Ramaswami, & Wadhwa, 2005). The PDS works as follows: the

Ministry of Petroleum and Natural Gas fixes a quota for each state according to historical

levels (not actual demand). This state quota is then distributed to select wholesalers and

retailers, who apportion it to local households at the subsidized price (IEA, 2007).

Household quotas vary by state, sector, and whether they use LPG fuel as well. LPG can

only be purchased from state oil companies, or from the dealers that work with them.

And unlike the quota involved in the PDS, it can be purchased without any quantity

restriction. Finally, while LPG access is fairly limited to urban areas, the PDS system

allows consumers nearly everywhere in India access to kerosene.

The chief irony of India’s current dirty subsidies is that they are justified and

30
implemented on a pro-poor basis, and yet their pro-poor benefits are questionable at best.

The original purpose of both subsidies, as mentioned earlier, was to increase the welfare

of households by shifting from the use of unsafe and increasingly scare traditional

biomass fuels like firewood towards modern fossil fuels (Thukral and Bhandari). Yet the

existing subsidies fail to actually help those who need to make this switch in rural areas;

instead, they benefit those in urban areas who already have access.

The large majorities of rural area without distribution networks for LPG see no

benefit from cheaper cost and must continue using primitive biofuel sources, and existing

users- richer urban residents- gain all the benefit (IEA 1999). This flies in the face of

actual need, as rural households depend on the dirtiest fuel- biomass derivatives- for

almost 85% of their cooking need (International Energy Agency, 2007). One estimate

states that the richer half of India’s urban population captures 75% of the total value of

the LPG fuel subsidy (“Indian fuel prices”). The United Nations Environment Program

reports that over 40% of the benefits accrue to the richest 7% of the population. Despite

these failings, LPG subsidies in 2008 represented nearly 70 billion Rs in expense, and

were recently extended through 2010 (United Nations Environment Program, 2008).

The kerosene subsidy represents a more complicated case because it is used in

two use cases with few substitutes: lighting among the rural poor, and cooking among the

urban poor. Thus, we would expect these households to capture a good deal of this

subsidy. Yet India’s kerosene subsidy regime is plagued by another problem: leakage.

Illegal diversion of kerosene via the public distribution system is widespread, and much

of it is used to arbitrage price differences in the market (Thukral and Bhandari). The

principle use is diluting transport fuel- both gasoline and diesel- because of their high

31
price. Another diversion of kerosene likely goes towards the fuel used in electric

generators (which are common, given India’s electric reliability problems). It is difficult

to estimate the extent of use because of the underground nature of the activity, but

analyzing the gap between government supplies and the amount consumed by households

is an easy way to guess. S. Gangopadhyay, et. al. show that between 1993 and 2001, this

gap has remained remarkably similar: around 50%. This suggests that government is

essentially getting half the return on its investment in this subsidy, and households are

receiving much less benefit from the subsidy than they should. Once diverted, the

kerosene forms a black market, and studies have estimated its extent. A 2005 study found

that 38% was diverted to the black market, and the total amount of rents (money

generated on these markets) totaled some $3 billion dollars (Shenoy, 2010). Kerosene is

not the only household fuel diverted. Approved dealers often divert LPG subsidies to

non-residential sectors because of a similar arbitrage opportunity. The total amount of

rents created by these two subsidies is visible in Figure 10 in billions of dollars.

Figure 10: Rents from Misappropriation and Diversion of LPG & Kerosene. Source:
Shenoy

Electrical Cross-Subsidies
Unlike direct fuel subsidies, electric cross-subsidies are assessed through price

32
discrimination between different groups of consumers. Cross-subsidies are the largest and

most long-standing of India’s energy subsidies because of the legacy of monopolization.

50 years ago the industry was entirely state-controlled, yet true privatization of the Indian

electricity sector has yet to occur. By the early 2000s, state electricity boards (SEBs) still

owned close to 90% of generating capacity and almost all of the distribution networks

(Lal, 2006). State-control resulted in huge financial losses, and the cause of that was the

prevalence of cross-subsidies, cheap power provided to politically important agricultural

constituents (Lal, 2006). Cross-subsidies altered electrical tariff rates between sectors so

greatly that by 2000, rates for industrial customers had skyrocketed to 15 times that

charged to agricultural customers (Thakur, Deshmukh, Kaushik, & Kulshrestha, 2005).

As costs to the industrial sector spiraled, SEBs could no longer afford to pay for the

power they purchased from central or independent power producers. As a result, India’s

SEBs were in dire financial straits by 2000. The Electricity Act of 2003 attempted to

alleviate this financial crisis. The central thrust of the Electricity Act is a “move towards

creating a market-based regime in the Indian power sector” by eliminating government

monopolization of the State Electricity Boards (Thakur, Deshmukh, Kaushik, &

Kulshrestha, 2005). The Act also requires the rationalization of electricity tariffs and

prices through transparent policies. State Regulatory Commissions are now explicitly

mandated to progressively reduce cross-subsidies and move towards the actual price of

electricity (Ministry of Power, 2008).

Despite these provisions, the cross-subsidy regime resists reform. Data from the

Central Electricity Authority reveals that agricultural rates- generally those paid to the

wealthiest households- are still about one third of the actual cost of electricity, and most

33
significantly, they haven’t dropped since the passage of the Act. Recent data on the

financial health of the electricity sector and the amount of subsidies needed to sustain it

confirm this trend. The Annual Planning Commission report for 2002 gives the most

accurate snapshot prior to the Electricity Act. In 2001-2, commercial losses without the

subsidy were -33,177.00 Rs. crore (a crore is 10 million Rs), or approximately $65 billion

USD. The 2007-8 Economic Survey provides a sobering update. In 2005-6, the deficit

had fallen slightly to -22,773 without the subsidy, yet that rose again by 2008-9 to

-26,461 (Planning Commission, 2002). As of 2008, the IEA reports that gross national

electricity subsidies amounted to some $9 billion, and that the average electricity tariff is

7 cents less per kWh than the market price (International Energy Agency, 2007).

Like LPG and kerosene subsidies, existing electrical subsidies are poorly targeted.

Rural areas without village electrification see no benefit from the reduced prices of

electricity, and poor urban consumers with access do not see much benefit; instead, it is

rich farmers who do well. Moreover, in areas where electrification does exist, the poor

often pay higher electricity prices because the slums or neighborhoods within which they

live do not enjoy regular access. Instead, they purchase electricity through informal

methods, such as illegal connections. Yet as a DFID study points out, an illegal

connection is not necessarily free. These customers are often vulnerable to exploitation

by various middlemen who charge high prices; it is “not uncommon for slum dwellers to

pay higher rates for electricity and water than most middle-class residents in their city”

(International Energy Agency, 2007).

34
5. Methods
Pilot Survey Methodology
In the summer of 2008, the author traveled to Mumbai, Maharashtra, India and

helped in conducting a pilot survey that would serve as a baseline of research for a Ph.D.

dissertation examining Indian electricity, reliability and welfare. Our survey methodology

was carried out according to the method known as “quota sampling”, a non-random

sampling method used for field research.4

Earl Babbie defines this method in The Practice of Social Research as a type of

non-probability sampling that establishes representativeness by arranging the distribution

of the sample to match that of pre-specified characteristics of the entire population

(Babbie). More concretely, the method begins with a matrix or table organized by this

characteristic. In our case, we organized representativeness around income because we

wanted to extrapolate insights about how energy and poverty (income distribution) are

related. I adapted data from a Greenpeace report that detailed the distribution of

population and income (Ananthapadmanabhan, Srinivas, and Gopal). That data is

displayed in visible in Table 2 on the next page.

Next, I simplified this distribution into four income tiers: less than 5,00

Rupees/month, 5,000-10,000 Rupees a month, 10,000-30,000 Rupees a month, and above

30,000 Rupees a month. These four quartiles roughly translated to impoverished, low-

income, middle income, and high-income categories. They transform to 73% of the actual

population in the lowest quartile (tier), 20% in the second quartile, 7% in the third, and

only 1% in the highest. Note that this statistical distribution need not serve as the exact

4
This research was conducted under the design and supervision of Narasimha Rao, Ph.D. candidate in
Stanford’s IPER program

35
 blueprint for our sampling approach. Instead, it provides a baseline for later extrapolation

of results. Once in India, our actual sampling developed out of a more random method

with a skew towards the second and third tiers. This was not unexpected, both because

we wanted to survey a wider range of households than just those in slums in order to

understand the full spectrum of energy poverty by income, and also because Maharashtra

(and especially Mumbai) has a higher average income than in India as a whole. The final

distribution of households we interviewed by tier is listed in the data section.

Population
Income Tier (millions) Percent of total

< 3,000 rs. per month 432,162 38%

3,000 <x < 5,000 490796 35%

5,000 < x < 8,000 155730 14%

8,000< x < 10,000 69178 6%

10,000 < x <15,000 5326 5%

15,000< x < 30,000 18804 2%

9,956 1%
>30,000 rs. per month

Table 2: Quota Sampling Matrix. Source: Greenpeace

We conducted 164 household interviews in total, and all within one Indian state-

Maharashtra. The author, the Ph.D. student, and one local Indian student conducted 69 of

those interviews in an urban and suburban setting, specifically in Mumbai and its

surrounding environs. Another hired Indian student conducted 95 of these surveys in a

more rural setting- the neighborhoods of Pune.

