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CleanAirSIG: Selling, subsidising or at no cost
[top] [end]IntroductionThis discussion: Selling, subsidising or at no cost sought out the views of the CleanAirSIG on whether people need to pay for household energy goods for them to be valued – particularly in the context of health.To get the discussion started, we used a paper by Christopher Shea in the Boston Post, you can read it here. Looking at the positive and negative effects of subsidies and targeted subsidies,two short quotes were used, looking different health interventions – but highlighting how effective subsidy can be in encouraging people to take actions which benefit their health. 'Arata Kochi, head of the WHO's global malaria program, weighed in: The success of a massive bed-net-distribution campaign in Kenya in 2006, Kochi said, "ends the debate." The netting was given away, and the campaign helped bring the proportion of young Kenyan children in malaria-ridden areas who were covered by bed nets from 7 percent in 2004 to 67 percent in 2006.’ And in another paragraph: ‘A Dutch nonprofit group that had been marketing deworming drugs to Kenyans agreed to take part in the experiment. It offered free treatment to students and parents at some schools while charging others subsidized fees ranging from 40 cents per family to $1.30. Both campaigns were combined with efforts to teach people about the dangers of worms. The researchers found that charging a fee for the relevant medicines brought use down from 75 percent in a school to 19 percent - a devastating result.’ Also, please take a look at Boiling Point 50, which has very conflicting approaches which have nevertheless been found to be successful. Further useful links from archive copies of Boiling Point30, 1993, were provided by Grant, and are given at the end of this page. [top] [end]HEDON CleanAirSIG discussion 18/02/2008[top] [end]Short summary of discussionsThis abstract attempts to encapsulate just the key action points that could lead to successful subsidy.[top] [end]General points
[top] [end]Subsidy mechanisms
[top] [end]Key factors needed for success with subsidies
[top] [end]Why should subsidies be used?
[top] [end]What else can be done?
[top] [end]Detailed summaryThis discussion looked at four different scenarios for those wishing to purchase household energy technologies – particularly to alleviate smoke. Each week a different question was introduced. The responses are roughly grouped according to these scenarios. To get the discussion started, a paper by Christopher Shea, in the Boston Post, was highlighted: http://www.boston.com/bostonglobe/ideas/articles/2007/11/11/a_handout_not_a_hand_up/[top] [end]Week 1: Subsidies and targeted subsidiesBackground. Two quotes from the article were given: ‘Arata Kochi, head of the WHO's global malaria program, weighed in: The success of a massive bed-net-distribution campaign in Kenya in 2006, Kochi said, "ends the debate." The netting was given away, and the campaign helped bring the proportion of young Kenyan children in malaria-ridden areas who were covered by bed nets from 7 percent in 2004 to 67 percent in 2006.And in another paragraph:‘A Dutch nonprofit group that had been marketing deworming drugs to Kenyans agreed to take part in the experiment. It offered free treatment to students and parents at some schools while charging others subsidized fees ranging from 40 cents per family to $1.30. Both campaigns were combined with efforts to teach people about the dangers of worms. The researchers found that charging a fee for the relevant medicines brought use down from 75 percent in a school to 19 percent - a devastating result.’…and two references to articles in Boiling Point looking at the arguments for and against subsidy: Boiling Point 50: http://www.hedon.info/goto.php/BoilingPoint50-January2005And an earlier edition - Boiling Point 30 from 1993 - Sales and Subsidies www.hedon.info/CleanAirSIG:Subsidies#InTheArchives Adam Biran (LSHTM) pointed out that although the article was excellent, the role of social marketing was slightly misleading as it can be used at any (or no) level of subsidy. It is an approach to communication that recognises that even a free product can carry costs (not necessarily financial) associated with its use and may therefore need to be 'marketed'. Nikhil Desai noted that ‘subsidy’ (like ‘market’) is not a well-defined term in economics. Measurement of subsidies is difficult, which leads to difficulties in measurement of the efficacy of the subsidy. Jacob Moss (USEPA) noted that things that there seemed to be a pre-existing demand for items that worked with subsidy – e.g. mosquito nets and water purification. With little awareness of the smoke problem or potential benefits of an improved stove, subsidy could not possibly be successful and would distort expectations for future markets. A certain scale of success and awareness (perhaps via marketing to those that can afford a modest price), could trigger a greater awareness and demand, prior to some possible subsidy or giveaway for the poorest of the poor. Magi Matinga agreed about the links between knowledge and demand, and recognised that