- 18th May 2020
As MECS country-level activities increase and expand, it is becoming increasingly relevant for researchers to decipher the policy instruments public institutions use to coordinate and influence their national (cooking) energy landscape. With this in mind, over the next few months, MECS researcher, Dr Meron Tesfamichael, will post blogs focusing on a selection of policy tools (e.g. subsidy, tax, information campaign, inter-agencies coordination). With an objective to unpack and demystify, each piece will focus on one policy instrument from domestic cooking energy perspective. The first blog investigates the role of subsidy as an economic incentive.
By Dr Meron Tesfamichael, University College London
COVID-19 has brought discussions about the role of the public sector to the foreground. With how governments respond to the pandemic seen as critical to control its spread, one early lesson emphasises the value of an effective public sector. Governments in Africa are being called to demonstrate decisive leadership, streamline resource mobilisation and facilitate coordination. COVID-19 and indoor air pollution are hardly the same. However, with all the talk about ‘effective public sector’, one also starts to wonder what countries could do about indoor air pollution.
According to WHO, annually, millions of people die from illnesses attributable to the inefficient use of solid fuels and kerosene for cooking. A problem that could be rectified by increasing access to modern cooking energy. However, doing so requires identifying contextually relevant solutions and creating an enabling environment for its sustainable adoption. ‘Enabling environment’ is used here to invoke an idea of a government with the capability to put together and implement a ‘cocktail of policies’ effectively and deliberately to ‘spark a cooking revolution’.
Governments have many tools in their policy toolbox they can use to enable and accelerate household cooking energy transition. Regulatory policies to form the baseline for other policies and to affect the decision environment of households and service providers. Information-based policies to address knowledge-deficits. Incentive-based policies to nudge the marketplace in the desired direction. Subsidy is one incentive-based tool governments possess. Within the energy sector, subsidies are used either the lower the costs borne by users or incurred by producers. These days, subsidies are generally condemned for distorting markets by encouraging excessive consumption of the subsidised products and for shifting demand away from those whose pricing reflects real market conditions.
Distorting energy markets and shifting demand is what governments did in the 1980s in response to reports of accelerating deforestation. From 1970 to 2000s, in Senegal, annual household LPG consumption grew from 3000 to 100,000 tonnes as a result of an LPG subsidy introduced to lessen charcoal dependency in urban areas. In Addis Ababa, Ethiopia, between 1980 and 2000, household ownership of electric mitad increased from 13% to 70%. This follows a state-sponsored large-scale production and marketing of the stoves at subsidised prices. Similar examples can be found in Ghana, South Africa and Zimbabwe. However, subsidies also tend to become victims of their success. Financing that starts small (with time) grows in size and popularity that it becomes politically difficult to roll back. In 2012, when the Nigerian government removed fuel subsidies protests escalated into violence, forcing the government to reverse part of the effort. Nigeria is not an isolated case. Over the years, attempts to eliminate subsidies have been met with protests in many countries.
Subsidies come in many forms. In South Africa, the 50kWh free basic electricity policy has played an essential role in encouraging households to cook with electricity. In Bangladesh, targeted subsidies have enabled 3 million rural households to gain access to SHSs and displace kerosene. In India, Delhi became the first kerosene-free city when the city ended kerosene subsidies by providing free LPG equipment to low-income residents. In Indonesia, by reallocating kerosene subsidies to LPG, the government shifted 50 million households to cook primarily with LPG. In India, the GiveItUp campaign has been urging wealthier families to give up their LPG subsidy so the government can continue to subsidise lower-income households. Governments are also increasingly subsiding the consumer through direct cash transfers.
It is often advised for subsidies to have an exit plan, i.e. how it should be ended while safeguarding any gains achieved. The problem is that more often, governments remove a subsidy during financial constraints, thus not in a position to ensure those that are likely to be affected are protected. However, there are some examples where governments have coordinated effort to address possible fallouts. In Ghana, the removal of fuel subsidies was followed by energy and non-energy policies to lessen the impact, including raising the daily minimum wage by 20%.
Where the desired outcome is to curb excessive consumption, it helps if a subsidy is followed by other measures to ensure the subsidised option is the viable option. In Senegal, the LPG subsidy was accompanied by an increase in the cost of the license fee for wood-cutting. In Ethiopia, a kerosene subsidy was supplemented by strict guidelines to control the flow of fuelwood into the capital city. In Kenya, tax exemptions for LPG were followed by a new tax on kerosene. It is also important to ensure the alternative option is more appealing than the subsidised good. In 2014, the government of Ecuador launched an induction stove promotion programme to alleviate the fiscal burden of subsidised LPG. However, despite an extensive effort, induction stove adoption remained lower-than-projected, mainly due to the persistence of subsidised LPG as a viable alternative and the high costs of induction stoves and induction-compatible cookware.
Economists advocate for a targeted approach to maximise the subsidy effectiveness. However, the question of who should be targeted is a contested terrain. Targeted subsidies can be ineffective if the gains achieved cannot be sustained once the subsidy is removed. In Ghana, a review of the Rural LPG subsidy programme shows that nine months after the initial delivery of filled cylinder 58% of the households have not refilled. Likewise, in rural India. Universal subsidies also remain popular for several possible reasons: first, there is limited evidence regarding the relative effectiveness of targeted versus untargeted schemes. Second, the political benefits associated with the administration of universal schemes are many. Third, the process for identifying and transferring resources to selected beneficiaries is either underdeveloped or prone to accusations of political bias.
One COVID-19-related article warns governments against mimicking each other because the pandemic is producing different effects for different groups of people in different settings. Meaning, governments must find their own path and effective governance should be contextualised. Another lesson is that market-based solutions are essential, but institutions that regulate, coordinate and balance incentives against risks are also important. Finally, how governments choose what policy tool to use is inherently political. Hence, although a policy review goes a long way towards explaining the general trajectory of a country, a political economy lens can broaden considerations beyond technical solutions to include institutions and processes through which policies are negotiated and implemented.