At both locations, we conducted interviews within a variety of neighborhoods in

order to increase the geographic distribution of the sample. In Mumbai, we visited around

F
36
10 different neighborhoods, although they each clustered into one of three areas. The first

area, Bandra, is an urban area just north of Mumbai and is represented as the green pin in

Figure 13 below. This area is known as one of the more upscale areas in Mumbai and so

made up the majority of our households in tiers three and four. Thane and Mulund, the

yellow and red pins respectively, are more developing areas on the outskirts of Mumbai

proper. They contain both slums and middle income areas.

Figure 12: Urban and Suburban interview locations in Mumbai

37
Economic Methodology
Measuring Efficiency
This paper employs the Kaldor Hicks test (or criteria) to test the overall efficiency

of reform. Kaldor Hicks is simply a variant of the much more widely recognized Pareto

criteria. In classical economics, Pareto efficiency is the gold standard of efficiency

measurement. We say that a change from one allocation to a second is a second is Pareto

efficiency if it results in a Pareto improvement. This means that it improves the welfare

of at least one person without making anyone worse off. Although this definition satisfies

the rigorous standards of microeconomic theory, it is too strict to accommodate most

real-world policies. The Kaldor-Hicks (KH) efficiency test is a variant of the Pareto test

that accommodates more possibilities. Thus, the KH test is often referred to as the

‘potential’ Pareto criterion, because it requires only that the winners compensate the

losers. Formally, Kaldor-Hicks efficiency is a relational property. The property is defined

as follows: one state of allocation, E’, is Kaldor-Hicks efficient relative to another, E, if

and only if those whose welfare increases in the move from E to E’ could fully

compensate those who lose, and still create a net gain in welfare (Coleman, 1980).

Although a Kaldor-Hicks efficient allocation might be Pareto superior, it does not

need to be. Consider the Edgeworth-Bowley box (visible in Figure 13 below) as an

illustration. Here, there are two goods- records and books. ‘a’ is the initial distribution of

the two items between the two, the dotted line connecting a, b, d is the indifference curve

for Jones, and the dotted line connecting a,c,d is Smith’s indifference curve. A move

from a to b is Pareto superior, because Jones does not lose while Smith will gain. The

whole range of Pareto superior moves are represented in the shaded lens. Moves that

fulfill the Kaldor-Hicks test fill a broader set of possibilities, and are represented here as

38
 the larger lens surrounding the
Figure 13: The Edgeworth-Bowley Box. Source:
Coleman
shaded one. Thus, a move from

point a to point f would satisfy

the Kaldor-Hicks efficiency test

but fail the Pareto superiority

test. A move from a to c,

however, fulfills both tests. So

while all Pareto superior moves

are also Kaldor-Hicks efficient,

not all Kaldor-Hick efficient moves are Pareto superior.

Intuitively, this is most similar to cost-benefit analysis- it simply weighs total

gains against total losses. This is in part a valid comparison, because the Kaldor-Hicks

criterion forms the rationale in welfare economics upon which traditional cost-benefit

analysis is based. However, a pure Kaldor-Hicks test varies from this more conventional

test in two ways. First, cost-benefit analyses often include social welfare weights or

distributional concerns in their overall measurements; Kaldor-Hicks does not. Second,

cost-benefit analysis considers just overall change, but unlike Kaldor-Hicks ignores

compensation. Compensation is of particular relevance to this analysis, where losses to

the poor must be accounted for.

Household Welfare Changes

However, this paper must reach an overall comparison of allocation through a

more granular economic approach. In the context of subsidy reform, we consider what

the effect of increasing prices of fuels will have on household welfare. Although there

39
has been debate about approaches to welfare change measurement through the history of

economics, in its standard conception they are assessed through willingness to pay

(WTP), the amount that an individual would pay to avoid a less preferred situation.

Willingness to Pay is in its own right an indirect measurement of change that will result

to a consumer’s surplus (CS), or the “residual difference between the value of a

consumption bundle and the amount which that consumer actually paid for it” (Seller,

Stoll, and Chavas, 1985). Yet estimations of willingness to pay are difficult to measure in

energy markets, where microeconomic theory fails to provide a clear understanding of

the demand function for electricity and other energy goods. Empirical microeconomic

work to date often states that demand for these goods has no satiation point, an

assumption that clearly contrasts with reality. Peter Choynowski constructs a series of

both linear and more complex demand functions that fix this assumption by creating

tradeoffs between primary and backup fuels. An example is visible in Figure 14 below,

where you simply measure the price and quantity of electricity consumed (price and

quantity B) against the price and quantity of an alternative fuel (price and quantity A).

Figure 14: A Linear Demand Function for Electricity. Source: Choynowski, 2002

Yet measuring consumer surplus under even these improved functions becomes

40
highly complex when one moves from consumption of one good to a bundle of energy

goods. In the real world, you have substitutability between far more than two options, as

alternative sources often vary. There are also relevant distinctions in energy use by

function, e.g. cooking or lighting. As a result, both A and B are in constant flux, making

it rather impossible to estimate welfare with a traditional microeconomic approach.

Rather than measuring welfare by estimating surpluses under each good and then adding

up to the entire household, this paper employs a simpler and more intuitive approach.

Households already face tight budget constraints on the goods they can consume. This is

true in the case of bundles of energy goods, like kerosene and cooking fuel, that are

essential and not luxury items. With the assumption that households are not consuming

energy goods trivially, we measure the increase in total energy budget that occurs as

formerly subsidized goods like electricity and kerosene no longer receive artificially

lower prices. This increase in expenditure above and beyond what was already paid

represents a simple proxy for welfare gain or loss. To test this, consider a simple thought

experiment: if the household loses a certain amount of money as result of increasing

prices, wouldn’t they be willing to pay (WTP) that amount to avoid the less preferred

situation? This method is applied to data from the National Sample Survey Organization,

which offers a high level of resolution on household energy prices and budgets.

I used NSSO data to fill in all of the price and quantity data needed for this simple

proxy measurement. For each household, i, we define total loss as the budget line shifts

out from old subsidized prices to new higher prices as follows:

Equation 2: Total Household Loss under increasing fuel prices

41
 The numerical values in the equation are reference prices that quantify expected

market prices: 3.15 Rs/kWh higher in the case of electricity, 22.5 Rs/L in the case of

kerosene, and 31% higher prices in the case of LPG (see Data section for detail). The

other variables represent input variables from survey data; Qe is the quantity of

electricity, Kp and Ko are PDS and black market quantities of kerosene, Pk the average

price already paid for kerosene, and Pl and Ql the price and quantity of LPG already used.

The losses for an individual house is then summed over the total sample size of n=3172,

and for each household multiplied by the weight of the survey in order to accurately

approximate the total size of the sample. This is mathematically visible in Equation 3:

Equation 3: Summation of Household Losses

Equity
Efficiency is only one litmus test for the acceptability of a new distribution. We

must also consider equity- or the distribution of effect that a certain policy action brings.

In this study we pay special attention to the effects on the poor, those households that are

already at low levels of income and who experience disproportionate levels of energy

poverty. In “Poverty: An Ordinal Approach to Measurement”, Amartya Sen argues that

changes in the distribution of income among the poor are a salient way of assessing

change in poverty measure. All else equal, “a reduction in income of a person below the

poverty line must increase the total poverty measure” (Sen, 1976). Therefore, in order to

assess equity with particular focus on the poor, this study relates the distribution of

income to the differential effect of the subsidy.

Assessing the existing distribution of income from survey data is straightforward,

42
but we must construct an index of subsidy effect. This index measures the difference

between the energy prices the household experiences and the known subsidized rates, and

scales this difference to the whole sample. It is on a scale from 0-2, where 2 indicates the

lowest price and thus highest rate of subsidy observed, and 0 represents the highest price

and thus lowest rate of subsidy observed in the sample. The index draws from the two

most accurate energy price variables we obtained from the survey: the price the

household pays for kerosene in Rupees/liter and the average electrical tariff they pay (as

calculated from their bills). The index compares with the known subsidized prices for

kerosene and electricity in Maharashtra- 11 Rs/L and 1.57 Rs/kWh, respectively. This

index, SE, is calculated as follows;

Equation 4: Subsidy Effect Index Formula

Note that if a household does not use one of the fuels, their subsidy effect index

will fall. In order to determine the relative effect of subsidy and income, I investigate the

correlation between the variables using a standard logistic regression. I used the STATA

software for this analysis. Note that because I was simply assessing the correlation in the

distribution and not necessarily assessing causation (e.g. income subsidies (X) are

actually causing household per-capita income to (Y) rise), I did not employ dummy

variables (Z). The outcomes of these regressions are visible in the results section.

Quantifying Externalities
Indoor Air Pollution
In the health literature, the only experimentally valid way to directly measure the

impacts of health impacts of air pollution in a given area is to conduct epidemiological

43
studies for an area that “establishes dose-response relationships linking environmental

variables to observable health effects” (Lvovsky, 1998). Yet dose-response relationships

are both costly and specific to one area. Aggregate values, or estimations of impact across

many different areas, have developed as a result. They are developed through a process

known as meta-analysis, in which the results of many studies are pooled and in which

stochastic properties of each study are reduced by taking the mean and variance of the

meta-distribution (Lvovsky, 1998).

At this aggregate level, disability affected life years- or DALYs- are the standard

measure of the burden of disease. This metric combines both life years lost due to

premature death and fractions of years of healthy life lost as a result of the resulting

illness or disability. Although there are other lost-time metrics, the DALY has the

advantage of being the currency of research for the WHO. This means that the metric is

listed in global databases that differentiate by various levels of impact by age, sex,

disease, and region (Smith & Haigler, 2008).

