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

http://creativecommons.org/licenses/by-nc/3.0/us/

This dissertation is online at: http://purl.stanford.edu/py027yn9445

© 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.

ii

http://creativecommons.org/licenses/by-nc/3.0/us/http://creativecommons.org/licenses/by-nc/3.0/us/http://purl.stanford.edu/py027yn9445

I certify that I have read this dissertation and that, in my opinion, it is fully adequatein 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 adequatein 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 adequatein 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 adequatein 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 inUniversity Archives.

iii

iv

v

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

vi

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

vii

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.

viii

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.

ix

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 3) ................................................ 120

Appendix C - Long-Term Demand Response Model (Chapter 3) ........................................ 125

Appendix D - Household Survey Design ............................................................................... 129

x

LIST OF ILLUSTRATIONS

Figure 1: Basic Entitlements – Interpretations and Metrics in Literature .................... 14

Figure 2: Per Capita Carbon Dioxide Emissions: Country Averages and Internal

Distribution (Illustrative) ............................................................................. 19

Figure 3: Variation in Urban Household Kerosene Use - Mumbai, Maharashtra and

India 2004-05 ............................................................................................... 30

Figure 4: Cooking Fuel Shares by Income Decile – Maharashtra, 2004-05 ................ 31

Figure 5: PDS Kerosene Prices by Quantity Sold – Maharashtra 2004-05 .................. 34

Figure 6: Kerosene Use for Cooking/Water Heating – Maharashtra 2004-05 ............. 37

Figure 7: Kerosene vs. LPG Delivered Fuel Cost Comparison (2004-05 prices) ........ 39

Figure 8: Population Share by Kerosene Subsidy Benefit – Maharashtra 2004-05 ..... 43

Figure 9: Kerosene Subsidy Progressivity: Urban and Rural Maharashtra 2004-5 ..... 44

Figure 10: Kerosene Subsidy Progressivity – Nandurbar District, 2004-05 ................ 45

Figure 11: Kerosene Subsidy Quotas and Actual Use (a) Urban ................................ 46

Figure 12: Households with Insufficient Kerosene Quotas – Maharashtra 2004-05 ... 48

Figure 13: Subsidy Price by Purchased Quantity – Maharashtra 2004-05 ................... 50

Figure 14: PDS Kerosene Prices, Quantities, and Transport Distances by District ..... 51

Figure 15: Electricity and Welfare Model Simulation Approach ................................ 58

Figure 16: Electricity Block Tariff – Maharashtra State Electricity Board, 2004-05 .. 66

Figure 17: Residential and Industrial Price Impact Comparison .................................. 75

Figure 18: Industry Group Electricity Intensities (2003-2004) .................................... 76

Figure 19: Household Expenditure Electricity Intensity – by Income Group .............. 76

Figure 20: Average Residential Prices - Low Carbon Pricing Scenarios ..................... 79

Figure 21: Distribution of Welfare Losses - Low Carbon Pricing Scenarios ............... 80

Figure 22: Distribution of Welfare Losses - Energy Efficiency Sensitivity for the

Economic Efficiency Scenario ..................................................................... 83

Figure 23: Distribution of Welfare Losses - Energy Efficiency Sensitivity for the

Equity Scenario ............................................................................................ 84

Figure 24: Country Intranational Income and Emissions Distribution: 2007 .............. 93

xi

LIST OF TABLES

Table 1: Kerosene Consumption by Region and Market: Maharashtra 2004-05 ......... 32

Table 2: Household Kerosene Use by Function, Region and Priority ......................... 36

Table 3: PDS Kerosene Price Discrimination Model Results ...................................... 53

Table 4: Optimal Prices – Baseline and Low Carbon Scenarios .................................. 77

Table 5: Welfare Metrics – Baseline and Low Carbon Scenarios ................................ 78

Table 6: Optimal Prices – Industrial Elasticity Sensitivity .......................................... 81

Table 7: Welfare Metrics – Industrial Elasticity Sensitivity ........................................ 82

Table 8: Optimal Prices - Energy Efficiency Sensitivity for the Economic Efficiency

Scenario ......................................................................................................... 84

Table 9: Optimal Prices - Energy Efficiency Sensitivity for the Equity Scenario ....... 84

Table 10: Exemption Costs Under Alternate Development Paths in India .................. 94

Table 11: Informal Economies in Developing Countries ........................................... 103

1

CHAPTER 1 – CLIMATE CHANGE MITIGATION: A HUMAN RIGHTS PERSPECTIVE

1 Introduction

Global climate change has been called the “perfect moral storm” (Gardiner 2010).

This is for good reason. Given the unprecedented nature of climate change, humans

must confront a number of ethical challenges at once. Greenhouse gases (GHG)

emitted from sources across the globe have accumulated in the atmosphere over

centuries, to a large extent without our knowledge, causing unintended and potentially

catastrophic impacts on people and biodiversity in the future. While these emissions

come largely from industrialized societies, their long-term impacts fall

disproportionately on poor societies, through weather-related events that are not easily

traced to their causes, and with considerable scientific uncertainty surrounding their

severity and timing. Furthermore, that GHG arise primarily from the use of an

essential input – energy - into most human activity implies that to minimize the effects

of climate change societies would have to undergo shifts in infrastructure as well as in

lifestyles at an unprecedented scale, scope and pace. How will we compromise to

distribute this responsibility across countries? No matter what or how much action

humans take to combat climate change, these actions will have moral repercussions,

for people in the future or today, and mostly likely for both.

The climate change problem presents challenges for decision-making at the individual,

state and international level. The complex causal chain between human activity and

climate impacts and the separation in time and space between emitters and victims

makes it hard for individuals to acknowledge the threat of climate change, let alone to

modify their behavior (Swim 2009). At the state level, modern societies‟ reliance on

centralized sources of emissions (“collective emissions”) such as power plants and

industrial facilities and dispersed sources such as automobiles necessitate the

establishment of economy-wide institutions and policies to enable emissions

reductions. At the international level, because the atmosphere serves as a “global

commons” into which all humans‟ GHG emissions accumulate the worst impacts of

2

climate change cannot be mitigated by the actions of any one country alone.

Combating climate change requires cooperation among countries, each of which have

different interests in climate change policy, states of development and political power.

A critical concern is that the poorest populations in the world contribute the least to,

have the most to lose from, and have the least bargaining power to influence

negotiations on, climate change (Sagar 2001).

As such, global climate change is arguably the most complex international policy

challenge facing humanity. After over three decades of scientific research, almost two

decades of international negotiations, and the publication of four reports by the

Intergovernmental Panel on Climate Change (“IPCC”), over 120 countries - including

the United States, European Union members, China and India - signed the

Copenhagen Accord. This non-binding agreement symbolizes the overwhelming

acceptance by state governments of human interference with climate.

We agree that deep cuts in global emissions are required according to

science, and as documented by the IPCC Fourth Assessment Report

with a view to reduce global emissions so as to hold the increase in

global temperature below 2 degrees C, and take action to meet this

objective consistent with science and on the basis of equity.