priorities for stove disseminators and communities may be very different. The first step is to get a critical change in perceptions of smoke, as even the doctors tend to think it is just temporary discomfort: Subsidies (alone) will not be effective no matter how good the design. Magi feels that other illnesses, HIV/AIDS, diarrhoea, Malaria etc, have a much higher profile, thus information should come before subsidies. There is a need to clarify two separate issues: willingness to pay and the capacity to pay. The capacity to pay has a lot to do with affordability as well as knowledge. Rakesh Kumar added that subsidy is normally decided by, and for, those who probably do not need it. An example in India is a subsidy to change the engine to take CNG fuel for the three-wheeler taxis which was only taken up by a few, as the rest had already made the change without the subsidy as they saw the benefits. C.V Krishna joined the discussion to agree that the Indian Government scheme had not been a success, mainly because it did not take into account cultural differences and applied a rigid approach in its stove design instead of working with the community to design acceptable stoves. To be successful, stoves would have to be developed through changes in basic designs agreed with communities to their satisfaction, and through training in maintenance and repair. Later in the discussion he described a potential solution: WHO supporting communities to build their own stoves from local materials, but with skills and training and perhaps some support for materials not available locally. This way smoke free stoves that also save the environment could be made available to all. Debajit Palit, of the Energy and Resources Institute, New Delhi, shared a success story of the National Programme on Improved Cookstoves (NPIC) in West Bengal. It recorded one of the highest improved cooking stove penetrations under NPIC, setting up ongoing infrastructure. Stove builders, NGOs etc. have carried forward the cookstoves dissemination without any subsidy for five years, because of the perceived benefits of improved cookstoves, and the availability of stove builder to build and maintain the stoves - reported in Boiling Point 50. http://www.hedon.info/goto.php/InstitutionalPartnershipInImprovedCookingStoveDissemination Nikhil expressed disappointment that a systematic survey for knowledge generation and dissemination had not been part of the study. Parveen Dhamija, of the MNRE India, indicated that rural women wish to use improved gadgets for their kitchen but cannot afford them. Traditional stoves are constructed at no cost. Prefabricated durable improved stoves should available to the people at minimal cost and local NGOs should revive locally developed improved cookstoves set up under NPIC. Nikhil questioned whether this was proven – that people will say they have no money in such situations. The reality may well be that they do not want the product, or they would be pressing harder for subsidies. Harry Stokes suggested that where good quality stoves must be subsidized in order to reach consumers who would not otherwise be able to afford them, they should be subsidized, in order to provide the opportunity for safety, efficiency in fuel use, and quality of life improvements in the home, particularly if the economy can one day earn these subsidies back in the sale of carbon credits, or, more fundamentally, in progress toward the MDGs. Lazarus Chew felt that the benefits of the stoves programs over the years have not done enough to make them worthwhile. He feels that stoves programmes have not been initiated by those living in the countries in which they have been run, and that the technologies are now good enough to be disseminated commercially and should be run as businesses without outside support. Liz Bates felt that commercialisation was fine if there was a profit to be had - but that the role of the NGO was to support those who could not be reached in this way. Could Lazarous describe to us the technologies that are both effective in alleviating smoke, and affordable to those on low incomes, that are currently available through shops and other outlets in Zambia. Liz described the Practical Action smoke project (Kenya, Sudan, Nepal), where lack of money to pay the capital cost of a smoke-alleviation technology was a major problem, and the positive (measured) impacts of alleviating smoke were very real. Particularly in Kenya, food vs.repayments was a very real issue. The project included both micro-credit and (in Nepal) direct subsidy. Money was paid back during those seasons when people had money – at other times they were lacking food as well as fuel. Smoke reduction, and other benefits, were monitored. Liz believes that with greater direct subsidies, the project could have reached out with low cost interventions to those with little or no money and supported the repayments of those looking for more convenient interventions (such as LPG) to speed up the turn-around and reach more households. In all three countries, those able to access the interventions were positive about the impacts. Klas Heising provided a detailed and useful response highlighting some excellent work done in the Andes: http://tinyurl.com/3buvxs and making the following argument, strongly endorsed by Don O’Neal, of HELPS International (‘Finally a reasonable voice. Thank you.DON O'Neal’): According to economic theory, subsidies are justified when the market fails to provide efficient allocation of goods. If one of the following criteria is fulfilled, there is a case for subsidies and even neoliberal economists won't disagree:
