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Distributional Impacts of Energy Policies in India: Implications for Equity in International Climate Change Agreements

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Distributional Impacts of Energy Policies in India: Implications for Equity in International Climate Change Agreements DISTRIBUTIONAL IMPACTS OF ENERGY POLICIES IN INDIA: IMPLICATIONS FOR EQUITY IN INTERNATIONAL CLIMATE CHANGE AGREEMENTS A DISSERTATION SUBMITTED TO THE EMMETT INTERDISICPLINARY PROGRAM IN ENVIRONMENT AND RESOURCES AND THE COMMITTEE ON GRADUATE STUDIES OF STANFORD UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY NARASIMHA DESIRAZU RAO AUGUST 2011 © 2011 by Narasimha Desirazu Rao. All Rights Reserved. Re-distributed by Stanford University under license with the author. This work is licensed under a Creative Commons Attribution- Noncommercial 3.0 United States License. http://creativecommons.org/licenses/by-nc/3.0/us/ This dissertation is online at: http://purl.stanford.edu/py027yn9445 ii I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. Lawrence Goulder, Primary Adviser I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. Debra Satz, Co-Adviser I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. Joshua Cohen I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. David Victor Approved for the Stanford University Committee on Graduate Studies. Patricia J. Gumport, Vice Provost Graduate Education This signature page was generated electronically upon submission of this dissertation in electronic format. An original signed hard copy of the signature page is on file in University Archives. iii iv ABSTRACT Two-thirds to three-fourths of future global greenhouse gas emissions by 2030 are likely to come from large developing economies. Their participation in mitigating climate change is imperative to achieving the target of restricting global average temperature increase to 2 degrees Celsius above preindustrial levels that was set in the Copenhagen Accord of December 2009. But a third of the world’s poor live in one of these economies, India. While there is much agreement among scholars that climate mitigation should not interfere with the humans’ ability to enjoy a minimal standard of living, there is little scholarship on how to carve out such an “exemption” for poor subpopulations within states in international climate change mitigation agreements. Further, there is little analysis in developing countries of how the impacts of specific mitigation policies would be distributed across the population. This dissertation begins to fill these gaps. I analyze one class of issues related to the role of state governments that would receive such an exemption from mitigation for their poor, but who may not be accountable in international agreements for how such an exemption is implemented. States influence the poor’s emissions through policy choices and the institutions that implement policies. These policies and institutions affect the number of people that are entitled to an exemption, and whether they would actually receive its associated benefits. This work consists of three studies, the first two of which are positive studies of the income distributional impacts of potential climate mitigation policies in Maharashtra, India. The first study examines the impact on income distribution of removing the kerosene subsidy. The second study evaluates the leverage electricity regulators have over the distribution of mitigation burdens in the electricity sector. The third study is a normative assessment of the ethical and practical challenges of implementing an exemption for the poor in international climate mitigation agreements. In the absence of broad-based institutions for redistribution, governments subsidize essential consumption, such as food and household energy supply, but with well v known fiscal and environmental costs, including to climate change. However, how the benefits of the kerosene subsidy policy are distributed among the millions of kerosene users is not understood. This study formally examines these benefits for different income groups and the overall efficacy of kerosene subsidies as a redistributive policy. The study shows that households’ allocated quotas far exceed kerosene demand in rural areas, which encourages suppliers to divert kerosene to other sectors. Urban households, on the other hand, some of whose cooking budgets would double without the subsidy, supplement subsidized kerosene use with purchases in the black market. A better targeted subsidy in urban areas alone would avoid high costs of the current policy, yet avoid the impoverishment of urban users from their complete removal. The second study assesses the distributional impacts of investing in low carbon supply in Maharashtra’s electricity sector to the extent required to meet the Indian government’s pledge in climate negotiations to reduce the economy’s carbon intensity. I examine the regulator’s leverage in rate-setting over the distribution of these incremental costs across households. Using an economic simulation model of the electricity sector and household welfare, I assess the impacts of economy-wide electricity price scenarios under different political and institutional constraints. The analysis reveals that regulators can insulate low-income households from welfare losses without trading off aggregate welfare losses as long as they can raise prices to industry and high-income households. While feasible, this pricing approach may be politically unacceptable. Mitigation may also have a co-benefit of reducing supply interruptions to the poor. These results emphasize the importance of qualifying mitigation burdens by the internal policies and institutions on which they depend. The third study questions the adequacy of burden-sharing proposals for climate mitigation that advocate an exemption for the poor without accounting for states’ agency over the costs and outcomes of such an exemption. How to allocate the cost of this exemption, however, can complicate international agreements. Participating states face moral hazards over the choice of future baselines of the poor’s emissions. I show - using India for illustration - that the financial stakes for parties in how future growth is distributed in India can be up to tens of billions of dollars. I suggest that there is no vi clear moral basis to make benefiting states accountable for minimizing the poor’s emissions. Getting agreement on the terms of exemption may be easier if benefiting states adopt comparative benchmarks of accountability for the poor’s emissions, but which do not infringe on particular policy choices. Furthermore, participating states should share design agreements to ensure that the poor receive the benefits of an exemption. vii ACKNOWLEDGEMENTS Dedicated to the memory of Stephen H. Schneider (1945-2010) I am grateful to Steve Schneider, who was my primary advisor and mentor, for encouraging me to pursue this topic and imparting the meaning and importance of interdisciplinary research. After his passing, I have been extremely fortunate to have the close guidance, open-mindedness, patience and rigor offered by Larry Goulder. Joshua Cohen was instrumental in developing my ideas in global justice. Debra Satz gave me invaluable guidance and opportunities to present my work to intimidating audiences. I am grateful for David Victor for his pragmatism and commitment to my development and for financing my fieldwork through the Program in Energy and Sustainable Development. Paul Baer has been an informal advisor and collaborator whose work served as a launching point for mine. I thank Ashok Gadgil and Kirk Smith at Berkeley for useful conversations in the formative stages. My conversations with Girish Sant of Prayas Energy group kept me assured of the policy relevance of my work. I am indebted to Gayatri Gadag, Ravi Deshmukh and Dipak Patil in Pune, India for their help with data gathering and fieldwork. I thank my research assistants, Chris Bennett, Evan Woods and Allison Fink, for their contributions to my analysis. I am grateful to Pam Matson, Danielle Nelson and Helen Doyle for the opportunities and support I have had at E-IPER. My dissertation was made possible through funding from the Robert G. Kirby and Philip & Jennifer Arnold Satre Fellowships. Its successful completion would not have been possible without the moral support of Asha Ghosh. viii TABLE OF CONTENTS CHAPTER 1 – CLIMATE CHANGE MITIGATION: A HUMAN RIGHTS PERSPECTIVE ................................................................................................. 1 CHAPTER 2 – KEROSENE SUBSIDIES: WHEN ENERGY POLICY FAILS AS SOCIAL POLICY............................................................................................ 27 CHAPTER 3 – DISTRIBUTIONAL IMPACTS OF CLIMATE CHANGE MITIGATION IN INDIAN ELECTRICITY: CASE STUDY OF MAHARASHTRA........................................................................................... 56 CHAPTER 4 – IMPLEMENTING AN EXEMPTION FOR THE POOR IN INTERNATIONAL CLIMATE AGREEMENTS .......................................... 87 CHAPTER 5 – CONCLUSIONS AND FUTURE RESEARCH ........................................... 111 Appendix A - Maharashtra Kerosene Quota Allocation ........................................................ 119 Appendix B – Detailed Results and Data Tables (Chapter
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