The aggregate values employed in this study come from these databases,

specifically the Comparative Quantification of Health Risks, which lists the burden of

disease in specific WHO sub regions. This region-wide data is then narrowed down

further with country-specific data obtained in Indoor Smoke from Solid Fuels: Assessing

the Environmental Burden of Disease and National and Local Levels. In this study, the

authors compile exposure levels as well as baseline levels of disease burden in each of

the areas using primary and secondary sources (Desai, Mehta, and K. Smith, 2004).

We consider two types of exposure factors: those from the indoor burning of

wood, and those from the indoor burning of kerosene. The first factor is easy to calculate

44
because it is a solid fuel; the second is a bit more complicated. In rural areas, the switch

from biomass and other solid cooking fuels is of high priority, and so well defined

aggregate values exist for their impact on health. We simply use household use of wood

as our exposure metric. That exposure is multiplied by relative risk units for the three

main diseases: lung cancer, Chronic Obstructive Pulmonary Disease (COPD), and Acute

Lower Respiratory Infections (ALRI) (Smith & Haigler, 2008).

Table 3: Exposure Metric and Relative Risks. Source: Smith & Haigler

In order to obtain DALY value per household exposure, we must narrow the

aggregate values mentioned in Ezzati and Desai to the national, state, and finally

household scale. The calculation of DALYs/exposure parameterizes the all-India value to

just those Maharashtran households that burn wood indoors. This comes out to 0.066

DALY/exposure.

These calculations are less established when dirty solid fuels are eschewed in

favor of dirty liquid fuels. Urban households often do not often burn biomass or coal for

their energy needs, and so do not fall within the standard WHO parameters for solid fuel

use exposure. Yet that does not mean that kerosene users are unaffected by indoor air

pollution. In the literature, biomass fuels are often considered “high pollution fuels”

while charcoal and kerosene have been referred to as medium pollution fuels. Yet

45
experimental data from a Tanzanian survey suggests that Acute Respiratory Infections

(ARI) in children under 5 have a comparable incidence among both solid fuel and liquid

fuel use. While the incidence of ARI was 10.76% among those using biomass, it was

9.2% for ARI among those using kerosene- well within the margin of error (Kilabuko and

Nakai, 2007). This close similarity was not found with the other two disease risks

mentioned earlier. Therefore, although it is almost certainly an under-estimate, we

simplify the DALY/exposure to indoor kerosene use to around 1/3 of total relative risk,

or only the impact of ALRI. This yields a DALY/exposure value of 0.02.

I calculate DALYs in this study simply by multiplying the two DALY/exposure

values for the respective fuels by two dummy variables- Be and Ke, which represent

whether the household uses biomass or kerosene fuels and are simply 1 or 0 in value.

Adding these two exposure values for a household estimates the total DALY value based

on fuel use. In order to establish this value across the entire population, I sum these

amounts for each household, multiplying each value by the household weight value to

achieve representative validity. Here it is mathematically:

Equation 5: Total DALYs as a function of fuel use

Emissions
While estimations of health externalities must rely on top-down estimations in the

absence of clear dose-response data, emissions calculations are much simpler. All that is

needed are two sets of information. The first is the number of units of each fuel used by

households; this information is contained within the National Sample Survey data used

for welfare calculations. The second set is the conversion factors from fuel unit to carbon

46
dioxide emissions listed by various fuel types. That data is taken from Smith, et al. and

converted from energetic units to a more standard metric: kilograms of carbon dioxide

per fuel unit (K. R Smith et al., 2000). The table below lists these values for each of the

fuel types used by Indian households.

Fuel Fuel Unit Urban

Household
s
Wood Kg 1.3
Kerosene Liter 2.985
LPG Kg 3.085
Electricity kWh (unit) 0.6
Dung kg 1.1
Table 4: Carbon Content by Fuel Type

Although this data only accounts for traditional greenhouse gas contributors, and

not the more exotic emissions mentioned in the chapter on energy poverty, the existing

methodologies are simply not developed enough to estimate the effect of temporally brief

but significant emissions sources. While these estimations rely on the calculation of

GWPs (greenhouse warming potentials), GWPs for substances like black carbon are

difficult to calculate because of “the uncertainties and complexities of their creation and

atmospheric transformation, and because their effects are local due to their relatively

short atmospheric lifetimes” (Smith & Haigler, 2008). Thus, the total emissions

calculated in this report actually serve as lower bound estimates. Employing NSSO data,

I use the following aggregate equation to calculate the baseline total level of emissions:

Equation 6: Aggregate Household Emissions Footprint

47
 As in other equations, HHw represents the weight of each household; Qe represents

the monthly quantity of electricity used, Qw the quantity of wood, Ql the quantity, Qko and

Qkp are liters of Kerosene consumed through the black market and PDS, respectively.

Scoping
However, in order to translate tons of CO2 and DALYs into comparable

quantities, we need to obtain conversion factors for their valuation. In order to estimate

the value of tons of carbon dioxide mitigated, recall the recently established markets for

tradable emissions reduction permits (Hepburn, 2007). We can multiply each by the value

set on the international carbon market. Although this exact values varies, it hovers around

15€, or $20.5 Valuation of health values is a bit more complicated, because there is no

market for health loss avoided. Still, the WHO, the World Bank, and UNICEF have

developed a sort of “cost-effectiveness triage” that quantifies health related investments

(Smith & Haigler, 2008). This cost-effectiveness triage compares the value of DALYs to

GDP/capita, a relatively intuitive relationship between time and money. For simplicity’s

purpose, this paper uses the upper boundary of ‘very cost-effective’ interventions for the

valuation, and multiplies GDP/capita times each DALY averted. In this case, for all-India

valuations I multiply by the GDP/capita of $1,017.

6. Data

There are three primary types of data: reference price and subsidy data, the pilot

survey detailed earlier, and data from the Indian Government’s 63rd Household Consumer

Expenditure Survey. This section will broadly describe the data extracted from each, with

5
See http://www.carbonpositive.net/

48
particular reference to the important variables.

Reference Price and Subsidy Data

Electricity and kerosene prices and subsidy rates are listed in the table below, and

draw from a range of government and NGO publications. These prices serve as important

inputs to the welfare calculations and equations used with survey data.

Price Name Value Source

Average Electricity 3.2 WEO, 2007

Tariff Subsidy6 Rs
/kWh
Average 1.57 India Stats
Maharashtra Rs/
Electricity Rate kWh
Average Kerosene 11 Rs/ NSSO
Price Liter
Market Kerosene 22.5 WEO, 2007
Price Rs/
Liter
Table 5: Price and Subsidy Rates for Kerosene and Electricity. Various Sources

A report by the International Energy Association entitled “Getting Prices Right”

quantifies the India-wide efficiency costs of the subsidy regime through a macro-

economic model. Electricity has a 24.2% subsidy rate, which represents an economic

efficiency cost of 27.2 billion rupees. Kerosene had the highest subsidy rate, at 52.6%.

This represents a loss in efficiency of 12.9 billion rupees. Finally, LPG had the second

highest rate at 31.6%; this represents a loss of 1.8 billion rupees in efficiency (IEA

1999). Note that these rates have stayed relatively constant over the past 10 years. The

reason is that although budgetary costs have skyrocketed in the past years as oil prices

have risen, the government has specifically barred a major decrease in subsidy rates

(Shenoy, 2010). Combining efficiency losses across the subsidies and converting to
6
Note that no official data on electrical subsidies is available, as the Indian government
explicitly lists the balance sheet of the SEBs with subsidy amounts removed. This amount
serves as an India-wide approximation of subsidy effect

49
today’s dollar, these amounts come out to $1.018 billion, $512 million, and $88 million,

respectively. These efficiency losses are calculated as the amount that the government

must transfer to make up for artificially low prices (Psc) at a higher level of consumption

(Qs). This total efficiency loss is represented as the magenta triangle in the figure below,

and is calculated in relation to a reference or market price (P*) for each energy input.

Figure 15: Efficiency Losses from Energy Subsidy. Source: WEO

There are two other important estimations of these subsidy regimes in the

literature. The first is an estimation of the government’s total losses for the kerosene and

LPG regimes, which is best represented through under-recoveries. These under-

recoveries are defined as the losses of government-owned oil companies, which could

have made more if had sold their products abroad but instead, operate at significant loss.

These losses have been increasing yearly as oil prices rise, and the Ministry of Petroleum

and Natural Gas reports that they amounted to $6.14 billion for the PDS kerosene system,

and $3.83 billion for the domestic LPG system in 2009 (Shenoy, 2010). By employing a

value chain that calculates the cost of providing below-market power, they find that the

total losses from electrical subsidies amount to $8 billion per year (Shenoy). Finally, I

50
note the amount of rents- or black money- that is generated as a result of diverted subsidy

value. Around $1.7 billion is created as a result of diverted kerosene subsidy, while the

number is around $600 million for LPG. Those amounts are visible in Figure 10, which

appeared in Chapter 4. Table 6 below summarizes these three categories of costs for each

of the major subsidies.

Efficiency Cost Budgetary Cost Rents Created

Subsidy (millions USD) (millions USD) (millions USD)

Electricity 1081.8 8200 -

Kerosene 512 6140 1700

LPG 88.08 3830 600

Total 1681.41 18170 2300

Table 6: Losses generated by the existing subsidy Regimes. Sources: Shenoy
& WEO

2. Pilot Survey Data

The second primary source of data this study employs is the pool of 164

household interviews conducted in Maharashtra. Although this sample size is small and

the survey was simply a pilot, this pool of data is useful because we explicitly asked

questions about household income. In the scope of this paper, then, its particular use is in

the measurement of distributional effects.

