Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms
The high share of coal, the most carbon-intensive fossil fuel, in inputs to power generation
also increases CO2 emissions. In 2000, coal use in power stations contributed just over half
of India’s total emissions. This share is expected to increase further in the next three decades
if the authorities do not take drastic action to mitigate these emissions (Figure 6.4).
Figure 6.4: CO2 Emissions in India, 1971-2030 (million tonnes)
Source: IEA (2002b).
Under-pricing of electricity, by boosting consumption, exacerbates the problems of urban
pollution of and rising CO 2 emissions. The removal of all energy subsidies would lead to an
estimated 105 million tonne reduction in power-sector CO 2 emissions, equivalent to about a
third of current emissions. Most of this reduction – 99 million tonnes - would come from
lower coal use brought about by lower demand for electricity resulting from the removal of
electricity subsidies.
Electricity subsidies may also indirectly hold back rural development, even though subsidies
to farmers are intended to boost rural incomes. By undermining the ability of the SEBs to
invest in extending distribution networks to villages, they have restricted rural access to
electricity services. Today, less than a third of rural households in India have access to
electricity. 54 Lack of electricity keeps communities in poverty and contributes to its
perpetuation, as it precludes most industrial activities and the jobs they create. Access to
electricity and other modern energy sources is a necessary precondition for economic and
social development.
6.5 Reforming Electricity Subsidies
There is unsurprisingly considerable resistance to reforming electricity subsidies from those
current consumers of electricity that enjoy prices below full supply cost – especially farmers
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IEA (2002b). Chapter 13 includes a detailed discussion of the link between energy use and poverty.
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