BHUBANESWAR, India (AlertNet) – India’s high subsidies for polluting fuels like diesel and kerosene place a heavy burden on public finances and are compromising investment in clean energy alternatives, while removing them would hurt the poor less than commonly believed, researchers said this week.
In 2011-12, the fuel subsidies, together with the losses made by state-owned oil companies on the sale of regulated fuel, totalled 1.4 trillion Indian rupees ($27.7 billion), notes one of three new reports on the subject.
In India, under recovery – the gap between international petroleum prices plus refining and marketing costs and the amount earned from selling fuel at a lower, fixed price – has increased by more than 75 percent from 2010-11 and is three times the level in 2009-10, the study from The Energy and Resources Institute (TERI) adds.
This is because international oil prices have risen, but India’s subsidies for diesel, kerosene, Liquid Petroleum Gas (LPG) and gasoline have not been reduced at the same rate. India imports over 80 percent of the crude oil it needs.
Arguments against cutting fuel subsidies have focused on the negative consequences for the poor. But the research, released on Monday, estimates that putting diesel up by 25 percent would lead to a rise of only 1 percent in general price levels.
Some sectors would be affected more than others, particularly transport operators, it adds. Rail transport costs would increase by 2.5 to 3.5 percent, but industry would see a smaller rise, averaging just 0.25 percent. In agriculture, the cost of cultivating wheat would rise 2.75 percent and sugar cane, 0.75 percent, it says.
The three studies by the International Institute for Sustainable Development’s Global Subsidies Initiative (IISD-GSI), in collaboration with India’s National Institute for Public Finance and Policy (NIPFP) and Delhi-based TERI, aim to chart a policy path to reducing India’s fossil-fuel subsidies while managing the economic and social impacts of higher fuel prices.
Funded by the British government, the research also examines compensatory cash-transfer schemes that could be used to protect poor citizens when subsidies are cut and fuel prices rise.
The Indian government has committed to pruning subsidies for petroleum-based fuels, fertilisers and food from 2.5 percent of gross domestic product (GDP) in 2011-12, to 2 percent by 2012-13, and to 1.75 percent over three years.
But moves in this direction have been hampered by concerns that a hike in diesel prices will boost inflation, hitting the country’s large middle-class and vulnerable poorer people hardest.
In July, Prime Minister Manmohan Singh summed up the government’s predicament when he described raising the price of diesel as “a very delicate issue”.
Kaushik Ranjan Bandyopadhyay, associate professor at New Delhi’s TERI University, who worked on the cash-transfer recommendations, said the likely impact of higher diesel prices “has been blown out of proportion” and would actually be “negligible”.
The new research argues the overall impact will be less than feared, although it concedes that fuel inflation will be felt most by lower-middle class and poorer families. It suggests that introducing direct cash payments for these households would offset that inflationary effect.
CLIMATE CHANGE BENEFITS
While economic and social concerns have been the focus of the fuel subsidy debate so far, climate change aspects remain under-played, both in policy and public discussions, experts say.
Reducing subsidies for diesel and other petroleum-derived fuels would have far-reaching implications for greenhouse gas emissions, and pave the way for incentives to improve energy efficiency and expand clean energy solutions, researchers told AlertNet Climate.
“One can assess the significant impact of fossil-fuel subsidies on climate change from the International Energy Agency’s finding that phasing out these subsidies globally would lead to a 5.8 per cent decrease in carbon emissions by 2020,” Kerryn Lang, a Geneva-based project manager for IISD-GSI and one of the authors of a summary of the research findings for policy makers, said via email. “High prices would encourage consumers to become more energy-efficient and use cleaner forms of energy.”
Lang said that, because diesel is more highly subsidised than gasoline, many better-off Indians choose to drive cars that run on diesel rather than petrol, because it is cheaper. “Unfortunately, diesel is also more polluting than petrol,” she added.
Diesel accounts for 38 percent of consumption of petroleum products in India.
“Operation of trucks uses more than one half of total diesel consumption in the country while overall the transportation sector accounts for 70 percent of demand, adding hugely to emission levels,” said San Francisco-based Bhamy Shenoy of IISD, who peer-reviewed some of the research.
SUBSIDIES FUEL CORRUPTION
Low fuel prices have also led to the “mother of all corruption, the size of which is over INR 250 billion ($4.5 billion) per year”, said Shenoy, who has a background in the petroleum sector and has worked on subsidies for 22 years.
Subsidised diesel is illegally diverted for blending with petrol, and subsidised kerosene for those living on less than $1 a day is also illegally mixed with diesel, he said. “This is being done on a large scale and is highly environmentally damaging because of the inefficient combustion,” Shenoy explained.
Cheap diesel is also the reason behind the popularity of powerful diesel pumps for irrigation, which results in uneconomic use of water; the preference for diesel-fed power generation plants in India; and the large-scale use of diesel standby generators by the rich, according to Shenoy.
Exhaust fumes from trucks with diesel engines in higher-altitude Himalayan regions are a major source of black carbon which, along with aerosols, ash, acids from biomass and coal-burning, forms the Asian Brown Cloud – a haze that hovers 3 km above the Earth’s surface.
Black carbon heats the atmosphere by absorbing solar radiation reflected from the earth. It also contributes to snow melt by depositing soot on the snow, darkening it and enhancing solar absorption.
“In all such climate-damaging practices, the primary objectives of India’s National Action Plan on Climate Change – conservation, efficient resource-use and shifting to cleaner and greener sources of energy – are constantly being relegated to the background,” TERI University’s Bandyopadhyay said.
“(Diesel price controls) are serving neither the poor nor the climate, whose drastic changes will only exacerbate the plight of the poor,” he added.