Copenhagen Accord, December 2009

This agreement symbolizes an acknowledgement of our responsibility to prevent

imposing on future generations the harmful effects of climate change that would be

avoided with a maximum temperature rise of 2 degrees centigrade (“2C”).1

To achieve this target, the IPCC indicates that cumulative GHG emissions in the 21st

century would have to reduce from a projected average of 670 gigatons of carbon

(“GtC”) to 490 GtC (IPCC 2007). Based on current trends (“business as usual”, or

“BAU”), this implies that by 2030 annual global GHG emissions would have to

reduce to about half the levels that would otherwise occur (Project Catalyst 2009). The

pledges made by state governments in the Cancun Agreement of December 2010

1 Stabilizing GHG concentrations in the atmosphere at 450 parts per million (ppm) would keep the odds

of increasing average global temperature since pre-industrial levels by 2 degrees Celsius (“2C”) below

50 percent.

3

amount to only 60 percent of the mitigation levels required to achieve this target.2

Indeed, it has been estimated that even in the best case scenario that all the pledges are

implemented, we are still virtually certain to exceed the 2C target (Rogelj, Hare et al.

2009).

Perhaps the most divisive issue in international climate politics has been the issue of

how to distribute between developed and developing countries the burdens of reducing

GHG emissions (“mitigation”) further to meet the 2C target. The term „common but

differentiated responsibilities‟ (“CBDR”) in the UN Framework Convention for

Climate Change (UNFCCC) symbolizes the intent of the signatories to distribute the

burdens of responding to climate change so that industrialized countries would take

the lead in reducing emissions, while the less developed countries would give priority

to their development but aim to integrate climate change concerns in the future.3 In the

climate ethics literature scholars have interpreted CBDR in many ways, but generally

place greater responsibility for mitigation on industrialized countries (Gardiner 2004;

Gardiner, Caney et al. 2010). A meta-analysis of different burden-sharing proposals

suggests that under most views of equitable burden-sharing developed countries as a

whole need to reduce their emissions by 25-40 percent below 1990 levels, while

developing countries together would have to reduce emissions by 15-30 percent below

their BAU levels (den Elzen and Höhne 2008) by 2030.4 However, even though such

equity formulations have been proposed in negotiations since the first Conference of

Parties (“COP”) in 1995 (Ringius, Torvanger et al. 2002), developed and developing

countries have failed to have a dialogue about these equity principles, let alone reach

any agreement on how to allocate mitigation responsibility.

Although equity principles may never drive political negotiations, the need for

agreement on burden-sharing rules that are perceived as fair is compelling. The

2 Christine Figueres, UN Secretariat, December 20, 2010, Reuters.

3 Articles 2 and 3.1of the UNFCCC. The Convention has been ratified by193 countries, including the

United States. 4 Recent proposals from scholars in China and India calculate mitigation obligations based on a per

capita entitlement to cumulative historical emissions extending back to the early 20th

century. These

proposals would exempt China and India from any mitigation obligation until after 2030.

4

cooperation of large developing countries is essential to reach the 2C target, since

almost half the future energy demand growth by 2030 is expected to come from just

China and India (International Energy Agency 2008). But both countries‟ governments

are unlikely to agree to mitigation obligations that are perceived as demonstrably

unfair. Thus, it is also of political interest to assess fairness as one lens of burden-

sharing, while also giving attention to how to make these principles practicable and

how they affect the incentives for participation by state governments.

In the climate ethics literature, with few exceptions, scholars treat states as moral

agents, by defining mitigation obligations for them based on aggregate indicators, such

as GDP or emissions, but without accounting for heterogeneous national

circumstances. This characterization would either exempt or impose mitigation

obligations on large developing countries like China and India without regard for the

different segments of society that have vastly different levels of development but

which in aggregate terms account for comparable emissions. This has both ethical

problems and risks being politically untenable. Even the few exceptions where

scholars account for internal income inequality, states are treated as passive agents.

In this dissertation, I examine the implications of defining and implementing

mitigation obligations for subpopulations within developing countries. I explore the

ramifications of adopting one morally compelling principle of exempting the least

advantaged in society from the burdens of mitigation as a minimal basis for

distributing mitigation responsibilities. The central argument explored in this study is

that sovereign state policies influence the distribution of mitigation burdens related to

such an exemption among states. This raises new questions about the role of states that

receive such an exemption in climate agreements. The object of this study is both

positive and normative: on the positive side, I evaluate how state policies and

institutions influence the distributional impacts of climate mitigation policies using

India as a case. On the normative side, I evaluate the accountability of parties to an

agreement to achieve its objectives in light of these sovereign influences. I also assess

the issues that arise in getting agreement on the terms for such an exemption in

international agreements.

5

The remaining part of this chapter describes in more detail the motivation for choosing

this principle, the gaps in literature associated with operationalizing it, and how the

subsequent chapters contribute towards filling these gaps. This dissertation makes

other independent empirical contributions to policy literature regarding the impact of

energy policies on income distribution in India. These are also described below.

2 Scope of this Study

2.1 Focus on Intra-generational Equity

For convenience, scholars make a distinction between the ethical question of what

level to stabilize global temperature, from the related but distinct ethical problem of

how to distribute the sacrifices required to achieve this given level of temperature

stabilization among the current generation of people.5 The first is an inter-

generational equity issue that is viewed primarily as a question of how to balance the

interests of future and present generations of people. Because of the lagged effects on

climate of accumulating GHG in the atmosphere, global temperature would not

stabilize until after 2050, so only future generations would benefit from abatement.

But meeting this target would require making sacrifices today to shift to a low-carbon

infrastructure and prevent the „lock-in‟ of carbon-intensive sources of GHG, which

typically have lives of 10-50 years. Strictly speaking, future generations may have to

make sacrifices to maintain a steady-state level of GHG emissions. However,

maintaining safe levels of emissions in perpetuity may be less burdensome once

society has invested in low carbon technologies and climbed the learning curve of

putting in place and adjusting to a low carbon economy.

5 This separation is driven by practical considerations rather than moral ones. The same moral principles

apply in resolving both inter-generational and intra-generational issues. The choice of a particular

climate stabilization level may well have a bearing on the choice of an equitable distribution of

mitigation burdens today, and present moral trade-offs. If, for example, we chose to stabilize emissions

at 350 ppm, future generations would face less severe burdens from climate impacts, but the increased

mitigation requirements would, ceteris paribus, impose greater risks of burdens on the poor today. Both

issues therefore would merit simultaneous consideration purely on moral grounds.

6

For the purposes of this work, I take this inter-generational equity issue as resolved, at

least in aspiration. There remain questions on the one hand about whether 2C is

enough,6 and on the other hand whether 2C is too burdensome or even feasible.

Without knowing the level to which states actually commit, what matters to this work

is that the target is ambitious enough that large developing countries‟ participation is

unavoidable for its attainment. The practical implications of this assumption are

discussed later. I focus strictly on the intra-generational problem of how to distribute

the costs of meeting such a target.

2.2 Focus on Mitigation

In the climate justice literature, the intragenerational burden-sharing issue addresses

distributive justice for both mitigation and adaptation, and often together. The

distribution problem for adaptation is concerned with how to distribute the costs of

compensating victims of unavoidable climate change impacts. These impacts are

likely to affect the lives and livelihoods of millions of vulnerable populations in the

equatorial belt who do not have the means to adapt to these changes. However,

mitigation is a separate ethical problem from adaptation, even if common principles

may apply in their resolution (Vanderheiden 2009).7 I focus only on the mitigation

problem.

