The environmental costs of subsidies

The environmental costs of subsidies
It’s time to look at the deleterious environmental impact of subsidies so as to attain correct pricing of resources

A few days before Delhi’s odd-even rule—a road rationing scheme in which odd- and even-numbered cars were allowed to ply on roads on alternate days—was to be implemented, Delhi deputy chief minister Manish Sisodia appeared on a television channel to answer questions on the rule. During the show, Sisodia admitted that the idea to give a subsidy on diesel for farmers who use diesel-run pump-sets to irrigate their fields has led to a damaging impact on the environment. The number of cars running on subsidized diesel has multiplied over the years and contributed to the deteriorating air quality.

I use the word “admitted” despite knowing that Sisodia’s was not the brain behind the genesis of diesel subsidy. But at the same time, Sisodia and his party have been extremely reckless in showering subsidies to win political constituencies. If Sisodia were currently a politician in rural India, he would have naturally supported the subsidy on diesel.

This problem has now been solved. The lowering of oil prices has allowed India to eliminate the subsidy on diesel. But actually, the bigger problem is not yet solved—the one of the political economy and the mindsets it engenders.

Consider, for example, the electricity sector. Most Indian states provide electricity at very cheap rates. The finances of distribution companies in many of these states are entirely wrecked. To improve the situation, the Union government has recently announced a number of measures under the UDAY (Ujwal Discom Assurance Yojana) scheme, which won’t be successful unless the underlying causes—low tariffs, power thefts, large subsidy bills—are addressed.

Those who haven’t seen it first-hand should watch the movie Katiyabaaz, based in Kanpur, to get a glimpse of the political economy which sustains large-scale power theft in many parts of India. The majority of farmers receive electricity either free or at dirt cheap rates. Non-payment seldom invites punishment. Low power tariffs, subsidized diesel and the provision of minimum support price for certain water-intensive crops have together led to unrestrained exploitation of groundwater.

There are more examples. Any hike in passenger tariffs by the Indian Railways, for instance, is followed by an uproar by the opposition parties. In a one-of-a-kind episode, former railway minister Dinesh Trivedi had to step down days after presenting his maiden railway budget because his own Trinamool Congress party was unhappy with the absolutely minimal tariff hikes he had proposed.

Since passenger trains don’t earn enough, they are cross-subsidized by revenues from freight trains. The freight tariffs, as a result, are high and uncompetitive, which in turn has caused business to move to roads. This not just makes it difficult to sustain the cross-subsidy mechanism, but diversion of traffic to road also leads to increase in pollution. As current railway minister Suresh Prabhu said while presenting the budget for 2015-16: “The energy consumption is about 75-90% less for freight traffic when compared to road. The carbon dioxide emission is about 80% less than road.”

The traditional opposition to subsidies has come from the proponents of free markets. Subsidies distort markets and lead to inefficient outcomes—thus goes their indefatigable argument. But these examples show that subsidies also cause significant environmental damage.

This is interesting since, in India, there is a significant overlap between people who advocate subsidies in the name of the poor and those who fight for the protection of the environment. The latter movement has, so far, largely restricted itself to exposing the collusion between the state and big corporations. It is time they began looking at the deleterious environmental impact of subsidies. If they do so, it will be a victory for correct pricing of resources, if not for free markets and free-marketeers