Professional Documents
Culture Documents
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
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
3
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
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
Barnes, et al. makes the intuitive and empirical claim that “without efficient, clean
activities or to improve the quality of their lives” (Barnes and Floor, 1996). To
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
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
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
level trend: that per-capita income and the increasing use of modern (technologically
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
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.
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.
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
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
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
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.
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
12
2. Research Questions
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
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
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
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
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
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
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
externalities using IPCC and WHO methodology. The second question is both
clean energy interventions, and uses scoping techniques to estimate the mitigation and
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
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
increase the welfare of households affected by energy poverty and compound those
Development
There is an unambiguous relationship between energy poverty and economic
development, and this section provides evidence for this in a microeconomic and
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,
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
This composite energy index is then regressed with a composite index of human
Program’s Human Development Index (HDI). The results, visible below in Figure 5, are
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
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.
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
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
Environment
Energy poverty generates significant local and global environmental impacts.
Locally, reliance on firewood leads to the depletion of local natural resources, and a
(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.
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
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
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.
Yet the most exotic and potentially the most significant emissions are not even
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
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
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:
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;
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
interventions represents what is known in the literature as a co-benefit, and what might be
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
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
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
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
Monetary Fund, 2008). These are enormous costs that pose a threat to the financial
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
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
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.
international bodies have spoken out unequivocally about their negative implications.
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”).
from market prices. This huge drop in prices poses substantial costs through
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
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
sector, and electrical subsidies are determined at the state level. (International Energy
Agency, 2007).
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
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
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,
The two fuels have different distribution systems. Households receive around
90% of kerosene through a national public distribution system- otherwise know as the
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
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).
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
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
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
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
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
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
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”
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
Earl Babbie defines this method in The Practice of Social Research as a type of
(Babbie). More concretely, the method begins with a matrix or table organized by this
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
Next, I simplified this distribution into four income tiers: less than 5,00
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
Population
Income Tier (millions) Percent of total
9,956 1%
>30,000 rs. per month
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
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
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
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
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
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).
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
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
cost-benefit analysis considers just overall change, but unlike Kaldor-Hicks ignores
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
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
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
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
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
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:
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
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
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
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
43
studies for an area that “establishes dose-response relationships linking environmental
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
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,
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
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
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
simplify the DALY/exposure to indoor kerosene use to around 1/3 of total relative risk,
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
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
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:
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
(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
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.
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.
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.
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
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
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
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.
Middle 10,000- 16 39 55
Income 30,000
High Income > 30,000 8 7 15
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
• 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.
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
monetary values of goods and service consumed per month by individual households.
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
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:
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
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
54
Household Weighted
Increase in Loss Distribution
Subsidy Budget ($) (Millions $) of Loss
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%
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
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
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
Weighted Losses
Group (Millions $) Distribution of Loss
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
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
57
12
10
logcapita
8
6
0 .5 1 1.5
Subsidy Effect Index
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
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
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
urban and rural populations, the existing subsidy distribution is certainly regressive.
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
consumption levels, and yields a total of 2.28 million tons of carbon dioxide. The
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
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
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
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
• 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.
and third, we see that subsidy elimination will bring strong distribution and
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
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,
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-
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
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
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
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
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
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
mobilize support to reform the subsidies, would they follow through? Sumir Lal 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).
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
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,
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.
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
67
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
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
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.
68
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
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
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
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(Shalizi, 2007).
growth are profound and will become even more so in the coming years. In 2005, India
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
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
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.
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
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
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
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
72
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
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).
To get a sense for the signficance, consider the current size of the Indian
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
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
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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
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
Like the Chaturvedi Report, this paper finds that kerosene subsidies are ripe for
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
• Avoiding RS 9300 crore ($2 billion) in annual budgetary subsidy and the claimed
under-recoveries for the PDS system
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
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
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
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
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
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
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
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
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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
These stoves not only result in health and carbon mitigation, but also sequester carbon-
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
80
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
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
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
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Figure 18: Losses of SEBs from 1993-2000. (Thakur, Deshmukh and Kaushik)
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
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
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).
83
Implementation
If demand-side reform and subsidy reform might work together in unison, how
Wolak discusses one blueprint for reform. He argues that consumers face especially
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
because of the labor costs associated with the process and the fact that most customers
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
84
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
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
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
86
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