2.3 Focus on Energy-related Carbon Dioxide (CO2) Emissions

I focus specifically on the distribution of burdens associated with mitigating carbon

dioxide (CO2), which is the GHG with the longest life, fastest growth, and as a

consequence the greatest cumulative contribution to climate change.8 With the

6 While the 2C target has become the marker for dangerous interference, this is a subjective judgment

that was ultimately determined by political rather than scientific or moral considerations. The

governments of small island states in the Asia Pacific advocate for a 1.5C threshold to avoid the risks of

sea level rise on these islands. 7 For example, a stronger case can be made for counting historical emissions in determining peoples‟

liability for compensating victims of climate change than the case that can be made for counting

historical emissions in determining mitigation burdens, even though reasonable arguments have been

made in support of historical emissions in both distribution problems. See Vanderheiden, S. (2009).

Atmospheric Justice: A Political Theory of Climate Change. New York, Oxford University Press. 8 Carbon dioxide accounts for 60 percent of the total increase in radiative forcing, compared to 20

percent from methane. This is because although CO2 has a lower global warming potential (1:25), it has

7

exception of Brazil, CO2 emissions account for two-thirds or more of the GHG

emissions of the 20 largest contributors to global GHG emissions. Over 90 percent of

CO2 emissions come from burning fossil fuels, which makes the task of reducing

emissions intricately tied to how we use energy.

3 Support for Defining a Moral Minimum

The notion of exempting a certain category of people from mitigation burdens derives

from a human rights principle of a universal human entitlement to a minimal set of

„goods‟. This view finds support in the climate ethics literature, but has its roots in the

broader global distributive justice and has supporting international institutions. I

discuss these motivations below.

Basic rights are the morality of the depths. They specify the line

beneath which no one is allowed to sink.

Henry Shue (1999), Basic Rights.

The notion of a moral „minimum‟ occupies considerable space in annals of political

philosophy. Henry Shue‟s statement above characterizes the spirit of a moral

threshold. What does respect for human dignity demand that all humans have

regardless of their culture, nationality, location in history or place? More importantly,

who has duties to uphold these claims? Of interest here and in the global distributive

justice literature are the types of duties that such claims raise for states towards people

in other states. Two types of duties of external states are typically contemplated: duties

to help realize people‟s claims and to protect them from infringement by their own

state governments (“positive duties”); and duties to respect, or not infringe on, other

states‟ abilities to fulfill these rights for their own people (“negative duties”). While

there is considerable debate among philosophers as to whether universal human rights

exist at all, the existence of negative duties is relatively less controversial than positive

duties. That is, notwithstanding the debate over what entitlements deserve immunity,

a longer lifetime (5-200 years: 8-12 years).CO2 emissions are growing at over 1 percent per annum

globally, and at almost 5 percent in developing countries, while methane emissions are constant or

declining (World Resources Institute, cait.wri.org).

8

there is little justification, except under extenuating circumstances, for knowingly

infringing on others‟ basic entitlements.9 As discussed above, the goal of establishing

a moral minimum for mitigation agreements is to apportion mitigation responsibility

in a manner that does not infringe on the poor‟s basic rights. Thus, in this context,

where what is at issue is only whether parties to a mitigation agreement ought to

respect such a moral threshold, a moral minimum has considerable theoretical appeal.

3.1 Human Rights International Institutions

A number of international institutions exist that provide some legal recourse for

international human rights violations. The most relevant one for the purposes of

climate change mitigation is the International Covenant on Economic, Social and

Cultural Rights (ICESCR). The ICESCR has been signed by all the major economies

including the United States, China, European Union, India, Brazil and South Africa.

The ICESCR includes the right of people to be “free from hunger” (Article 11.2), the

right to the “enjoyment of the highest attainable standard of physical and mental

health” (Article 12.1), and to the “right of everyone to an adequate standard of living

for himself and his family, including adequate food, clothing and housing, and to the

continuous improvement of living conditions” (Article 11.1). The Covenant obligates

Parties to “at the very least...ensure the satisfaction of minimum essential levels” of

economic, social and cultural rights.10

The value of the ICESCR is to lend moral and political support to the justice concerns

posed by mitigation burdens, rather than to provide a legal mechanism to uphold

claims related to mitigation. Making a legal case for a human rights violation from

climate change is fraught with controversy and challenges, such as demonstrating

causation in proving injury, and identifying defendants. Particularly with climate

mitigation, assessing rights violations requires an evaluation of development policies,

which international law does provide a clear means of doing (Humphreys 2010).

9 Such extenuating circumstances may be where certain rights have to be infringed upon in order to

prevent other, more serious, rights violations. 10

ICESCR, General Comment 3, The Nature of States Parties‟ Obligations, UN Doc. E/1991/23 (Dec.

14,1990), ¶ 10, cited in Bodansky (2010).

9

However, if mitigation burdens can be credibly framed as a human rights issue under

the ICESCR, this can be used to capture public opinion (Bodansky 2010). Politicians

would be hard pressed to publicly oppose a position that advocated respecting human

rights, particularly one that demands only forbearance from causing harm. Indeed,

politicians have de facto supported this principle by not demanding the participation of

the poorest countries in mitigation agreements (Ringius, Torvanger et al. 2002). In

comparison, the principle of historical responsibility, which is one of the contentious

equity principles that divides developed and developing countries, carries sufficient

moral ambiguity on grounds of past ignorance to climate change, that US negotiators

have publicly dismissed the principle outright.11

3.2 A Unifying Thread in Climate Mitigation Burden-Sharing

Due to the unique nature of global climate change, the mitigation burden distribution

problem has been viewed through many lenses of fairness. Each of these views is

founded on different principles and, when operationalized, can lead to different

burden-sharing outcomes. A moral minimum represents a relatively uncontroversial

principle that constrains, but is consistent with, the application of these other

distributive principles.

The mitigation problem has been viewed at once as one of distributing: scarce

resources (to the atmosphere); responsibility (for pollution); and burdens (primarily,

but not only, financial). In the resource-sharing view, global climate change puts limits

on the amount of CO2 emissions that humans can safely emit. The carbon absorption

capacity of the earth can be thought of then as a “global commons” with scarce

capacity that has to be distributed, so that people have an equal right to pollute up to

the total safe level of CO2 emissions (Agarwal 1991; Jamieson 2001; Vanderheiden

2009). States therefore have rights to emit GHG in proportion to their population share

of the maximum allowable global emissions (the issue of state vs. individual

entitlements is discussed later).12

States then have a responsibility to mitigate all but

11 “U.S. Negotiator Dismisses Reparations for Climate”, New York Times, December 9, 2009.

12 In practice, emissions rights could represent a financial claim to the value of the rights that can be

traded rather than used.