[top] [end]Week 2: Paying the full-market priceBackground issues for discussion. On the positive side:
Priya Karve looked at two contrasting situations in the subsidised Indian Stove Program. Where government agencies ran the scheme, the geographical and numeric impact was very large, but usage and replacement was low. Where potters were subsidised and supported by NGOs, there were too high expectations with the potters expecting the NGO to purchase all the stoves and market them, whilst the households expected the NGO to give them away for free. ARTI now works with other NGOs that focus on participation of the people; their labour, time and money, so that the NGO role is that of a facilitator. If an NGO has established itself in a locality as a 'facilitator for finding solutions' (rather than as a 'solution provider') it can be a very valuable partner for a stoves programme. Now that 'off the shelf' products are being sold without subsidy, people are willing to pay the increased price as they have greater confidence in the product. Priya sought advice on how to reach those who cannot afford the market price. She felt that since NPIC, technology has advanced and it is time to look beyond the simple stove designs of the NPIC era. ARTI has developed an up-to-date stove, which though not cheap, but is popular among both rural and urban middle-class households www.arti-india.org . NGOs and donors are subsidising them for those living in poverty. Priya points out several commercial ventures promoting extremely good stoves all over India; all of these are enjoying some degree of success. Karabi Dutta (ARTI) believed that another reason for a failed subsidised programme was that even though improved, where stoves look too like traditional stoves they are not well received. People wanted ones that looked more modern and attractive. The Oorja stove is successfully sold in India without subsidy, as the salesperson is a woman from the village, so that women feel more confident to raise issues with her and resolve problems, and the stove is sold with only a small profit margin. Grant Ballard Tremeer observed that in many situations, the donor has their name emblazoned on the work, and that this makes adopting a business approach very difficult. NGOs administering subsidies and involvement in micro-credit can lead to people believing that repayments etc. are viewed with more leniency. Liz asked if, looking at the contributions from Priya and Karabi, it was fair to say that top-down subsidy is unlikely to work, and that one reason for this difference from the bed-net scenario is that stoves are very culture-specific and thus need more interaction from those using them rather than massive dissemination. Jimmy McGilligan, Barli Development Institute for rural Women Indore, does not like subsidies. Having provided them for the Institute for women to buy solar cookers for eight years, and using solar in the Institute, he is still only providing the subsidy for the same numbers, and still trying to persuade women of the need for clean energy. Another negative story was accessing solar lanterns that were subsidised, but all were faulty. Thus he feels that one should concentrate on the health messages, whilst developing more up-to-date technologies with desirable product attributes to which the women will aspire. He is appalled by the concept that to design stoves for the village kitchens, one must use mud, adobe and other local available materials. Villagers are now buying mobile phones; are they made from local materials? Klas Heising, although agreeing that those living in poverty are by no means homogenous believes that a well designed mud/adobe stove can have equal or better performance in speed, fuel consumption and smoke evacuation than metal ones. His experience, in Bolivia, is of a much higher number of abandoned modern metal stoves despite metal stoves costing 60USD whilst adobe ones with some metal parts cost 13USD as the adobe stove works better for people, and requires little or no subsidy. As gas is subsidized, those who can afford metal woodstoves tend to opt for gas – which is better for health. Nikhil Desai asked if the metal price was due to much higher prices for metals due to import costs and/or by import duties and/or recycling practices. If some product prices are high because of market distortions, it is better to attack the distortion at its source - e.g., duties and taxes. This is never easy, and means that non-governmental entities sometimes end up subsidizing where it is not needed. Anil Rajvanshi, Director,Nimbkar Agricultural Research Institute (NARI) was strongly in agreement with the need to modernize, and directed readers to his paper ‘Langmuir Approach to Rural Development’ where the