Each of the 164 households in our pilot survey completed a medium-length

survey questionnaire. The survey asked five categories of questions. The first section

evaluated basic background information such as dwelling type (slum, chawl, house, etc),

dwelling size, and total number of household members. The next section detailed house

economics. It asked about the education of the primary wage earner, occupation, monthly

51
income, and for a thorough breakdown of the house’s expenditure- including phone,

food, and type and price of cooking fuel. The third section evaluated electrical supply,

and asked for the type of electrical connection, service provide, and tariff. We also asked

for billing history, and recorded the amount of units (kWh) of power and amount paid

over the previous twelve months. The fourth section evaluated electricity reliability by

asking the variation and duration of power cuts during all four seasons. The fifth section

dealt with alternative sources of power, and asked the households how much they spend

on alternative fuels such as kerosene, candles, or generators per month. The final section

was only asked of rural households, and asked more qualitative questions on the impact

of reliability of livelihood as well as the types of cooking fuel used. The final sampling

distribution is broken down below into a 4x2 matrix by income tier and urban/rural.

Income Tier Income Urban Rural Total

(Rs/Month) Household Househol Households
s ds
Poor < 5,000 20 16 36

Low Income 5,000-10,000 25 33 58

Middle 10,000- 16 39 55
Income 30,000
High Income > 30,000 8 7 15

Sample Size N=164 N=69 N=95 N=164

Table 7: Breakdown of HH Interviewed by Income and Location

There are two key variables; one is from the first category above, and one is a

composite variable drawn from price data. Together they provide the information needed

to draw conclusions about the distribution of subsidy effect.

• Per capita income. The national level surveys employed in other parts of
this paper have much higher resolution on prices and expenditure, but do
not discriminate the effect of subsidy by income. This survey has a
reported household income for each interview, which is simply divided by

52
 the number of household members to yield a per capita income variable. I
take the log of this and get the dependent variable, logcapita.

• Subsidy Effect Index. This index is described in more depth in the

methodology chapter, and compares survey data on the price of electricity
and price of kerosene that the households pay to known subsidized rates.

2. National Sample Survey Data

The National Sample Survey Organization is a branch of the Ministry of Statistics

and Program Implementation within the Government of India. It conducts periodic

national surveys on a variety of topics. This study employs the 63rd round of the survey,

whose focus was on household consumer expenditure and which was conducted from

July 2006-June 2007. The survey provides high level of resolution on two data types. The

first are micro-economic levels of household consumption, as measured by the sum of

monetary values of goods and service consumed per month by individual households.

The second are macro-level total consumption by commodity group.

Within the first category, this study adapts a wide variety of specific energy prices

and quantities listed for individual households. These include the average price and

quantities of electricity, kerosene, LPG, charcoal, wood, and dung. The single most

important variable, however, is the measure of total monthly expenditure; this serves as a

proxy for the income and the wealth of the households. Increases in energy prices are

projected onto this base level of expenditure for welfare changes. Overall consumption

by commodity group is used in order to parameterize Maharashtra-specific results to

India as whole, by comparing various levels of fuel usage within the state as well as

nationally. This data is listed for the three key energy types studied below:

Electricity % LPG % Use Kerosene %

Use Use
All-India 66.3% 22.8% 34.4%

53
 Maharashtra 80.8% 38.9% 21.2%
Table 8: Fuel Use by Region and Type

The NSSO employs a very rigorous survey methodology, and each individual

household surveyed in the report receives a distributional weight that represents its

representativeness within the total population. Although I used a database that included

India-wide statistics, this study used data from households in Maharashtra alone. The

reasons were two-fold: first, in order to parallel the state focus necessitated by the nature

of the other survey data, and second, to distinguish between state-level and national-level

impacts and effects.

7. Results
Efficiency
We first use household data from the NSSO sample survey to construct a state-

specific estimate of welfare loss, using Equations 2 and 3. The results are visible in the

table below, and listed by subsidy type.

54
 Household Weighted
Increase in Loss Distribution
Subsidy Budget ($) (Millions $) of Loss

Electricity 6.73 -89.3 76.7%

Kerosene 2.79 -13.36 11.5%

LPG 4.63 -13.61 11.8%

Table 9: Maharashtra Welfare Losses

The largest increase in monthly energy budget takes place as a result of increases

in electricity prices, at over $6.73- or some 300 Rupees per month. This is mostly a

function of the fact that households consume more electricity than they do of any other

energy input. Yet rising prices create significant increases in monthly budgets among all

three inputs. When these amounts are multiplied by the weights of each respective

household and summed to the entire state of Maharashtra, that distinction becomes even

more dramatic. Electrical welfare losses represent more than three-quarters of the

distribution of loss. Kerosene and LPG losses are nearly identical on a statewide level, at

around $13.5 million in losses for each. Note that each household does not necessarily

feel the effect of all three changes, because most do not use all three. Specifically,

kerosene and LPG are often mutually exclusive fuel choices, especially in urban settings.

The average increase in budget for each household is $7.28. This represents a 6.98%

increase in total expenditure, and the same decrease in effective budget.

Next, we parameterize these results from Maharashtra to India as a whole, and

compare potential costs to the potential benefits that would result from subsidy

elimination. In order to parameterize the results, we assume the same reference fuel

prices and subsidy levels affect Maharashtra as everywhere else in the country. This is

perfectly tenable in the case of LPG and Kerosene, which are centrally administered; it is

55
fuzzier in the case of electricity, but also a best possible approximation given the paucity

of good data on electrical prices or subsidies. Then, we simply transform these numbers

from Maharashtra’s population to India’s population, taking care to adjust for the

changing distributions of fuel use detailed in Table 8 in the last section. This yields the

third column in the table below. The total increase in electrical losses remains

proportional, LPG becomes relatively less significant on a national scale, and kerosene

becomes more significant.

Welfare Gains Welfare Losses

Subsidy Type (Millions $) (Millions $) Balance

Electricity +1081.8 -861 +220.33

Kerosene +512 -254.5 +257.5

LPG +88.08 -94.9 -6.82

Total +1681.41 -1210.4 +471

Table 10: Welfare Gains, Losses, and Balance

We fill in the second column with the efficiency gains earlier referenced in Table

6, and consider the overall efficiency of subsidy elimination through the Kaldor-Hick

criterion. The elimination of the kerosene and electrical subsidies produces a welfare gain

that is large enough completely compensate losses- thus, these two policies pass the KH

test. The elimination of LPG, however, does not. Collectively, the three subsidies pass

the test. The most attractive option is the elimination of the kerosene subsidy, in which

India-wide net gains alone ($257.5 million) can more than compensate total losses

($254.5), and are larger than any other option. Yet electrical subsidies still remain the

most substantial potential gain, as their elimination would increase welfare by over $1

billion dollars. Please note that for sake of comparison, these estimations of gain do not

56
consider budgetary or secondary benefits of elimination, only the immediate welfare

gains to households. The discussion section broadens this perspective.

We can also observe the distribution of loss by various categories. Although the

NSSO data does not segment by income, we can differentiate by urban and rural

households. Across all subsidies and corrected for the difference in relative sample sizes

of the two groups, urban populations still bear a significantly higher proportion of the

damage, at nearly 60% of total loss.

Weighted Losses
Group (Millions $) Distribution of Loss

Urban 69.17 40.5%

Rural 47.2 59.5%

Table 11: Distribution of Welfare Loss by Urban/Rural Tier

Equity
Recall that in order measure to the equity of subsidy elimination, we can examine

the pattern of distribution. The basic question we must ask is whether the existing

distribution is regressive or progressive- that is, if it is creating negative or positive

distributional impacts. If the existing subsidies are regressive and reinforce an unequal

distribution of wealth, then their elimination is justified according to this second criterion.

We first consider the statistical relationship of per-capita income and the subsidy effect

index that were described in the earlier chapter.

57
 12
10
logcapita
8
6

0 .5 1 1.5
Subsidy Effect Index

Figure 12: Overall Subsidy Effect by Income

Independe Dependent Coefficient t-value P>|t|

nt
Logcapita Subsidy Effect .655 3.10 0.002

Figure 12 above demonstrates that the level of subsidy benefit increases

significantly with income. The table below confirms this statistically, as the P>|t| value

falls far below the .05 level of significance. Because the level of subsidy benefit

significantly increases with income, it is regressive. Intuitively, this means that those at

low levels of income and high levels of energy poverty receive relatively high prices

relative to those at higher levels of income. This is clearly a perverse outcome.

This evidence is persuasive, but does not necessarily prove the subsidy is to blame

relative to other confounding factors. In order to confront this possibility, let’s consider

more careful evidence for poor distribution by considering the targeting of the subsidy

differentiated by income group. We earlier defined various income tiers from 1- the

poorest, to 4- the richest, and we employ these here in order to distinguish the differential

level of subsidy effect by income in a more granular way. Those results are visible

58
statistically in Table 13 below and in the accompanying graph. They are compelling

because the significance of the relationship between income and subsidy benefit

progressively in each tier. At tiers one and two, there is no relationship to speak of and

the slopes are flat; by four, however, there is a statistically significant relationship and a

correlation is clearly visible in the graph.

Independe Dependent Coefficient t-value P>|t|

nt
Tier 4 Tier 4 Subsidy 2.568 2.26 0.042
Income
Tier 3 Tier 3 Subsidy 0.602 1.83 0.073
Income
Tier 2 Tier 2 Subsidy 0.125 0.77 0.447
Income
Tier 1 Tier 1 Subsidy 0.234 1.16 0.253
Income
Table 13: Correlation of Subsidy Effect to Income by Tier

1 2
12
10
8
logcapita
6

3 4
12
10
8
6

0 .5 1 1.5 0 .5 1 1.5
Subsidy Effect Index
Graphs by Income Tier

Finally, consider the difference in distribution between urban and rural groups.