10

their entitled emissions. This view mirrors other moral theories that view global

economic inequality as arising primarily from an arbitrary and unequal distribution of

natural resources (Beitz 1979). While drawing some support from such theories, the

per-capita emissions view seems to represent a kind of resource fetishism, by

assigning value to what is only a means to an end (Caney 2009). Further, as the per

capita emissions allocation is derived from a scientific limit, there is no guarantee that

this allocation protects any fundamental human interest (Hayward 2007), particularly

since the benefits that flow from it – cheap energy - vary widely based on people‟s

fuel endowments. Thus, this view begs the question of why an international climate

burden-sharing regime should isolate this one resource for redressing unequal access,

when the benefits that such a right would provide – energy – can be obtained from

other resources, such as solar energy.

The other two approaches are both principles of proportion,13

reflecting the objective

of treating “comparable people comparably”. Mitigation costs should be apportioned

based on either the responsibility for causing the problem, or the capacity to bear the

burden of the problem. In the responsibility-based approach, since global warming

increases roughly in linear proportion to cumulative CO2 emissions, those who emit

more are more at fault for causing global warming, and therefore ought to bear

proportionately more responsibility for mitigation (“polluter pays”). This view is

backward-looking, since past and present emissions of a particular GHG that

accumulate in the atmosphere contribute equally to climate change.14

However, the

responsibility approach is problematic when applied to individuals rather than states,

because historical emissions are not obviously the responsibility of individuals who

happen to have been born in the same state (Caney 2010). This view also penalizes

states for their fuel endowments by putting at risk the basic needs of people who can

13 As in Aristotle‟s dictum: “what is just is what is proportional, and what is unjust is what violates that

proportion”. Aristotle, Nicomachean Ethics: Book V: Ch.3. 14

This responsibility may extend only as far back as the point in time prior to which people can claim

that ignorance about climate change absolves them of any liability for the harm caused by prior

emissions.

11

ill afford to bear mitigation burdens, and who may have no control over their

emissions.15

The capacity view, on the other hand, is forward-looking. People should bear

mitigation costs in proportion to some measure of their “ability to pay”, such as

income or wealth. This is because CO2 emissions derive from the combustion of fossil

fuels, whose use is ubiquitous in the global economy. Mitigation therefore imposes

burdens on people by inducing lifestyle changes, shifts to more expensive low carbon

energy sources, or emissions reductions from existing energy sources. Since people

ultimately care about their welfare and not emissions, the problem should be viewed

as one of distributing the burdens on human welfare that arise from mitigation.

However, the capacity view penalizes those who may have low emissions due to

efficient energy use or less carbon-intensive lifestyles.16

And more importantly here,

the capacity approach gives priority to the poor, but doesn‟t proscribe imposing

mitigation burdens that may cause harm.

Both the principles of proportion thus have their respective merits and problems

(Caney 2010). These tradeoffs are somewhat irreconcilable, and subject ultimately to

political, rather than ethical, resolutions.17

But all three approaches to different degrees

risk imposing mitigation responsibility on the poor. This gives cause to define a

minimum inviolable threshold of human well being upon which mitigation burdens

should not impinge (Shue 1999; Caney 2009). This threshold thus serves to

circumscribe the scope of applying burden-sharing principles, rather than provide an

alternative to them. Note that these distributive principles are also consistent with a

moral minimum – any of them can be applied to divide mitigation burdens among the

emissions and people that are not exempt by virtue of this minimum.

15 See Section 3.1 - Brazil and South Africa have almost identical average GDP and income inequality,

but Brazil has a quarter of South Africa‟s carbon dioxide intensity (and half its GHG intensity) due to

their reliance on hydro and coal respectively. Imposing responsibility-based mitigation burdens on both

countries imposes greater risks to the interests of South Africa‟s poor population. 16

For example, the United States and Hong Kong have comparable average GDP, but Hong Kong has

almost 40 percent lower energy and carbon intensity (which therefore is not due to fuel endowments). 17

One burden-sharing approach in fact combines both in proportion that can be chosen by decision-

makers (Baer et al 2008).

12

Thus, a moral threshold can be thought of as a unifying and morally compelling thread

that runs across these burden-sharing approaches. Below I expand on how this

principle serves as a minimal principle of distribution, before I turn to the content of

such a threshold.

3.2.1 What does ‘minimal’ mean?

There are many senses in which a moral threshold of exemption is minimal in a

mitigation burden-sharing framework. The most important sense is that this principle

has lexical priority over all other distributive principles that are invoked to determine a

fair allocation of mitigation burdens (Caney 2009). As discussed above, this threshold

is inviolable, and therefore absolutist, 18

in the sense that under no circumstances

should people bear any mitigation burdens that compromise these rights.

The second sense in which a moral threshold is minimal is that it alone is not

sufficient to specify a complete allocation scheme for mitigation burden-sharing. This

principle only defines an exemption from mitigation, but says nothing about how

burdens should be distributed among those who are not exempt. One might think of a

„default‟ approach that eschews any principles of „fair‟ distribution, and treats all

present and future emissions equally. In such a case, states and/or individuals would

reduce their own emissions based on causation, or proportionately. If the exemption

were incorporated as the only equity consideration, the resulting allocation scheme can

be thought of as the least demanding claims that can be made by developing countries,

in principle. As noted earlier, the content of this claim may still be financially

demanding, depending on the definition of such an exemption.

Lastly, because of its theoretical appeal and importance, respect for a moral threshold

is the least of justice considerations that a global climate mitigation regime ought to

incorporate, if it has to eschew all other considerations. When viewed with this

perspective, a moral threshold for exemption from mitigation may serve as a common

18 To be clear, it is not absolutist in the context of all human rights. That is, basic needs do not

necessarily have lexical priority over the right to life and security.

13

ground for agreement between major economies, if cooperation between developed

and developing countries depends on the incorporation of justice concerns at all.

I now turn to the content of an exemption threshold.

3.3 Moral Threshold – Equality of What, and How Much?

An inviolable moral threshold “in principle” risks being facile without some claim

about its content. Even the practical significance of an exemption threshold in a

climate agreement rests on how expansive a guaranteed minimum ought to be, rather

than on whether one ought to exist at all. At the same time, the „Equality of What‟

debate – what features of the human condition should count in basic entitlements - is

larger than the domain of climate change. This study does not engage in that debate.

However, it is possible to provide at least reasonable bounds for a moral threshold for

which there is sufficient support in literature, keeping in mind that this support need

only apply to the negative duty of non-infringement.

The literature on what constitutes fundamental human entitlements is extensive.

Definitions vary in how they have been conceptualized and in the range of their

constitutive elements (Figure 1). Among philosophers, in their „thinnest‟ form it has

been argued that a minimal set of universal rights comprises rights to only physical

security. Henry Shue defines subsistence rights as additionally comprising economic

security, on which human‟s survival also depends (Shue 1980). Shue argues that these

basis subsistence rights have lexical priority over all other types of rights, because

other rights cannot be enjoyed by people unless they can subsist. In the climate ethics

literature, Shue indirectly supports a subsistence-based moral threshold by

differentiating „subsistence emissions‟ from luxury emissions (Shue 1993).19

A number of scholars view human rights as instrumental to ensuring a quality of life

beyond mere subsistence, but do not dwell on the meaning of „decency‟(Buchanan

19 Simon Caney (2010) points out that Henry Shue does not use the language of rights despite being an

advocate of basic rights. This may be to avoid alienating opponents of human rights formulations in

general. However, the content of his formulation of subsistence emissions derives unambiguously from

subsistence needs, even if he frames them in terms of emissions.

