The Role of Taxes and Subsidies in the Clean Cooking Transition - Coggle…
The Role of Taxes and Subsidies in the Clean Cooking Transition
Subsidy and tax policies play a key role in achieving universal clean cooking access.
Cost barriers are the primary challenge for clean cooking adoption in LMICs.
SDG 7.1 aims for universal access to modern energy services by 2030.
The paper focuses on stove and fuel prices to enhance affordability.
Two strategies include subsidizing LPG (e.g., Indonesia, India, Ecuador, Peru) and tax exemptions for clean cooking fuel and technology (e.g., Ghana, Kenya).
Two main arguments for price interventions aimed at altering households’ use of improved efficiency cooking stoves and clean fuels:
Economic Efficiency and Externalities
It reflects societal costs, such as health and environmental damage.
Challenges arise due to non-market acquisition and informal transactions.
Taxing polluting stoves and fuels aligns with tax theory principles.
Affordability and Subsidies
Subsidizing efficient stoves encourages cleaner options.
Taxing improved stoves can worsen market inefficiency, hindering adoption.
Affordability challenges hinder clean solution adoption, especially for the poor.
Social and Private Gains in Clean Technology Transitions:
Positive Social Net Benefits
Transitions to cleaner technologies yield positive social net benefits, excluding firewood to kerosene shift. Societal gains arise from improved health and environment, except in specific cases.
Limited Private Benefits
Cleaner technology adoption is often linked to negative or minimal private benefits. High costs associated with cleaner options contribute to reduced individual gains.
Price Elasticity in LMIC Households
This price sensitivity contributes to low private adoption rates of improved technologies.
The gap between actual and socially optimal adoption levels widens significantly due to this price sensitivity.
LMIC households, especially lower-income and rural ones, exhibit price-sensitive demand for improved cooking technologies.
Price Sensitivity Factors For Adoption of Clean Cooking Fuels/Technology
Concerns about technology suitability and durability
Lower emphasis on health risk reduction
Tight liquidity constraints
Limited bargaining power of women who bear pollution's cost
Subsidies are crucial for encouraging clean cooking solutions. They make cleaner options more affordable for households.
When households have access to free or heavily subsidized traditional fuels (like biomass), introducing subsidies for cleaner fuels can increase overall household energy expenses. Despite promoting cleaner fuels, households may stick to traditional options to keep costs low.
Global Impact of Subsidies:
Indonesia: Successful transition from kerosene to LPG fueled by coordinated LPG subsidies and phasing out kerosene subsidies.
Rural Ecuador: An 89% adoption rate of LPG due to generous subsidies.
Persistent Challenge of Stacking
Despite subsidies, households often mix clean and polluting technologies. Observed in countries like Peru, Ecuador, Indonesia, Mexico, and India.
Factors: affordability, supply chain, preferences, and non-health considerations.
Non-Price Policy Interventions
Besides subsidies, non-price measures are essential. Options like financing for durable goods and LPG pay-as-you-go models can ease financial constraints.
Improving access through better supply chains and infrastructure. Empowering women as suppliers and consumers for a faster transition to modern energy services.
Subsidy Imbalance in Clean Fuel Adoption:
LPG subsidies in Indonesia primarily benefit medium- and high-income households.
Biogas subsidies in China tend to favor those with substantial livestock.
The wealthiest 20% in lower- and middle-income countries capture a significant share of fuel subsidies (43%) compared to the poorest 20% (receiving 7%) (IMF 2013).
Initiatives like India's Pradhan Mantri Ujjwala Yojana (PMUY) struggle to reach the most marginalized households despite targeting.
Energy subsidies, especially for clean fuels, tend to favor higher-income households disproportionately.
Enhanced Targeting Methods
Categorical targeting based on geographic area or observed characteristics.
Means-testing using income, assets, or consumption data.
Quota-based and volumetric targeting tied to consumption volume.
"Ordeal" mechanisms involving specific actions for discounts
Promotion of Voluntary "Opting Out
Encourages wealthier households to voluntarily forgo subsidized connections, benefiting those in need.
Reasons Why Subsidies Are Not Widely Used
Budget Constraints and Political Challenges
Subsidies demand financial resources often lacking in LMICs due to budget constraints.
Removing entrenched subsidies, as seen with LPG in Ecuador, poses significant political challenges.
Trade and Regulatory Barriers
Governments impose import duties on efficient stoves and tax cooking fuel purchases, raising costs. Administrative and licensing barriers also impede efficient cooking technology adoption.
Promote a transition away from subsidy dependence.
Leverage local market distribution to ease the burden on public finances.
Target subsidies toward the poor and vulnerable.
Spoiling the Market Argument
Subsidies may distort cleaner cooking markets. Not all households revert to polluting tech after subsidies end.
Empirical evidence shows initial subsidy adoption doesn't always reduce willingness to pay later.
Supply-Side Innovation Effects
Governments and donors subsidize stove suppliers, which can also impact innovation.
Demand-side subsidies can maintain competition and product quality.
Subsidies may discourage innovation by favoring older technologies. Limited research on this innovation effect.
Balancing innovation and affordability is essential in subsidy design.
Recommendations for Effective Implementation of Clean Cooking Subsidies
Aggressive Subsidies for Adoption
Deploy strong subsidies in LMICs to promote clean cooking adoption. Generous subsidies bring social benefits, even considering some leakage.
Removal of Taxes and Levies
Eliminate taxes and levies on clean and improved cooking solutions, especially in areas with limited access to modern cooking energy.
Enhanced Targeting Strategies
Prioritize low-income households, sensitive to prices, and reliant on traditional cooking. Use methods like geographic, means-testing, quotas, and Aadhaar-linked systems for accurate identification.
Base subsidy allocation on local constraints, socioeconomic factors, and energy availability. Align electric cooking subsidies with renewable energy sources or consider gas subsidies for urban areas with unstable power.
Complementary Adoption-Enhancing Measures
Address liquidity constraints with financing options.
Strengthen supply chains and fuel distribution networks.
Combine subsidies with complementary interventions.
Engage local implementers and raise awareness of clean cooking benefits.
Learnings from Related Sectors
Learn from successful expansion in sectors like electricity, health, sanitation, and water treatment.
Apply strategies such as guaranteed access, well-targeted discounts, and alternative benefit allocation mechanisms to clean cooking initiatives.