New Delhi, April 28, 2021—As millions of Indians await the government’s response to a record increase in the price of liquefied petroleum gas (LPG), experts warn that poor households may benefit two times less than better-off consumers from LPG support if the government doesn’t change the design of the LPG subsidy policy.

According to a new report (How to Target LPG Subsidies in India from the International Institute for Sustainable Development and the Initiative for Sustainable Energy Policy, at Johns Hopkins University),  the poorest 40% of households in rural and urban parts of Jharkhand received less than 30% of government LPG support in FY2019, when LPG subsidies comprised nearly 28% of all central government energy subsidies. 

The government halted LPG subsidies in May 2020 due to low oil prices and consequently lowered domestic LPG cylinder rates. However, LPG cylinder prices have recently increased from INR 594 in May 2020 to INR819 in March 2021, leaving millions of Indians struggling to afford the cooking fuel. Experts warn that LPG price support for poor households is vital and needs to be reintroduced urgently, but the existing policies need redesign to support those who need it the most.

“It's clear that poor households need LPG subsidy so when the government reintroduces LPG subsidies, it should avoid repeating old mistakes and channel benefits toward poor households, who are otherwise compelled to rely on less-clean biomass-based solid fuels,” says the report author, Shruti Sharma. “Rationalizing subsidies will be crucial for steering away from a regressive subsidy regime and saving the government crores during these tough economic times.”

According to the experts, the main bottleneck in improving subsidy distribution is high consumption of subsidized LPG cylinders by better-off households. The majority of India’s rural households continue to use more of the freely available wood and biomass-based fuels instead of subsidized LPG, while better-off households with higher consumption of subsidized LPG end up receiving a larger share of the subsidies. 

Experts highlight that the lack of data on the efficiency of the LPG subsidies has prevented the government from recognizing the inequity in distribution. “Jharkhand’s case study shows clearly that there is a knowledge gap in identifying poor households accurately,” says Sharma. “If we want to fix the problem of unaffordability, targeting is key.”

Experts recommend that focusing subsidy benefits on a narrower subset of beneficiaries can not only support the poorest consumers but also lower the overall program cost. 

The study estimates that poor households in Jharkhand with a Pradhan Mantri Ujjwala Yojana (PMUY) connection consumed only 5.6 cylinders annually—far lower than the current annual limit (or quota) of subsidized cylinders set at 12. Until poor households can increase their LPG cylinder consumption, the government can consider further reductions in the annual limit from 12 to 9 cylinders. The study estimates that this could reduce subsidy expenditure by 14% in rural areas and 19% in urban areas without significantly changing the average distribution of benefits. 

The study also found that there was no good link between poverty and whether or not households were PMUY beneficiaries: there was a mix of low-income and higher-income households among both PMUY and non-PMUY households. This means that trying to focus the subsidy only on PMUY beneficiaries—a commonly aired suggestion over the past several years—might create more problems than solutions. 

In the short term, the Centre must invest in mapping the knowledge gap and identifying the equity of LPG subsidies across India. In the medium term, experts recommend that state governments should consider testing smarter indicators like vehicle ownership to better identify well-off households and restrict their LPG subsidy. “Poverty is contextual, and this report tested interventions for Jharkhand, a state with high poverty, so findings might not be the same for states with lower poverty levels,” said Christopher Beaton, a study co-author. 

The COVID-19 crisis has severely affected the incomes of poor households, further stressing the need to increase their support for LPG subsidies. “The lack of clarity on LPG subsidies may push poor households who cannot afford unsubsidized LPG to using unclean biomass, severely impacting the health of women and young children—already, we found that the poorest households had to dedicate 9%–11% of their monthly expenditure, compared to only 3% among better-off households. The government should consider better targeting of LPG subsidies to increase affordability for the poorest,” said Beaton.

Since the Paris Agreement was signed in 2016, countries have committed to act on climate change through their Nationally Determined Contributions (NDCs), plans that set country mitigation and adaptation targets every five years to keep global warming in check. Yet the United Nations Environment Programme’s recent Emissions Gap report on climate ambition shows that, under current government pledges, NDCs are largely insufficient and will lead to at least a 3°C warming by the end of the century. The ratcheting mechanism of NDCs—in other words, their increasing ambition over time—is critical to avoid a climate crisis.

How Can Countries Increase the Ambition of Their Climate Action?

Two particularly important tools that countries have at their disposal are carbon pricing and fossil fuel subsidy reform. Working as two sides of the same coin, these tools raise fossil fuel prices to be more in line with their true cost, which promotes more efficient consumption and therefore combats climate change while directing investments toward clean energy alternatives. Both can not only keep emissions in check and help countries meet their climate targets, but they also raise much-needed revenue for a green recovery from COVID-19. Every country should include ambitious carbon pricing and subsidy reform targets in its NDC. So far, however, this is not the case.