14

2004; Hayward 2007; Caney 2009). Simon Caney, more recently, casts human rights

as claims to a decent standard of living, or to the emissions that are required to enjoy

decent living conditions. Nussbaum and Sen conceive of basic entitlements as

constituting capabilities or opportunities for human function rather than a set of goods

or services.

Figure 1: Basic Entitlements – Interpretations and Metrics in Literature

Note: Marks indicate the metrics used for different definitions of entitlements in literature.

There is also a viewpoint that frames basic entitlements as development rights, which

include economic, social and political entitlements to individuals. This approach is

distinguished by its emphasis on a collective entitlement to a process of change that

leads to the progressive realization of the individual rights (Andreassen 2006).

Although development rights are a relatively undeveloped and unexplored concept, the

exploration of the importance of collective processes for realizing individual rights is

unique and important. The problem is that there is little theoretical guidance as to what

such a collective entitlement should entail, and how much energy (and by extension

emissions) that entitlement should include.

Among this range of definitions, it is plausible to infer that subsistence needs are a

common and minimal set of basic rights. No other functions or liberties can be

enjoyed without subsistence. Then, subsistence can be thought of the most minimal

candidate for a moral minimum. However, what additional entitlements beyond

subsistence should count is an open question. Broader entitlements related to political

15

rights or capabilities are relatively abstract. However, there is wide support for

including some measure of decent living standards, even if their specification is

subject to some bargaining.

A few burden-sharing proposals incorporate an exemption for emissions within

countries. They indeed demonstrate the wide range of possible interpretations of a

moral minimum. Muller et al and Chakravarty et al estimate that a 1 ton per capita

threshold provides for subsistence needs. On the more inclusive side, Baer et al in

Greenhouse Development Rights base their exemption threshold on an entitlement to

development rights, which they quantify at $20/day per capita. This represents the

type of „upper bound‟ mentioned above that has some normative appeal but is hard to

justify as a specific number (Baer 2008).

It is therefore important, but difficult, to objectively define a more expansive upper

bound for a reasonable threshold than mere subsistence. Though seemingly obvious,

this observation has serious implications for how an exemption threshold might be

implemented in practice. Without a normative basis, such a threshold may have to be

determined through political negotiations. Under this assumption, I set aside the matter

of the level of the threshold in this study.

I turn next to how to measure such a threshold.

3.3.1 Metric for a Moral Minimum

Income is a frequently used and a practical choice for a metric for an international

exemption threshold, despite its known limitations as an indicator of human well-

being (Figure 1). There is a well-known tension between inclusiveness and their

measurability in defining an indicator of human well being and its constituents.

Indicators of subsistence needs, such as calorie intake, are reasonably accurate. The

Human Development Index (HDI) comprises income, life expectancy and literacy, but

the latter two are crude proxies for health and education. Among the more inclusive

measures is the Multi-dimensional Poverty Index (MPI), which contains 10 indicators

of health, education and living standards, including access to water, sanitation and

16

electricity.20

However, the added dimensions complicate measurability and inter-

personal comparisons. For instance, the electricity access indicator does not capture

actual energy supply, which is a more accurate indicator of the quality of life

conferred by electric service. Further, a composite index implicitly allows trade-offs

between potentially incommensurable indicators, such as life expectancy and

electricity access. Such indices, while more inclusive, present a potentially misleading

standard of objectivity in comparing living situations in different cultural and

geographic contexts.

While the development of these indicators has been motivated to a large extent by the

limitations of income as an indicator of living standards, they have yet to match the

benefits of income as a commensurable indicator across countries. Income provides a

universal measure by which to assess the value of disparate goods and services that

reflect people‟s living standards, by measuring the costs of these services in market

transactions. Where market transactions fail to accurately reflect people‟s living

conditions, techniques have been developed to impute prices for non-market services

and externalities, and to adjust price indices to reflect different purchasing powers

(Stiglitz 2008).

As a practical matter, income also correlates with these multidimensional indicators, at

least at low levels of development, and with emissions. Income exhibits a relatively

predictable correlation to carbon dioxide emissions at an aggregate level, both across

and within countries. A National Academy of Science paper shows that emissions

elasticities of income across and within countries range from 0.7-0.9. With multi-

dimensional indicators, the body of research on these metrics is too limited to provide

either an understanding or actual data of their relationship to emissions in different

countries.

To summarize, exempting the emissions associated with human‟s most basic living

conditions from people‟s mitigation obligations is a morally compelling justice

20 The Oxford Poverty and Human Development Initiative

(http://www.ophi.org.uk/policy/multidimensional-poverty-index/)

http://www.ophi.org.uk/policy/multidimensional-poverty-index/

17

principle that ought to have priority over other principles that might govern how

mitigation costs should be distributed. For a threshold to have moral and practical

significance in an international climate change agreement but not escape credulity as a

minimum, such a threshold must be defined to include more than mere subsistence but

not extend beyond standards for decent living conditions. However, justifying a

particular basket of goods or a threshold level as a moral minimum is not important for

the purposes of this study. For the purposes of policy, the metric of income provides a

reasonable compromise in quantifying a basic minimum between the needs of

inclusivity and flexibility on the one hand, and the need to translate such a threshold

into an emissions exemption. I now turn to the challenge associated with

operationalizing a moral threshold in a climate mitigation regime.

4 Limitations of a Statist View of a Moral Minimum

The principle of a moral minimum challenges presumptions in climate ethics and

policy about the beneficiaries and agents of burden-sharing arrangements. With few

exceptions, the discourse on climate equity assumes states to be agents of a burden-

sharing arrangement, not just as the parties who would implement the terms of an

agreement, but the agents whose interests the agreement would be designed to protect.

This assumption has also been made among scholars who think that burden-sharing

arrangements should allow for poor peoples‟ development needs (for instance, by

exempting poor countries from a climate agreement).

As such, scholars have predominantly proposed exemption thresholds that apply to

states. These entail the notion of „graduation‟ – that countries abstain from taking

steps to reduce emissions until they reach some threshold indicator, such as average

GDP or average per capita emissions, or a combination of the two (Höhne 2006;

Frankel 2007; Michaelowa 2007).

This statist approach to climate equity is compelling from a practical standpoint. First,

it may be a reasonable simplification to account for disparities in wealth across

countries if the inequalities within countries are of a second order. Second, it may be

18

prohibitively burdensome to account for and verify internal socioeconomic indicators

in structuring and implementing agreements.