Past research has already confirmed the difference in per-capita subsidy use between

urban rural areas, as 20% more subsidized kerosene is used in urban than rural areas

(Gangopadhyay, Ramaswami, and Wadhwa). Because per-unit subsidies are the same

59
everywhere, this suggests that urban areas receive more of the subsidy benefit than rural

areas. The table and graph below represent this trend in a more statistically compelling

way. While there is a random clustering of income and subsidy effect in rural areas, the

correlation in urban areas (P>|t| 0.005) is statistically significant. This confirms the fact

that urban households are benefiting more than rural ones, who experience more poverty

and energy poverty. In aggregate, differentiated by income groups, and differentiated by

urban and rural populations, the existing subsidy distribution is certainly regressive.

Independe Dependent Coefficient t-value P>|t|

nt
Rural Rural Subsidy 0.324 1.32 0.191
Income
Urban Urban Subsidy 1.069 2.88 0.005
Income
Table 14: Subsidy Effect by Rural and Urban Use

0 1
12
10
logcapita
8
6

0 .5 1 1.5 0 .5 1 1.5
Subsidy Effect Index
Graphs by urban

Externalities
Finally, because both efficiency and equity only consider market efficiency and

distribution, we must consider the deleterious non-market effects that are caused by

energy over-use at subsidized prices. The two primary externalities are carbon emissions

60
from over-use of dirty fuels and the health impacts of indoor fuel combustion.

For carbon emissions, we establish a baseline for the total carbon impact of

existing energy use, and then determine the reduction that might occur under a reform

scenario. Using Equation 6 and NSSO data yields a baseline carbon footprint of some

2.85 million tons. In order to determine the drop that might occur under increasing prices,

I keep the total energy budget constant and drop quantities as the prices rise using a

variation of Equation 6. This results in a move from over-consumption towards efficient

consumption levels, and yields a total of 2.28 million tons of carbon dioxide. The

difference attributable to the existing subsidy regime is 567,225 tons of CO2.

Using Equation 5, we aggregate health effects by adding exposure factors for each

household. This comes out to 973,096 DALYs for all of Maharashtra. Here, estimating

the relative implication of the subsidy regime on health is more difficult because our

effect is defined not per-unit, like with carbon-emissions, but per-exposure. As a

conservative estimate, let’s assume that subsidy removal does nothing to change existing

biomass consumption, but does reduce kerosene consumption by 50%- almost exactly the

subsidy rate. If this holds, DALYs would drop to 883,553- a reduction of 90,353. Note

that these externality estimates are Maharashtra-specific, because a high degree of

resolution on individual household fuel use and exposure is necessary. However, for a

rough estimate we can merely transform these numbers from Maharashtra’s population to

an all-India number- this comes out to 7.09 million tons of CO2 mitigated and 1.129

million DALYs averted. These savings are valued at $141 million for carbon mitigation

and $1.129 billion for the averted impact of exposure.

61
8. Discussion

This paper has posed two related questions- whether subsidy if reform is justified,

and if so, how we might accelerate movement up the energy ladder with clean energy

interventions. This chapter will conclude the first question with a discussion that recaps

the case for reform; consider subsidy removal within the reality of India’s political

economy and institutions, and mentions potential limitation in analysis. Chapters 9 and

10 next address the second question and present pathways to implementation.

The Case for Reform

So how robust is the case for subsidy reform? Let’s take removal of all three

subsidies in aggregate. We have the following India-wide benefits:

• An all-India total welfare gain of $1.68 billion, and a net gain of $471 million

• Equity improvements, as all three subsidies are regressive. Contrary to their stated
goals, they enrich rich and urban households to the detriment of the poor and rural
households they were meant to help.

• Significant reductions in environmental externalities, at 7.09 million tons of CO2

mitigated and 1.129 million DALYs averted- nearly $1.25 billion in value.
In the first case, we see that elimination passes the Kaldor-Hicks test. In the second

and third, we see that subsidy elimination will bring strong distribution and

environmental improvements as well. In short, elimination of India’s subsidy regime

passes all three criteria- efficiency, equity, and externalities- and qualifies as a triple-win

reform opportunity. Surprisingly, direct gains are actually eclipsed by the indirect gains

that would follow elimination. Budgetary cost savings (elimination of under-recoveries)

are substantial, at $18.1 billion, and the elimination of black money sources amounts to

$2.3 billion. Finally, subsidy elimination would also increase electrical reliability and

62
quality as consumption fell, and would reduced reliance on fuel imports.

When we consider the three subsidies separately, the kerosene subsidy stands out

as the most promising candidate for elimination. It is the most inefficient of the subsidies,

and so the pure welfare gain that comes from its elimination is the highest of any option-

$257 million. Unlike LPG or Electricity, its use actually generates both a carbon footprint

and health exposure risks, so its phase out would bring double co-benefits. Finally,

kerosene’s distribution regime is extremely deleterious. The subsidy regime has

misappropriated government funds, spurred the creation of significant black markets and

rents, and resulted in other indirect damages such as adulterated fuel and political

corruption (Shenoy, 2010). Subsidy elimination would save $6.1 billion in under-

recoveries and cut out $1.7 billion in rents.

Individually, neither LPG nor electricity is a particularly attractive candidate for

reform. LPG subsidy rates are not as high as those on kerosene, and so total welfare

losses exceed gains. So while the subsidy is clearly regressive and antithetical to the goal

of eliminating energy poverty, unlike kerosene it is not so inefficient for those whom it

benefits. Electrical subsidy elimination would bring the largest potential gain at more

than $1 billion. Yet because electricity is the most substantial energy good consumed,

rising electricity prices drives the majority loss- 76% in Maharashtra, and 71% of the

India-wide loss. LPG elimination and electrical subsidies would both bring substantial

carbon mitigation, but would not benefit health outcomes.

Despite all of these society-wide benefits, the picture is not as rosy on the

household level. The average household effectively loses $7.28 per month, as they must

63
pay that much more for energy. The majority of the losses come from an increase in

electricity budget- $6.73 for those electrified. LPG budget increases are the second most

substantial, at $4.63 per month, and kerosene is the least, at an increase of $2.79 per

month. Worst of all, this distribution is concentrated among the urban poor- those who

have the highest level of energy poverty and are most harmed by negative price shocks.

60% of the distribution of loss is concentrated in urban areas, although most of this is

attributable to the simple fact that LPG is not readily available and that less homes are

electrified in rural areas. Although the distribution of loss by poverty can’t be drawn

statistically from the data- NSSO does not ask for income but merely totals expenses- it’s

fair to say that the poor still suffer a disproportionate loss. Poorer households already that

face tight budget constraints, and in often spend upwards of 10% of their monthly budget

on energy goods, so it’s reasonable to conclude that negative price shocks would

disproportionately fall on them.

How do these benefits and losses compare? The benefits of subsidy elimination-

in terms of efficiency, equity, and externalities- are all diffuse, as they accrue to society

as a whole and no single group. Yet crucially welfare losses- some $1.2 billion in total-

are direct and concentrated on individual households, and these losses disproportionately

fall on the urban poor- often those in slums. So while the opportunity for subsidy

elimination is attractive on paper, it would hurt those who are least off, and is

indefensible in practice.

Barriers to Reform

64
 These household losses from rising energy prices are an extraordinary barrier to the

feasibility of reform. Because the change from a subsidized world to a non-subsidized

world generates many losers but no discrete winners, eliminating any or all of the

subsidies discussed herein would be a herculean political task. This all confirms the

political anecdotes mentioned in Chapter 4, that energy subsidies are a massive political

flashpoint and in the words of the Economist, ‘too hot to handle.’ Formally, there are two

important barriers to reform in India’s political economy: the rent distribution problem

already mentioned above, and a commitment problem in which advocates of reform

rarely go on to actually carry it out.

Consider the kerosene example as an example of the rent problem. The kerosene

subsidy creates substantial rents- nearly $1.7 billion, as referenced in the data section.

These rents directly benefit a whole series of stakeholders- politicians, distributors, and

black market dealers. In fact, the PDS system has become one of the principal methods

by which the state provides welfare to the public; it is now “used by all of India's political

parties to generate and maintain political support” (Shenoy, 2010). In “Lessons Learned

from Attempts to India’s Kerosene Subsidy,” Dr. Bhamy Shenoy explains that once rents

accrue from a government subsidy to recipients, it becomes difficult to initiate any sort of

reform because of a basic information asymmetry. While the beneficiaries fully

appreciate the benefit of the rents they are receiving and will take strong measures to

prevent their removal, the losers often do not comprehend their own deprivation and are

therefore unmotivated to act. In the case of the kerosene subsidy, a whole legion of

politically influential stakeholders will now oppose any measure, from politicians that use

the subsidy to garner votes to store owners that use the PDS system to funnel kerosene to

65
fellow dealers for a profit on the side. Shenoy details a whole laundry list of past reforms

that have failed to either cut down on rents or reform the system. For example, in 2006

the government added blue colorant to government kerosene in order to prevent it from

being diverted into the black market. Yet distributors soon found a way to eliminate the

dye by storing the fuel in clay, and the proposal was dropped the next year in the face of

substantial political backlash (Shenoy, 2010). This indicates how intensely rents

galvanize their beneficiaries, and illustrates that once the subsidy genie has been taken

out of the bottle, it is exceedingly difficult to put back in.