case is made for closer cooperation between civil society and corporate world for rural development http://www.nariphaltan.org/langmuirrural.pdf . [top] [end]Week 3: Giving things away for freeBackground. This discussion started with a quote from Fuel for Life (WHO 2006) http://www.who.int/indoorair/publications/fuelforlife.pdf“A cost-benefit analysis, recently conducted by WHO, evaluated different intervention scenarios for meeting the voluntary MDG energy target .... Globally,the analysis shows a payback of US$ 91 billion a year from the US$ 13 billion a year invested to halve the number of people cooking with solid fuels by providing them with access to LPG by 2015.....Making improved stoves available, by 2015, to half of those still burning biomass fuels and coal on traditional stoves, would result in a negative intervention cost of US$ 34 billion a year as the fuel cost savings due to greater stove efficiency exceed the investment costs. This generates an economic return of US$ 105 billion a year over a ten-year period (Table 5). Time gains from reduced illness, fewer deaths, less fuel collection and shorter cooking times, valued at Gross National Income (GNI) per capita, account for more than 95% of the benefits. There is debate on the appropriate valuation of time. When these time gains are conservatively valued at 30% of GNI per capita for adults and 0% of GNI for children, the economic payback decreases to US$ 31 billion a year for LPG and US$ 33 billion a year for improved stoves. Jacob Moss urged some caution when referring to WHO's cost benefit analysis in quoting their aggregate numbers, although the publication provides really good insights, such as the fact time savings could be on par, or exceed the health benefits, of reduced mortality). He is concerned that the final analysis uses assumptions about stove adoption that may be too optimistic. Margaret Owino, Regional Director, SCI (EA) described how, between 1995 - 2002 solar cookers were given out in refugee camps. Towards the end, attempts to introduce payments failed as refugees are used to being given everything free of charge. In 2003, a project in Western Kenya, used a little subsidy at the introduction, some promotion, and ensuring the CooKits were accessible. The community is now buying the technology at full price and 4000 units have been sold. The same system is being adopted in two new communities and it is slow but it works as the users - mainly women, pay little by little. When they complete, they get their cooker. This project is about to be reviewed. Mawahib Eltayeb Ahmed of the Sudanese Environment Conservation Society(SECS) commended the work and felt it would be of benefit in Darfur. C. V. Krishna advised that another route is to construct, and teach the construction methodology, of the mud solar cooker, which although less efficient can be self-built at a lower cost. [top] [end]Week 4: Subsidies: the overall pictureBackground. Are subsidies a good idea?What will make them work?Is money better spent on subsidies or information or both Nikhil Desai answered each point: He felt that they are undoubtedly useful, and that details of how much, how, to whom, under what rules, and at what cost confuse the picture. There are no widely marketable ‘clean air technologies’ to date, except for LPG. To make them work, Nikhil feels that clarity and predictability of rules, and near-certainty that the products work, are strongly desired, along with desirable product attributes. Money is probably needed for both increasing knowledge and direct subsidy. Telling poor people about smoke hazards but not offering them choices and solutions is insulting. In order to tell ‘them’, we first need to ask them, study them, enrich our understanding; if after all that we cannot bring in money for their sake … they can only conclude that either the problem is not that severe or that we do not care. He feels that many of those working in this field focus exclusively on the most difficult market segment - poor rural households with low-quality solid fuels (poor wood, sticks, agro wastes, dungcakes) who are unwilling to make changes, leading to the reasoning that one has to use only traditional materials rather than more modern stoves. He urges that one seeks to find people who will change, and to identify what brings about those changes, and to work with the market leaders. Nikhil asked whether subsidies are problematic in this sector because:
Nikhil questioned why one should not subsidise the rich, but suggested that if taxes were going to subsidize the rich anyway, LPG cylinders and stoves at 25% upfront payment, once-in-ten years would be a good thing, provided one could identify individual households, and that LPG filling was liberalized so that any company could fill and exchange. Anil responded that all the subsidised LPG would go into two and four wheelers. Everywhere, in rural areas of India, technicians convert vehicles into LPG powered systems. Even without subsidy, LPG cylinders are diverted to these uses, creating artificial shortages; a subsidy would make it worse. He suggested that if subsidy is really required, it should be for ethanol for household purposes. It is renewable and can be distilled locally with rudimentary technology and is a safe mixture for household uses. Shashi Kad, Policy Researcher, APFED and CDE Projects, Japan, believes that both direct subsidies and knowledge are important. Clean air technologies cover a very wide range and the type of subsidy is dependent on location. He feels that information and facilitation on the options for clean air may not require any subsidy. [top] [end]Fuel subsidiesBackground. It was noted by Klas Heising that fuel subsidy may be one of the key areas of discussion. On this basis, some of the comments that pertain to fuel subsidies have been presented separately in this section Klas Heising suggested that perhaps the key is to look at fuel subsidy. Brazil subsidized gas heavily for decades, and biomass fuel use went down to something like 10% of households. When subsidies were removed, biomass fuel consumption for cooking went up. Subsidizing gas may make a lot of sense, solving the problems for many and concentrating improved stove programs on those who will not have access to gas due to economic or logistic reasons (in Bolivia, about 40% of the population). Magi Matinga agreed – for kerosene as well, and noted that Brazilian subsidies have been re-instated. She felt that they are more versatile products, which can lead to abuse (used for transport etc.). India's government subsidises kerosene and LPG for domestic use. There is evidence of a lot of this subsidy being abused; nevertheless those living in poverty benefit, and one should question whether these benefits at least match the costs lost through abuse. Would monitoring a perfect system be even less cost effective? A lot of the subsidy finds its way to small/medium enterprises – but low-income households usually run these anyway – so maybe another route out of poverty. Looking at Brazil; LPG reaches 98% of households including 93% of rural households at a cost of slightly less that US$60 per year per low income households. Are these well targeted subsidies overlooking other costs - cost of vouchers, identifying qualifying households whose status may be quite dynamic, policing the targetting etc. Under what conditions is such targeting of of LPG subsidies possible? Apart from government and/or donor financing and logistics, what other barriers are there? For example, in Malawi there are attitude barriers to using gas because of fear of accidents. Vinay Tandon describes the mountainous state of Himachal Pradesh where promotion of LPG to poorer households living around protected forest areas is hindered by high capital equipment costs and abuse of the LPG subsidy. Increasing knowledge on smoke hazards / health impact is better done by NGOs, whilst direct government subsidy on LPG (that reached the poor) or improved stoves would be effective. Currently almost all subsidised LPG goes to urban areas (and to the not so poor), with evident massive misuse for commercial purposes. Subsidy to remote areas would be a fraction of the total LPG subsidy bill and almost nothing compared to the free electricity given to well off farmers. The payback would be improved quality of life (of women and girls especially), and reduction in the pressure on the few remaining forests. Harry Stokes favoured subsidies to get cleaner fuels to the poorest families, including subsidizing LPG, although has concern that kerosene does not combust cleanly and fears that fossil fuels may not be affordable or sustainable in the long term; and kerosene is expensive to refine . To get clean fuels to poorer consumers, he highlights the Global Clean Cooking Fuel Initiative published by Jose Goldemberg et al. in ESD in 2004, although notes the absence in the initiative of alcohol fuels. http://www.princeton.edu/~energy/publications/pdf/2004/Goldemberg,%20Clean%20Cooking%20Initiative,%20ESD%202004.pdf . Crosby Menzies felt that subsidising or not subsidising did not make sense in Africa. Southern Africa is also one of the poorest regions, and market forces do not apply very much to the average person. He favours solar, but fears that ethanol as a cooking fuel is based on land and pesticide use, and reduction in biodiversity . He feels that carbon subsidy may be a good way forward, but that using the market as the only tool for those in serious poverty is not acceptable. Harry Stokes responded that though intensive, industrial scale agriculture for monoculture crops can and has created substantial environmental impact, producing ethanol from the wastes that would be dumped as they have very little value prevents them from being a source of devastating pollution. Converting these wastes to a clean fuel in a modern distillery is a win-win on both the production side and the end use side. As with any other stove-fuel combo, one must have the right stove in order to use ethanol or methanol in an optimal fashion. He advocates developing and using simple alcohols in place of fossil fuels as a way to avoid the necessity of having to subsidize increasingly expensive fuels to get them to lower income consumers. http://www.bioenergylists.org/en/gaiabrazil2007 . Locally produced alcohols can be produced cheaply enough to market to the consumer