These considerations are important, if true. However, they are as yet unexplored. How

much would a statist approach distort the distribution of burdens, and what is

financially at stake? For large developing economies that have comparable total

emissions from both wealthy and poor populations, the case for a statist approach

seems weakest. Consider, for example, the emissions of the populations earning below

and above the average GDP in China, India, Brazil and South Africa (“BASIC

countries”), who together contributed 60 percent of non-Annex 1 countries‟ GHG

emissions in 2005. In aggregate terms, the CO2 emissions from those who earn more

than the countries‟ average GDP are comparable, with those earning less contributing

over 40 percent of total emissions in all these countries.21

But in per capita terms, the

higher income group comprises a third or more of the population but have average per

capita emissions that are more than double that of the population who earn less than

average GDP. This does not even represent the full spread of emissions (and income)

inequality within these countries. In India, for example, in 2003-04 the top 3 percent

of the population had CO2 emissions of at least 4 tons per capita, which was four times

the country average.22

If, hypothetically (Figure 2),23

a burden-sharing regime were established where

countries that had average per capita emissions below the world average (~4.5 tons)

were exempt from mitigation, Brazil and India would be exempt, but approximately

50 million people in Brazil and 35 million people in India who emit more than the

21 This figure has been calculated on the basis of an empirically validated observation that income

distribution best resembles a log-normal distribution, which is uniquely specified by the average GDP

and Gini coefficient. See Chapter 4 for details on this. Data sources include: for income and population,

International Monetary Fund (2008); CO2 emissions, US Energy Information Administration (2008);

Gini coefficient, World Bank (2005) 22

According to Parikh et al (2009), ten percent of the urban population in India (~360 million) has

average carbon dioxide emissions of about 4 tons/capita. However, this is an underestimate, because

these data are based on household consumption expenditure, which the upper income groups are known

to understate in surveys. 23

Variations of this rule have been proposed in the literature. See Höhne, N., Michel den Elzen, and

Martin Weiss (2006). "Common but differentiated convergence (CDC): a new conceptual approach to

long-term climate policy." Climate Policy 6: 181-199.

19

world average would also be exempt. On the other hand, since China‟s emissions

exceed the world average, even with such a general exemption level 800 million

people in China would risk being exposed to mitigation burdens that the country

would have to adopt if mitigation efforts were not well targeted.

Figure 2: Per Capita Carbon Dioxide Emissions: Country Averages and Internal Distribution (Illustrative)

Note: Country emissions distributions show population ordered in increasing per capita CO2

Data Sources – See Footnote 21.

Thus, it seems that for large developing economies in particular,24

it would be

unreasonable to either exempt the entire country from mitigation obligations, or to

impose mitigation burdens without adjusting for an exemption for the poor. For these

countries, a statist approach would either arbitrarily impose mitigation burdens on

some people because of their location or ignore important risks imposed by higher

energy prices and other mitigation burdens on poor populations.

24 This issue is not unique to developing countries. Approximately 10 percent of the US population is

below the official poverty line, which implies that they have low or even negative disposable income.

Their living conditions may be better than the poor in developing countries, but they may not be in

position to bear any mitigation burdens.

Per

Ca

pit

a C

O2

(to

ns)

35 million

800 million

China

USA

EU (27)

Russia

India

Japan

Brazil

Middle East

Africa0

5

10

15

20

25

30

World Average

20

5 Implementing a Mitigation Exemption within States –

Contributions of this Study

Imposing mitigation obligations on states that are intended for only subpopulations

raises new positive and normative questions related to the implementation of these

obligations. On the positive side, since mitigation obligations are intended for only

those above a poverty threshold, to what extent would mitigation impacts fall on the

poor under existing institutional conditions within developing countries? This

dissertation examines specifically the influence of state policies over the distribution

of these mitigation impacts using two cases in India. These studies are the focus of

Chapters 2 and 3, and are discussed in more detail below (Section 5.1). The fact that

state institutions are not accountable under international agreements but can influence

the outcomes of these agreements raises normative questions about what obligations

states that receive an exemption should have in implementing such agreements. This

second question is the subject of Chapter 4, and is discussed in more detail below in

Section 5.2.

5.1 Distributional Impacts of Energy Policies in India (Chapters 2

and 3)

There is still a lack of empirical evidence on the magnitude and direction of the

interdependence and interaction of sustainable development and climate change, and

[their] equity implications…

New research is required that studies the linkages between climate change and

national and local policies [emphasis added]

Technical Summary, Working Group III, IPCC, 2007.

Climate mitigation in the energy sectors affects households predominantly through the

increased costs of energy services. Prices may increase as a result of shifts towards

more expensive technologies in the supply, delivery or consumption of energy, or as a

result of policy instruments, such as energy taxes (or the removal of subsidies) that

aim to discipline energy consumption. It is well known that in developing countries

energy subsidy policies and the state-owned bureaucracies that deliver energy services

to households serve many social and political objectives, such as redistributing income

21

and meeting the needs of special interests (Victor 2007). The distributive impacts on

households of mitigation policies in energy depend, therefore, on these baseline

service conditions and on how governing institutions implement mitigation policies in

conjunction with other social objectives. The novel approach of the studies in Chapter

2 and 3 is to characterize these baseline conditions and quantify the distributional

impacts of these institutions. Both studies pay particular attention to the leverage

policymakers have to influence these impacts through pricing policies. I investigate

the distributional impacts of two energy policies being considered or implemented in

India, both of which are being pursued for reasons not related to climate mitigation but

have the effect of reducing India‟s carbon intensity: removing the kerosene subsidy

and investing in low carbon electric supply.

In Chapter 2, I formally evaluate the impacts of the kerosene subsidy on income

distribution, its efficacy as an instrument of redistribution, and the causes of

misallocations of subsidies. This study provides new insights into the different impacts

of policy design and implementation failures on the distributional benefits of

subsidies. I also reveal a previously unrecognized phenomenon of price discrimination

and rent extraction by private licensees who distribute subsidized kerosene through the

Public Distribution System.

Chapter 3 contributes to the literature on climate mitigation policy impact analysis in

India. No study has as yet examined the impact of economy-wide increases in the

prices of goods and services that result from undertaking mitigation in the electricity

sector. I develop a simulation model of the electricity sector and household welfare in

the state of Maharashtra, to examine the leverage policy makers have over the

distribution of future mitigation costs. This study is also unique in that the simulation

incorporates the entrenched practice of load rationing to manage supply scarcities and

households‟ responses to outages. It therefore provides the most realistic simulation of

sectoral conditions among studies of the Indian electricity sector.

5.1.1 India as a Case Study

India is of critical importance in climate equity by virtue of the sheer number of

people living in poverty. Among the large developing countries that are candidates for

22

the types of within-country exemptions discussed here, India has the largest number of

poor people of any country, with a third of the world‟s poor and a third of the world‟s

malnourished children. China has a comparable population and has comparable levels

of inequality, but has achieved far more success in providing basic minimum living

standards. Thus, the prospect of climate mitigation exacerbating poverty is a less

pressing political concern in China than in India. Brazil and South Africa would also

serve as good candidates for similar analyses, but the financial stakes are orders of

magnitude less than in India, making their cases relatively less important in an

international agreement over burden-sharing. In fact, one may ask, given that the

overwhelming majority of Indians are poor (Figure 2), why isn‟t it reasonable to take a

statist view and exempt India altogether? The premise of this study is that only

countries with substantial rich and poor populations generate the moral dilemmas

presented here. However, India does have a sizeable and growing wealthy population.

Households earning more than $2/day (PPP basis) spend more than 40 percent of total

household expenditure in India, even though they comprise 25 percent of the

population. Further, the aggregate emissions from those earning more than $2/day are

comparable to South Africa and Brazil simply because of their sheer numbers. India

has a growing consumerist middle class comprising over 200 million people, whose

consumption could pose serious threats for climate change if measures are not taken

towards low carbon development.