The commitment problem poses a follow-up question: even if politicians could

mobilize support to reform the subsidies, would they follow through? Sumir Lal explains

the commitment problem more vividly as a ‘rhetoric-implementation gap.’ She explains

that while political reformers come to power through speaking to one audience, the policy

and financial elite, they are ultimately accountable to another- their political

constituencies. Take the case of electrical subsidies. Once in power, enacting direct

reform of these subsidies would be exceptionally difficult for three reasons. First, future

reform is not credible enough to counteract the upfront loss of an existing subsidy to

politically connected farmers; second, corruption and anti-reform resistance from utility

staff, bureaucracy, and the political class confronts the policy; and third, political will

evaporates as reform has no “visible political allies” (Lal, 2006). This phenomenon is

reflected in the literature on economic institutions; once actors gain political power, they

have an incentive to change the distribution of resources in their own favor, and repealing

subsidies would do the opposite of that (Acemoglu, Johnson, & Robinson, 2004).

New Reform Strategies

New reform strategies should adopt a social ‘aikido’ approach; they should

66
account for and work with political incentives, rather than struggling against them. Rather

than employing top-down strategies, such as forcing key targets and deadlines for the

elimination of cross-subsidies by state regulatory commissions, bottom-up strategies

might prove more fruitful. In the electrical example, this involves confronting subsidy

regimes through targeted communication with agricultural constituents and the creation

of a multi-sector “package deal” across agricultural, water, power, and credit sectors to

increase the incentives and credibility of reform (Lal, 2006). A bolder option is to

counteract the influence of those benefiting most by mobilizing those who benefit least,

and create a pro-reform constituency by engaging those disadvantaged by the existing

subsidy system. Local democracy is a neglected “institutional base of political

participation” in India with past success, and coalition building could confront the

subsidy regime directly (Sen, 1995). A third way out is to take subsidy reform out of a

political vacuum, and to package it with clean energy interventions. This sort of a

creative pairing can avoid upfront welfare losses, and ensure the most politically

important constituents receive benefit from the new government subsidy arrangement.

Chapter 10 outlines three of these possibilities.

Limitations in Analysis
There were several empirical limitations, specifically in pilot survey data. While

the NSSO data was carefully sampled and was composed of a statistically significant

number of observations, the data from the pilot survey was both imperfectly sampled and

drew from a relatively small set of interviews. This implies that that results from that

section are not necessarily representative of the larger population. Still, the number of

observations was large enough and the trends are distinct enough that they are

statistically significant within the sample. Finally, it is worth noting that the rural

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interviews in this pilot survey were conducted under only indirect supervision of the

author and Ph.D. student; so while they were inspected and corrected after the fact, they

are not as reliable as the urban set of interviews.

There are two relevant theoretical criticisms. The welfare calculations employed

the Kaldor-Hicks (KH) criteria, but there are doubts about both its ability to measure

welfare changes as well as adequately prescribe policy decisions. On the first count,

Edward Stringham argues that this criterion might not adequately measure changes

because it assumes that “measuring potential compensation entails merely adding up the

losses,” and therefore might not adequately measure wealth transfers (Stringham, 2001).

Yet this study does not seek to rigorously measure that compensation, merely to measure

overall welfare changes. On the second count, Chipman and Moore argue that the

Kaldor-Hick criterion contains implicit value judgments, and is ultimately a “utilitarian

smoke-screen” (Chipman and Moore). This might be a valid critique of welfare

measurement generally, but I make these judgments clearer by measuring not only

efficiency, but also the distribution, with an explicit focus on poverty. A second and

more serious critique is of the energy ladder concept that has served as a central metaphor

from this paper. Hosier and Dowd argue that authorities ultimately do not have much

influence in spurring movement up the energy ladder because fuel substitutions are often

more likely to occur with increase in income or urban migration (Hosier and Dowd). This

might be true, but I argue that energy substitution can also take place when supply

extensions by the authority remove this from the realm of a solely household decision.

9. India’s Window of Opportunity

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 This chapter and the next answer the paper’s secondary research question. We

first contextualize India’s clean energy transition within the context of a broader

sustainable development opportunity. In this chapter, we move on to bridge policy with

practice by considering a number of implementation pathways.

Even if energy subsidies prevent full movement up the ladder (Chapter 4), and

clean energy can accelerate movement up it (Chapter 3), the reader may be wondering if

change from the former to the latter is really within the realm of possibility. Fortunately,

India is at a critical stage in which it is reevaluating the entire trajectory of its future

energy system- a rare window of opportunity. This section seeks to brief the reader on

this development crisis- and the fortuitous impetus that new climate and resource

constraints create for clean energy.

A Developmental Crisis
As the world’s second-most populous state, India has a nominal per capita income of

around $1000 a year. Yet in recent years, the country has boasted close to an 8% yearly

growth rate (Ministry of Finance, 2008). This has driven up total primary energy demand

at a staggering rate of 30 million tons of oil equivalent (Mtoe) per year- nearly the size of

the entire Greek energy market. The total demand, some 537 Mtoe, overtook that of

Japan in 2005 (International Energy Agency, 2007). This red-hot pace of growth poses a

complex case study of the important inputs for economic development. Already, energy

and resource constraints are at odds. The gap between generating capacity (energy

supply) and energy demand is large, and growing larger. In 2003, India’s production was

merely 441 Mtoe, a shortage as large as 13% during peak power. That number is

worsened by transmission and distribution losses approaching 40% in some areas

69
(Shalizi, 2007).

Resource constraints trace carbon constraints. The climate implications of India’s

growth are profound and will become even more so in the coming years. In 2005, India

produced 1.1 billion tons of carbon-dioxide (International Energy Agency, 2007).

Despite a lower per-capita emissions level, this total is again nearly as big as Japan’s- the

world’s second biggest economy. The energy sector’s largest component, the electrical

power sector, is also the most environmentally important: it accounts for 48% of

emissions (Parikh and Parikh, 2002). This sector is heavily fossil fuel dependent, and

poised to become even more carbon intensive. Currently, the installed generation

capacity of 112,000 megawatts is 70% coal (Shalizi). In “Dancing with Giants”, Zmarak

Shalizi forecasts the anticipated impact of energy shifts in the coming years. In a baseline

scenario, total energy use quadruples from 515.6 Mtoe in 2005 to a projected 2,068.8 in

2050 (Shalizi). That increase is concentrated in dirty fuel, quintupling carbon emissions

to an estimated 3.6 Gigatons of Carbon in 2050 (Shalizi).

How, then, can India stake out a development pathway that allows for

development now but does not compromise its ability to do so in the future? The chapter

on energy poverty referenced the short-term climate effects of black carbon, yet global

climate change also poses a laundry list of long-term impacts might prove economically

and socially catastrophic.7 Because of carbon and resource constraints, and also because

it must develop an insurance policy, India faces a sustainable development imperative.

7
The IPCC Fourth Assessment Report, Working Group II Report on “Impacts, Adaptation, and
Vulnerability” details a few of these in Chapter 10. They include an increase in extreme rains in the
northwest during the summer monsoon, an increase in multiple-day heat waves, and in increase in serious
and recurrent floods. See http://www.ipcc.ch/ipccreports/ar4-wg2.htm

70
This section details how India might meet it.

Practitioners, politicians, and academics in the energy and development sectors

often regard sustainability as buzzword, and de-prioritize it relative to conventional

definitions of growth. Greener alternatives are considered a “tax on those least able to

afford it” (McKee, 2008). This prioritization is based on the assumption that

environmental and economic outcomes are largely separable (Baer and Athanasiou,

2008). But the implications of the Intergovernmental Panel on Climate Change’s 4th

report and the Stern Review on the Economics of Climate Change make that untenable

because they quantify the long-term economic damages of climate considerations. Stern

estimates that dangers of unabated climate change are equivalent to a loss of at least 5%

of GDP each year (Stern et al., 2006).8 A sea change has since occurred in discourse. The

2008 Strategic Framework for Climate Change states: “climate change has the potential

to reverse the hard-earned development gains of the past decades and the progress toward

achieving the Millennium Development Goals” (The World Bank, 2008). In a telling

shift, the World Bank’s 2009 World Development Report had its central theme as

development and climate (The World Bank, 2009).

Let There Be Light

As these realizations sink in, India is left with the Promethean possibility and

challenge of reinventing future energy and development trajectories. There are many

pathways that might work, and India is just beginning to choose among them.

India’s primary window of opportunity is also the Achilles heel of its existing

8
The Stern Report reached this estimate with a discount rate of 1.4%, an item of considerable controversy
because it is lower than many other studies. Yet Stern has also updated the amount of annual GDP
investment required to avert loss from 1% to 2% in order to account for faster than experienced change

71
infrastructure: the fact that one-third of the country is still in the dark. India has the good

fortune of deciding what the energy infrastructure for this entire subset of the population

in the coming years. Depending on how that trajectory ocurs, rural electrification will

either make or break India’s sustainable development goals. A wide variety of renewable

sources will be necessary to bring light to the people, but one deserves special treatment

because of its enormous potential: solar energy. In the “Political Architechture of India’s

Technology System for Solar Energy,” Harriss-White, et al. outline the huge allure. Solar

can physically account for 94% of India’s additional electricity needs by 2031, leapfrog

grid extension and develop in rural areas, and its cost- at 20-25 Rs/kWh (around

$0.50/kWh) in 2009 is comparable to coal prices when externalities and subsidies are

factored in (Harriss-White, Rohra, and Singh, 2009).