In a 2019 report, the International Institute for Sustainable Development (IISD) and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) showed that, out of almost 200 NDCs, only 8% of countries (14 NDCs) explicitly pledged to reform fossil fuel subsidies, and only 12% of countries pledged to put a price on carbon (50 NDCs). (The EU is treated as a block, as it has submitted a single NDC.)

Every country should include ambitious carbon pricing and subsidy reform targets in its NDC. So far, however, this is not the case.

While all countries committed to submitting revised NDCs in 2020, only 71 countries did so. It is possible that several countries may have interpreted the postponement of the 2021 United Nations Climate Change Conference (COP26) as a reason to postpone NDC updates as well, but this is problematic as it further complicates tracking progress on subsidy reform and carbon pricing. For example, Canada recently decided to significantly increase its carbon pricing to CAD 170 a tonne by 2030 but did not submit an updated NDC last year.

Analyzing the text of all NDCs—including those updated in 2020—reveals very few new or more ambitious green fiscal policy commitments. Only 57 explicitly commit to carbon pricing (including emissions trading schemes) and 12 to fossil fuel subsidy reform. Furthermore, several of these pledges are aspirational rather than firm action plans. Perhaps most disconcertingly, looking at the 2020 batch of NDCs, we found at best no improvement on fossil fuel subsidy reform and, at worst, two countries that might have backtracked on their proposals.

Commitments to carbon pricing did increase, which is praiseworthy, but countries must openly acknowledge that fossil fuel subsidies are incompatible with climate action and begin to widely recognize and adopt fossil fuel subsidy reform as the powerful emissions reducing tool that it is.

Fossil Fuel Subsidy Reform and Carbon Pricing Are Still Underutilized in the 2020 Revised NDCs

Many countries make commitments to renewable energy subsidies as a means of meeting their mitigation targets, but fossil fuel taxation and subsidy reform remain underutilized. While renewable subsidies can incentivize deployment, their positive effects could be cancelled out if countries simultaneously continue underpricing fossil fuels.

Only a handful of countries link fossil fuel subsidy reform or carbon pricing to creating a fair playing field for renewables in their NDCs, including Burkina Faso, Colombia, Ethiopia, and Singapore. Ethiopia stands out for eliminating virtually all of its fossil fuel subsidies in 2008. Switzerland also acknowledges the importance of reviewing domestic fossil fuel subsidies while cooperating with other countries, including through the Friends of Fossil Fuel Subsidies Reform. However, these commitments are still exceptions rather than the norm.

What Is Missing From Most NDCs?

Some countries such as Armenia, Kiribati, and the Solomon Islands detail how revenues raised from carbon taxes or levies might or will be used. Armenia refers to the possibility of using carbon pricing revenues to fund climate change mitigation and adaptation projects. Despite these outlying positive examples, however, most NDCs remain vague on how the revenues from carbon pricing and subsidy reform will be used and on what compensation measures will be put in place to protect vulnerable groups. For instance, Nigeria pledges to reform subsidies to fossil fuel consumption and production, acknowledging that consumption subsidies benefit higher-income households most. Yet Nigeria falls short in detailing how these reforms might actually be accomplished or how vulnerable consumers might be protected in the process.

Most NDCs remain vague on how the revenues from carbon pricing and subsidy reform will be used and on what compensation measures will be put in place to protect vulnerable groups.

Several NDCs also send mixed signals by supporting fossil fuel subsidy reform but promoting natural gas as a bridge fuel, as in the case of Morocco. Surprisingly, still very few countries make a connection between green fiscal tools and green recovery despite the opportunities for large revenue gains and emissions reductions.

Where Are NDCs at Now, and Where Do Countries Need to Go From Here?

The biggest emitters, namely China, India, and the United States, have not yet submitted an updated NDC and have, particularly in the case of the United States and China, relied on a fossil fuel heavy recovery. But positively, we are seeing some of these trends start to change. India used low oil prices during the pandemic as an opportunity to raise excise duties on diesel and gasoline to help fund its COVID-19 recovery. China pledged to be carbon neutral by 2060 and recently launched an emissions trading scheme in the power sector. In the United States, the Biden administration has also shown an unprecedented willingness to tackle the fossil fuel industry head on, including by seeking to eliminate certain subsidies to fossil fuel producers.

Several NDCs revised in 2020 also make a case for a green recovery and building back better. But clearly, when it comes to fossil fuel subsidy reform and carbon pricing, there is a long way to go before countries’ promises match the level of ambition needed to limit climate change to 1.5°C.