Despite this empirical focus on India, the arguments and analytical approach used in

this study can be applied to the BASIC countries, and also to other developing

countries, such as Indonesia, Pakistan and Nigeria. Though these countries currently

have predominantly poor populations, if they follow similar development trajectories

as the BASIC countries, they may well develop „top-down‟, in the sense that they

alleviate poverty while also creating significant wealth among the non-poor.

23

5.2 Implementing a Moral Minimum in International Climate

Agreements (Chapter 4)

In Chapter 4, I discuss the ethical and policy implications of implementing an

exemption for the poor in climate mitigation agreements. The issue I grapple with is

that the outcomes of such an agreement depend on the policies and actions of state

institutions that have no obligations under international agreements. This study

addresses two specific aspects of this moral hazard, related to the enforcement and

design of such an exemption for the poor.

5.2.1 Enforcing an Exemption

Beneficiaries of an exemption in a developing country may not get the benefits of an

exemption granted to a state on their behalf due to institutional corruption or weak

capacity. Who should be accountable for enforcing the exemption, if anyone?

Chapters 2 and 3 illustrate the enforcement problem in some detail. In Chapter 4, I

discuss the ethical obligations of signatories to an international agreement to ensure

that the poor receive the benefit of such an exemption. I also provide some guidance

regarding how such an exemption should be structured in climate policy in light of

these considerations.

5.2.2 Designing the Terms of an Exemption

States can influence the future distribution of income, and therefore emissions, around

a threshold through their development policies. Sovereign policies can therefore

change the total level of exempted emissions, which in turn influences the costs that

everybody else bears to support this exemption. If this is indeed the case, parties to

such an agreement would have an interest in designing the terms of such an exemption

to minimize their respective mitigation burdens, which could undermine the objectives

of the agreement.

These moral hazards raise an important question regarding the distribution of

mitigation burdens that has not been asked as yet in literature: how should the costs of

exempting the poor be distributed between benefiting states and other parties to a

mitigation agreement that incorporates such an exemption? Other relevant proposals

24

implicitly assume that these costs would be born equally by all the non-exempt

members of parties‟ to an agreement. However, given that states‟ sovereign policies

can influence how these costs are distributed, this assumption demands further

exploration and justification.

On the practical side, I investigate how these moral hazards would affect parties‟

interests in getting agreement on the terms of such an exemption. I quantitatively

assess what is financially at stake for parties to an agreement in the influence of states‟

policies over the burden of exemption. I suggest preliminary directions for climate

policy in how to structure and enforce an exemption in a manner that surmounts these

potential obstacles.

5.3 Precedents in International Agreements

With developing countries‟ increasing participation in international trade and

environmental treaties, the influence of these international institutions on poverty has

received much attention (Chen 2005; Clapp 2010). While there are many parallels

between previous international agreements and a future climate mitigation agreement

in terms of their impacts on poverty and sovereignty, the remedies that have been

sought and implemented in other realms have limited applicability to the case at hand.

In particular, although countries have obtained exemptions from particular provisions

of trade agreements, there are no precedents for exempting poor subpopulations in

large developing countries as is contemplated in the climate ethics literature and in this

study.

Both trade and environmental agreements present numerous pathways by which

poverty can be exacerbated, some of which are similar in outcome to some of the

impacts of climate change mitigation – such as to increase the prices of essential

commodities, such as energy, food and medicines.25

As such, these agreements raise

25 Another important pathway is through livelihood impacts, such as from reduced global demand for

products whose production support poor livelihoods, or by through policies that directly discourage

such production in favor of other products and services.

25

equally important claims of harm to the poor‟s basic needs as would a climate

mitigation agreement.

To avoid such impacts, among other motivations, there have been a few cases where

countries have sought exemptions from certain obligations under trade agreements. In

these cases, trade restrictions apply in specific sectors, but they are typically enforced

for countries as a whole. For instance, in the Trade-related aspects of Intellectual

Property Rights (TRIPS) under the World Trade Organization (WTO), least developed

countries have obtained exemptions from particular provisions related to drug patents

that would raises drug prices.26

WTO provisions also allow countries to restrict food

exports to ensure domestic food security, and to restrict imports that do not comply

with internal health and safety standards.27

While it is likely that the harmful impacts

of higher drug prices, less food supply or unsafe imports may fall only on certain

populations, and therefore do not necessarily justify absolute exemptions for states,

political negotiations have not developed to account for such intranational inequities.

International environmental treaties have also raised complex issues regarding the

claims of the poor to local environmental resources that have global benefits and to

freedom from the burdens of restricting the exploitation of these resources. Here too,

scholars have recognized the disconnect between the design of environmental

agreements between states and the multiple subnational agents that affect or are

affected by the environmental resources that these treaties are designed to protect

(Herring 1999). This is best illustrated in the case of the Montreal Protocol, which is

not only seen as one of most successful examples of resolving international conflicts

over the protection of a global environmental resource (stratospheric ozone) but is also

the most similar international environmental problem to climate change, since it

involves a “global commons”. While China and India were provided compensation by

developed countries in exchange for adopting restrictions on chlorofluorocarbons,

Herring points out that the Montreal process in India was restricted to a narrow

26 Article 6, Transitional Arrangements, in the TRIPS Agreement.

27 General Agreement on Tariffs and Trade (GATT), Article XI, and the Sanitary and Phytosanitary

Agreement under the WTO respectively.

26

governing elite, and the obligations and costs within India of compliance were not

evaluated before or after the treaty.

Thus, the need to examine subnational distributional impacts of states‟ participation in

international agreements seems important and neglected in literature. International

agreements in other domains may well benefit from, rather than inform, the design and

implementation of exemptions for the poor in climate mitigation agreements. There

may be other lessons that can be learned from the experiences of previous

international agreements, such as how to design a fair negotiation process or monitor

compliance. However, drawing these lessons would require a more comprehensive

comparative analysis of international agreements, which is beyond the scope of this

study.

27

CHAPTER 2 – KEROSENE SUBSIDIES: WHEN ENERGY POLICY FAILS AS SOCIAL POLICY

1 Introduction

Energy subsidies have attracted renewed attention with the urgency of climate change.

Historically, because broad-based institutions that enable direct cash transfers, such as

income tax (Piketty 2009), are lacking in many developing countries, household fuel

subsidies often serve as instruments of redistribution (Komives 2005). In India, the

high fiscal and environmental costs of these subsidies have been well documented

(Gangopadyaya 2005; Komives 2005). Economists estimate that kerosene subsidies,

for example, carry a fiscal burden of $4-6 billion per year, and efficiency losses of $1-

2 billion per year (International Energy Agency 1999; Morris 2006). Kerosene use

also accounts for over 18 million tons of CO2 emissions annually,28

or over 1.5 percent

of the country‟s CO2 emissions.

The Indian government is now considering phasing out kerosene subsidies, and

eventually replacing them with conditional cash transfers (Parikh 2010).

Notwithstanding the theoretical merits of direct cash payments, the feasibility, timing

and merits in practice of such an ambitious identification system are uncertain and

disputed (Dreze 2010).