National policy intiatives are just now recognizing this opportunity. Prime

Minister Mahoman Singh announced the National Solar Mission (NSM) in August 2009,

an ambitious $19 billion USD plan to install 20 Gigawatts (GW) of solar capacity by

2020, 100 GW by 2030, and 200 GW by 2050 (Nature). These are ambitious numbers, as

India’s existing electrical grid is around 146 GW- and only 5 megawatts of that is solar

capacity. In a recent special article in Economic & Political Weekly, Govindarajalu,

Deshmukh, Gambhir, Sant, et. al. comment that the NSM heralds a sea change in Indian

energy policy because it recognizes resource and climate constraints for the first time

(Govindarajalu et al., 2010). The NSM is one of the eight missions established under

India’s new National Action Plan on Climate Change (NAPCC). It has the explicit and

central objective of establishing India as a global leader in solar energy by creating the

policy conditions for it diffusion across the country as quickly as possible.

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 The most interesting aspect of the NSM is the detailed targets and timelines it has

set for the installation of various types of solar energy. As visible in Table 15 below, it

focuses on four different streams of solar installations. By far the largest of the four is

conventional, grid connected solar; this composes 20 of the total 22 GW planned for

deployment by 20201. Off grid solar composes the 2 GW of remaining planned

installation. Large solar thermal collectors are budgeted in millions of square meters;

solar lighting system targets are by the far the most ambigous, with 20 million systems

budgeted but with an explicit lack of phase-wise targets (Govindarajalu et al., 2010).

Table 15: National Solar Mission Targets

To get a sense for the signficance, consider the current size of the Indian

electricity sector. In 2005, total power-generating capacity was 146 GW (International

Energy Agency, 2007). In order to meet future demand, future capacity must nearly

double to 255 GW by 2015, and will more than triple to 522 GW by 2030. If the full 20

GW of solar capacity were to be added by 2020, it would represent more than 5% of the

total capacity. In past government projections, coal and natural gas fill the vast majority

of future demand. In any reasonable scenario, they will certainly increase, as visible in

Figure 16. Yet the National Solar Mission’s mandate of 20 GW- whether they eventually

reach it or not- calls for a drastic reorienation in the type of future capacity additions.

73
Finally, consider that these capacity additions represnt only grid additions, and therefore

understate the future extent of off-grid and community-level renewable energy .

Figure 16: India's Capacity Additions by Fuel Type. Source: WEO, 2007

There are many concerns about how wildly optimistic and unrealisic this goal is,

but also some reasons to remain hopeful. As photovoltaic panels become mass produced,

cost parity will become more likely and implementation more scalable. Along with large-

scale energy interventions to tax fossil fuels and provide strong incentive for large-scale

solar plants, the plan also provides provisions for local interventions, a good mix of

implementation. And allthough the $19 billion price tag is not all available at one time,

the government of India has already made an initial fund available with some $1.1 billion

for financial incentives.

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10. Climbing the Energy Ladder

This section is a workspace for creative policies that each present a new way to help

Indian households climb up the energy ladder. I present three, each of which represents a

pairing of subsidy elimination and clean energy, and corresponds to one of the three

subsidies this paper focuses on- kerosene, LPG, and electricity. Each section covers

background, implementation strategies, and an estimate of potential co-benefits.

Kerosene & Home Solar Systems

In 2008, an Indian government document known as The Chaturvedi Report

surfaced. The report, drawing on NSSO survey data, revealed that only one percent of

rural households used kerosene for cooking, and that the amount of households that use it

for lighting had been dropping over the past few decades (Shenoy, 2010). This Report

recommended that with electrification still only in planning for many areas, rural

households that live below the poverty line should simply be given a solar lantern- each

of which only cost around $75 at the time. The total cost of the proposal was around $5

billion dollars- less than the existing subsidy applied to kerosene. Although it caught

traction within the government for a while, nothing came of it. This section will resurrect

this idea, with particular attention to new opportunities for implementation that now exist

within the context of India’s National Solar Mission.

Like the Chaturvedi Report, this paper finds that kerosene subsidies are ripe for

elimination. In fact, kerosene elimination presents the greatest potential welfare

improvement of any subsidy. While kerosene is enormously inefficient, dirty, and

damaging to health, solar lighting systems and off-grid solar systems can make a

tremendous difference in the lives of the rural poor that are still in the dark. Because

75
household-level solar interventions do not require existing infrastructure but rather can

operate as stand-alone systems, they offer a quick and cost-effective solution. More

quantitatively, Deshmukh, Gambhir, and Sant conduct a top-down analysis using the

same NSSO 2006-7 data that’s used in this paper. They find that replacing all existing

kerosene-based lighting systems would create the following benefits:

• Annual savings of 3600 crore ($800 million) for the poor9

• Avoiding RS 9300 crore ($2 billion) in annual budgetary subsidy and the claimed
under-recoveries for the PDS system

• Avoiding 10 million tonnes of CO2 emissions a year

Implementation
Although the price tag has seemed daunting in the past, new streams of finance

and the dropping costs of clean energy makes this conversation relevant once again. The

total price tag for new NSM is 82,000 crore, or $18.2 billion dollar. This is an enormous

outlay of funding, and one of the explicit goals of the NSM is already to install 20 million

solar lighting systems by 2022. This is certainly less than the actual need- some 72

million households, according to an NSSO estimation of total households using kerosene

fuel. Yet this target is bold when one considers how many systems have been installed to

date- only 500,000 solar lanterns and 700,000 solar home systems. Meeting the target

will require that the Indian government provides “4,250 systems every day until 2022”

(Govindarajalu et al.) Yet how much of the NSM’s $18.2 billion has been earmarked to

actually accomplish this? Govindarajalu, et. al estimate this based on the only existing

funding mechanisms: capital and interest subsidies funneled through ongoing village

electrification programs of the Ministry of New and Renewable Energy (MNRE).

9
This welfare gain assumes that households already possess a solar system and are now saving money
relative to what they spent on kerosene before

76
Assuming an 18W system at Rs. 6,000 and a 90% capital subsidy, they estimate that the

total subsidy amounts in the existing plan amounts to Rs 500-1,000 crore in total, or

$110-210 million, as visible in Table 16 below.

Table 16: NSM Funding Commitments. Source: Govindarajalu,

2010

This is a significant number in its own right, but merely 1% of the total funding allotted

under NSM- a relative drop in the bucket. New financial and distributive innovations are

needed in order to make the switch from kerosene to solar lighting a reality.

Financially, the simplest fix is a re-distribution of the huge amount of subsidy already

alloted under NSM. A national solar lantern intervention is relatively cheap. Highly

efficient While Light Emitting Diode (WLED) lanterns are available at Rs. 400 ($9) a

lantern in bulk. Even if a 100% subsidy were provided on the cost, the India-wide cost of

supplying just lanterns to all 72 million households comes out to only 650 million- 8% of

the total budget that’s already been commited under the NSM, and far less than the

Chaturvedi Report predicted. Because this is only 10% of the existing budgetary cost of

the existing kerosene subsidy regime, eliminating only the most inefficient parts of this

subsidy could entirely fund the initiative. If this distribution of funding proves too

77
difficult to change, other options exist. The NSM could broaden the existing 90% capital

subsidy for solar home lighting systems in remote areas to all households, thereby

mobilizing additional funding through the MNRE. A more comprehensive program

would offer low interst loans to manufacturers and buyers, as well as accreditation to

approved service providers. Although the possiblity of signficant carbon mitigation opens

the possibility of international funding through Nationally Appropriate Mitigations, these

funding sources are often slow while the need is more urgent.

Distributionally, the NSM can reach more kerosene-using, unelectrified houses than it

otherwise could by using existing networks. The simplest option is the PDS network,

which already reaches nearly the entire country and would cut down on the need to

develop a new system. There is also the National Unique Identificaiton (UID) scheme, a

new program that works to increase delivery of social goods by identifying traditionally

poor and hard to reach groups. Solar lanterns or solar systems could prove an ideal

example of improved delivery of public goods under this system (Govindarajalu et al.)

Estimation of Co-Benefits
We can scope co-benefits for this intervention by using the equations already

applied in the first half of this paper and applying a few additional assumptions. A

scenario in which kerosene is eliminated in favor of solar lanterns creates both reductions

in emissions and reduction in health exposures. Let’s make the optimistic assumption that

all kerosene fuel is switched. Total carbon emissions now come out to 2.625 million tons-

a reduction of 194,764 tons of CO2. For health, we eliminate the DALY/exposure for all

of the households previously using kerosene, and find a dramatic decrease. The total

drops from 973,906 to 793,201, a savings of 180,705 DALYs. Like in the results section,

78
note that these externality estimates are Maharashtra-specific, because a high degree of

resolution on individual household fuel use and exposure is necessary. However, for a

rough estimate we can merely transform these numbers from Maharashtra’s population to

an all-India number- this comes out to 2.4 million tons of CO2 mitigated and 2.25 million

DALYs prevented. This has a rough monetary value of some $2.25 billion in health and

$48 in million carbon mitigation, a payoff that is nearly four times the upfront cost

calculated earlier ($650 million).

LPG & Efficient Cook Stoves

We saw in the results section that LPG is not as inefficient as kerosene or

electricity, and so its elimination does not pass the Kaldor-Hicks test. But as the

distribution section revealed and articles cited earlier have noted, the LPG subsidy is

exceedingly regressive because it only benefits those who already have access to an LPG

stove- rich urbanites (Thukral and Bhandari, 1996). Since the problem is distribution, in

this section we consider what would happen if the provision of existing LPG subsidies

was complemented with diversion towards the distribution of efficient cook stoves to

those who need them most- households that still burn biomass indoors. In “Fuel for

Life,” the World Health Organization employs exactly this sort of a split between LPG

and improved cooking stoves in their health interventions. They find that the switch from

indoor solid fuels to efficient cook stoves yields more benefit than a comparable

intervention with LPG or improved biofuels (WHO, 2006).