without subsidy; both ethanol from sugar cane or methanol from gasified waste biomass or from flare gas, where the wet portions can be pulled off for LPG and natural gasoline and the dry portion (generally 85% to 95%) of the gas can be used to make methanol very cheaply; they can enter the local market at less than half the cost of kerosene and at a fraction of the cost of LPG, making subsidies unnecessary. The risk is that all this fuel will be taken for transport on the global commodity market, rather than being priced within the real local market where it is needed – as in Ethiopia. Better that the government ensures that supplies are locally available, than that they export the alcohols and then have to subsidise imported fossil fuels as they burn cleanly in the home, reduce CO dramatically and eliminate particulates. http://www.bioenergylists.org/en/taxonomy/term/46%2B439/1 Nikhil Desai is unaware of evidence that there have in fact been ‘savings’ in wood or an improvement in average wood quality, or where the monetary or time savings have been directed. Subsidies that have gone to fossil fuels and nuclear have delivered abundant energy which, to date, cannot be said of renewables or improved stoves programmes. Fossil and nuclear fuels have delivered safe enough and clean enough energy albeit that renewables might be safest and cleanest, but yet to deliver on the promise of being cheap enough. Though there is a perception that micro-finance could enable clean energies to reach those in poverty, the basic economics and consumer satisfaction must be sufficiently robust for this to happen. The reason why solar cookers are not available in every town, village and city is that supply chain agents are not interested in small markets; the opportunity costs in terms of working capital and sheer human knowledge are too high, there are other things to sell. By the same token, consumers with access to microfinance have other things to buy, as evidenced by their preferences in the market. Karabi Dutta described a recently completed Household Energy and Health Project in Maharashtra where time-saving the use of time saved was measured. Most of the ladies spent the extra time in their agricultural land, weeding cleaning etc., providing an indirect monetary benefit; but almost no one was happy with the extra time gained with the reduction of cooking time and wood collection time and as reducing it deprived them of the social time when they go in a group to collect wood. This is a really interesting report, but as it is not related to subsidy, a link to the report is provided here LINK Crosby Menzies disagreed that coal and nuclear has provided safe and clean energy, whilst renewable energy technology has been able to fill the needs for more than 50 or 40 years but was called too expensive.With global warming a verified reality , the only ways for renewable energy to become cheaper is if its subsidised or supported in the same way as coal or nuclear. We need to re-evaluate the way that we calculate the value of generating energy taking into consideration elements that current business takes for granted. Nikhil noted that Zambia had the cheapest household electricity tariff (some 2 US cents/kWh for the first 150 kWh or so), the highest per household electricity consumption (300+kWh a month), and easily 45-50% electrification. With high LPG costs, those who cannot use electricity for cooking have no choice but biomass. He questioned how, in this context, solar could scale up to even 10% of the unelectrified market? How much subsidy would be required for it to be available at a price of, say, $25 (after subsidies), and that ethanol/gelfuel stoves might better compete than solar. The question is not whether to subsidize but whether subsidies can both be fiscally sustainable and lead to a sharp increase in market uptake (with resultant improvements in costs, performance, and supply chain reliability). Crosby replied that in Zambia it would make sense for government agencies, NGO’s or the carbon market to fill the gap, creating work for people installing solar technologies in the villages and townships. It is also a question of urgency as it is far easier to deploy bigger numbers if you take the money issue out the way and say we need people to get this equipment as soon as possible to avoid ecological and social disaster and improve people's quality of life, the millennium development goals the human rights charter etc. In South Africa it seems appropriate to try the entrepreneurial model as fuel costs for a year cost more than the capital cost of a solar cooker. Another member of HEDON and SunFire Solutions are about to launch a project that will explore exactly the issue of how best to use some form of subsidy (carbon markets in this case) to introduce a product. [top] [end]In the archivesBoiling Point issue number 30 from April 1993 was entitled "Sales and Subsidies" and has some useful contributions. To read the entire journal follow this link: Boiling Point 30 - April 1993. Articles include:
[top] [end]ContributorsUser:Liz Bates 18 February 2008Categories: Subsidies| CleanAirSIG | |||||||
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