Though kerosene subsidies are known to be poorly targeted, their distributional

benefits are not well understood. Over 800 million Indians use kerosene for lighting,

of which 200 million across income groups also use kerosene also as a cooking fuel.29

Suppliers and distributors divert 40-60 percent of kerosene upstream in the supply

chain to other lucrative markets such as transportation,30

forcing some households to

purchase kerosene in the black market (Morris 2006). The government draws support

28 Assuming emissions of 2.5kg/liter, from ~7.3 billion liters of annual consumption, based on

household consumption data from National Sample Survey 2004-05 29

Author calculations using National Sample Survey of Consumption Expenditure 2004-05, discussed

in Section I. 30

In transportation, kerosene is used as a cheap fuel substitute to diesel. In construction, kerosene is

used in making tar for paving roads.

28

for phasing out the kerosene subsidy in part from the finding of an expert committee

that the income shocks on poor households on average would be fairly small (Parikh

2010). However, these averages mask the distribution of benefits.

Even though kerosene subsidies are known to be poorly targeted, their distributional

benefits are not well understood. Suppliers and distributors divert 40-60 percent of

kerosene upstream in the supply chain to other lucrative markets such as

transportation,31

forcing some households to purchase kerosene in the black market

(Morris 2006). The government draws support for the phase-out of the kerosene

subsidy in part from the finding of an expert committee that the income shocks on

poor households on average would be fairly small (Parikh 2010). However, these

averages mask the distribution of benefits.

The World Bank finds that in general quantity-based utility subsidies tend to be

regressive because their use increases with income. However, these do not apply to

kerosene, whose use does not correlate well with income. One study of fuel taxation in

India finds that the direct benefits from household kerosene use are progressive (Datta

2010). However, the study offers limited detail on underlying regional differences and

causes. Further, progressivity alone may not justify public spending on subsidies.

Other redistributive policies may have higher impacts on poverty and cost less to

deliver.

In this paper I formally examine the performance of the kerosene subsidy as an

instrument of redistribution using several measures. I evaluate the subsidy‟s

materiality (what budget share does the subsidy represent to households) and its

progressivity (do poor households benefit more than the average household). For

purposes of comparison with other redistributive policies, I assess efficacy (what share

of the total subsidy goes to poor households as intended, not counting indirect

benefits32

). I explore the distinction between implementation failures and design

31 In transportation, kerosene is used as a cheap fuel substitute to diesel. In construction, kerosene is

used in making tar for paving roads. 32

Data on the diversion of kerosene to other markets are unavailable, which makes it difficult to

understand who benefits from these diversions. These diversions are often controlled by organized

29

limitations, and evaluate some of the subsidy benefits under ideal implementation

conditions. Lastly, I explore the phenomenon of price discrimination by distributors of

subsidized kerosene, whereby households pay a wide range of prices for subsidized

kerosene. This price variation is an important, and overlooked, component of the

benefit incidence for a subset of households.

Overall, this study supports the phase-out of subsidies in rural areas only. However,

kerosene subsidies are material and progressive in urban areas. Particularly where

access to wood is lacking, kerosene subsidy benefits can be up to 5 to 10 percent of

household expenditure, and its removal would more than double these households‟

cooking budgets. However, the goal of policy should be to phase out kerosene

demand, rather than the subsidies, by improving access to LPG.

This study relies on data from the National Sample Survey of India for Consumption

Expenditure, 2004-05 (NSSO0405) and draws qualitative insights from a primary

survey conducted of 450 households in urban and peri-urban parts of Maharashtra in

2009/2010 (See Appendix D).

In Section 2, I describe the various uses for kerosene in different household in

Maharashtra, and how these functions influence the subsidy‟s relative benefits. In

Section 3, I discuss the measurement approach and the results of the subsidy

performance analysis. In Section 4 I discuss the subsidy performance under ideal

implementation conditions. In Section 5 I discuss price discrimination by ration shop

owners (RSOs). In Section 6, I discuss policy implications.

2 Kerosene Market and Use Characteristics

Kerosene use is widespread in India and in Maharashtra in particular. In Maharashtra,

seventy percent of households (68 million people) use kerosene. Of these, about 50

million users are in rural areas, and 18 million are in urban areas.

crime syndicates in Maharashtra. See „Maharashtra Cracks Down on Oil Mafia‟, Hindu Business Line,

January 28, 2011.

30

Kerosene use is not homogenous across the country, particularly between rural and

urban areas. Urban use of kerosene is higher in Maharashtra than in the rest of the

country, and even more so in the vast slums of metropolitan Mumbai (Figure 3). The

average kerosene consumption among households earning less than Rs. 4,000 per

month (or $222 PPP) in urban Mumbai is over 10 liters per month. As a result, though

26 percent of kerosene users in Maharashtra are in urban areas, they consume 45

percent of total household kerosene use in the state.

Figure 3: Variation in Urban Household Kerosene Use -

Mumbai, Maharashtra and India 2004-05

Kerosene is also used widely across income groups, but rarely as a primary fuel

(Figure 4). Rather, kerosene is used more commonly as a backup fuel, to electricity for

lighting, and to LPG and biomass for cooking. This is because kerosene is not a

preferred fuel. This feature of kerosene is evidenced by the fact that households using

multiple fuels rarely, if ever, use kerosene as a primary fuel, either for lighting or

cooking.33

The poorest in rural areas – who rely on wood for cooking – and the

wealthiest in urban areas – who use LPG exclusively – hardly use kerosene. This is in

33 This was found both in the primary survey and NSSO0405, where households name their primary

lighting and cooking fuels.

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10

Ker

ose

ne

(Lit

ers/

Mo

nth

)

Income Deciles

Mumbai Suburbs

Rest of MH

India

31

contrast to LPG, which is a preferred cooking fuel, and whose use correlates well with

income, as shown in Figure 4.

Figure 4: Cooking Fuel Shares by Income Decile – Maharashtra, 2004-05

(a) Rural

(b) Urban

Source: National Sample Survey of Consumption Expenditure, 2004-05

Note: Kerosene use below 4 liters is assumed to be for lighting.

Two underemphasized characteristics of kerosene use in households are important in

understanding the benefit incidence of subsidies: actual kerosene market prices\, and

0

20

40

60

80

100

120

1 2 3 4 5 6 7 8 9 10

Ave

rage

Co

oki

ng

Ener

gy(M

J p

er c

apit

a)

Income Deciles

LPG

Kerosene

Wood

0

20

40

60

80

100

120

1 2 3 4 5 6 7 8 9 10

Ave

rage

Co

oki

ng

Ener

gy(M

J p

er c

apit

a)

Income Deciles

LPG

Kerosene

Wood

32

kerosene‟s use as a cooking fuel. These are discussed next, along with how they affect

subsidy benefits.

2.1 Kerosene Markets

The quantity of subsidized kerosene allocated by government is intended to meet

household needs. In reality, households in Maharashtra purchase over 40 percent, and

in urban areas over 50 percent, from secondary (black) markets (Table 1).

Households are supposed to purchase all their household kerosene needs through the

Public Distribution System (PDS). As part of the PDS, millions of retailer