Implementation
How much might this cost, and what avenues exist for implementation? Although

an upfront cost is necessary, by some estimates it takes only $3 to switch from an open to

an efficient cook stove (Bond et. al. 2005). According to government survey data, some

79
826 million Indians reply on primitive cook stoves that burn wood and coal. That comes

out to a flat cost of some $2.48 billion- merely 2/3 of the existing budgetary cost (under-

recoveries) of the existing LPG regime. In other words, some of the LPG subsidy could

still be retained even while efficient cook stoves are distributed to every single relevant

household in the India. New avenues for implementation have just emerged, most

prominently the MNRE’s new National Biomass Cook-stoves Initiative.

Although implementation might take place using a number of new stove

technologies, particular attention should be paid to a new generation of bio-char stoves.

These stoves not only result in health and carbon mitigation, but also sequester carbon-

preventing aerosol emissions and enhancing soil. Bio-char, or biomass-derived black

carbon, relies on a novel approach of combustion called pyrolysis that immediately

converts around 50% of the carbon content of fuels into a valuable, carbon-rich by-

product (Lehmann, Gaunt, and Rondon, 2006). This technology would reduce the amount

of biomass-derived black carbon that is currently being released into the atmosphere and

generating spatially and temporally strong radiative forcing, as detailed in the chapter on

energy poverty. A terrestrial diagram of biochar technology is visible below.

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 Figure 17: Biochar using Pyrolysis. Source: Lehmann

Estimation of Co-Benefits
Cook stove implementation might vary wildly, but for purposes of scoping I make

two optimistic but reasonable assumptions. First, they might displace the use of wood in

about half of households, reducing their carbon footprint and exposure to indoor air

pollution from solid fuel simultaneously. The 50% penetration figure has been commonly

used in other scoping exercises, and references a middle ground between the inertia of

energy poverty and the potential of mass distribution (Smith & Haigler, 2008). Second,

efficient cookstoves might also be distributed in urban settings, where they could be

distributed to those living in slums who still have no access to LPG for cooking and

instead use wood or kerosene. To simplify, I assume that 1/3 of urban kerosene usage

might decline- again, with simultaneous health and enviornmental benefits.

This yields dramatic environmental and health co-benefits. Carbon emissions drop

from the baseline of 2.85 million tons to 1.98 millions tons, a reduction of 873,440 tons

of CO2. Total DALYs in Maharashtra nearly halve from the baseline of 973,906 to

517,671- a reduction of 456,234. Recall from the methodology section that reductions in

aersols are hard to quantify because they have variable GWPs. Yet efficient cookstoves

81
could have a highly signficant reduction on this sort of emission, especially if a

cookstove program employed biochar technology to sequester black carbon. The India-

wide numbers here are 10.9 million tons of emissions averted and 5.7 million DALYs.

This has a rough monetary value of $218 million in emissions and $5.7 billion in health

outcomes- more than double the upfront investment, and likely more because of

reductions in black carbon that would follow.

Electricity & Demand Interventions

While kerosene and LPG subsidy elimination can be fairly easily paired with

clean energy, electrical subsidies represent a more complicated case. This is because the

clean energy interventions mentioned earlier- cook stoves and solar systems- are supply-

side solutions that merely switch from existing technologies to new ones. Electricity has

no immediate substitutes, but instead must shift from coal and other dirty generating

sources to cleaner substitutes like solar over time. Rather than estimating the long-term

impact of grid-based solar, this section considers a more discrete intervention: altering

the efficiency of the existing transmission and distribution of electricity. In the status quo,

transmission and distribution losses escalate upwards of 25% due to technical losses, lack

of metering, and large-scale theft (Singh). These losses have been escalating over time, as

expanding power supply cannot keep up with demand. These inefficiencies trace the

losses of the SEBs administer the power, as visible in Figure 18 below. These existing

inefficiencies are ‘dirty’ because households are now over-consuming power, and this

imposes significant costs and signficant carbon emissions.

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 Figure 18: Losses of SEBs from 1993-2000. (Thakur, Deshmukh and Kaushik)

Could we pair the elimination of electrical subsidies with efficiency

improvements on the demand side of the electrical sector? The existing literature suggests

that the potential improvements are more than enough to compensate for the welfare

losses that might come with subsidy reform. In a planning commission report, Kirit S.

Parikh argues that energy efficiency and demand side management are the most effective

possible intervention in the electrical sector, and necessary to meet energy and

development benchmarks in the coming year (K. S. Parikh). Eletrical price reforms,

subsidy removal, and privatization of electrical consumer goods are themselves strong

opportunities for efficiency, and might enhance demand-side transmission and

distribution reform. For example, a move from subsidized to market prices would

improve market signals, creating strong efficiency upgrades in appliances and electricity

system (Parikh and Parikh). Finally, note that subsidy elimination offers a strong

possibility for efficiency upgrades because over-consumption is mostly the product of

wealth households. Thus subsidy reform would not cause “forced energy” savings by the

poor due to deprivation, but instead force reduction among the top 10% income group,

which emits 12 times as much per capita each year as the lowest (Parikh and Parikh).

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Implementation
If demand-side reform and subsidy reform might work together in unison, how

might we implement them? In “Managing Demand-Side Economic and Political

Constraints on Electricity Industry Re-Structuring Process”, Stanford Professor Frank

Wolak discusses one blueprint for reform. He argues that consumers face especially

strong demand-side economic and political constraints in their consumption of electricity.

The success of reform beginning with or involving the transmission and distribution

sector may hinge on this point. Frank Wolak argues that traditional demand-side

mechanisms are invalid in a developing context; hourly metering is close to impossible

because of the labor costs associated with the process and the fact that most customers

wouldn’t pass a net-benefit test as to whether or not measuring their consumption is

worthwhile (Wolak). Most consumers do not pay their bills, and social norms in India

lend credence to large-scale theft given the perceived corruption of the power sector.

Wolak recommends group payment programs for electricity bills as consumers in a given

area typically take their energy from the same high voltage transmission networks

(Wolak). This would allocate liability for wholesale energy at a group level, reducing the

likelihood of theft and free riding through social pressure. In turn, it would also eliminate

some of the seemingly intractable problems at play in the financial viability of further

privatization. Wolak makes the point that without a fundamental shift in consumer

behavior through changed norms, it is unlikely large-scale private investment will take

hold, and it is doubtful that even government money on the sector is being well spent.

Technically, one option that might reduce losses is an increase in the voltage of Indian

electrical systems. This would decrease the load shedding that is characteristic of poor

power reliability and reduce T&D losses substantially.

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Estimation of Co-Benefits
Electrical reform would not improve health outcomes. Yet because electricity use

drives the carbon footprint of the average household, it yields dramatic environmental

benefits. Let’s use the 25% figure referenced earlier, and assume that the electricity

sector can now make due with only ¾ of what it used before. Even though electricity is

the least carbon-intensive of fuel choices, at 0.6 g CO2/unit, households consume it at

such a high quantity that this 25% increase in efficiency makes a large difference. The

total carbon footprint comes out to 2.66 million tons, a reduction of 190,505 tons. This

comes out 2.31 million tons on the national scale, and $53.2 million in emissions

reduction value.

11. Conclusion

Final Recommendations
• India's dirty energy subsidies do represent a triple-win reform opportunity. Their
elimination could bring a substantial gain in welfare and reduce budget losses,
eliminate a regressive policy, and reduce indoor air pollution and carbon
emissions. Their elimination is therefore of the highest priority.

• Nonetheless, the author does not recommend that this reform take place on its
own. Despite broad benefits, subsidy reform would substantially harm individual
households, specifically the urban poor, and would encounter a great deal of
political opposition. Therefore, dirty subsidies must be paired alongside new
subsidies for clean energy in order to mitigate loss and achieve co-benefits.

• Although national policies are already considering clean energy and especially
solar, they are not thinking boldly enough and not considering interaction with
existing subsidies. Kerosene subsidy elimination should be paired with
distribution of solar home systems through funds already committed under the
National Solar Mission or the MNRE. Efficient biochar cook stoves should be
distributed to solid-fuel households via the new National Biomass Cook-stoves
Initiative, and partially funded through the existing LPG subsidy. Electrical
subsidy reform could be paired with demand side improvements that improve
service and reduce over-consumption of power. All of these interventions
produce significant co-benefits, but cook stoves produces the most, at nearly $6
billion dollars worth of averted carbon emissions and health exposure.

85
Implications & Further Study
And so what are the stakes? If the interwoven issues of climate, health, and economic

development discussed in the paper seem significant but disparate, perhaps a shift in

perspective is in order. If climate change is our first great global challenge, then it is no

longer tenable to consider local dirty fuel in local or even national contexts. We must

envision the problem and the opportunity as planetary. And instead of a short time

horizon, we must consider history’s long view. Fred Hoyle, whose powerful insight on

the uniqueness of our planet served as an introduction to this paper, might also provide us

with some concluding perspective. He has claimed that by exhausting natural resources

such as coal, oil, and metallic ores, our species has embarked on a ‘one-shot affair’ in our

transition from primitive conditions to high-level technology (“Olduvai Theory: Sliding

Towards a Post-Industrial Stone Age, by Richard Duncan”). It will require a full coalition

of organizations and the full spectrum of human ingenuity to make the great transition

from a dirty, inefficient, and regressive economic system towards one that is compatible

with what Hoyle calls our ‘planetary system.’ This paper has presented the case for what

is innately a local and limited intervention in the Indian energy sector, but opportunities

to accelerate movement up the energy ladder exist everywhere in the world that there is

still energy poverty. It is the hope of the author that elements of this analysis might serve

as a blueprint for investigation for reform in other developing economies, where both the

need and opportunity are greatest.

86
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