Saturday, 3 June 2017

Pakistan should subsidise LPG for heating and cooking

Indoor air pollution is a serious problem in many (or most) developing and middle-income countries. The main source of indoor air pollution is the burning of solid fuels (such as firewood, animal dung, or crop residues) for heating and cooking purposes. In Pakistan alone, the World Health Organization estimates that over 70,000 deaths annually can be attributed to indoor air pollution (see here), with the global total being around 1.6 million deaths annually.

When we think about demerit goods (goods that society would prefer there was less consumption of), there are typically two solutions. The first option is a command-and-control policy that prohibits or limits the consumption of the good. In this case, governments could ban the use of firewood. However, it is unlikely that such a ban is feasible. The second option is to tax the good, but again in this case taxing is not feasible as firewood, animal dung, and crop residues can be obtained at low (or no) cost by rural households direct from the source.

In a new working paper, Muhammad Irfan, Gazi Hassan and I use household data from Pakistan to estimate the price and fuel expenditure elasticities of demand for various fuels used for heating and cooking. Specifically, we pooled data from three waves of the Pakistan Social and Living Standard Measurement Survey (2007-08, 2010-11 and 2013-14), and used Deaton and Muellbauer's LA-AIDS (Linear Approximate Almost Ideal Demand System) model. That sounds complicated and fancy (and it is), but the output is pretty simple - it estimates all of the price and fuel expenditure elasticities for the different fuels (natural gas, LPG, firewood, agricultural waste/crop residues, animal dung, and kerosene). We were also able to estimate different elasticities for rural and urban households.

We found that all fuel types except natural gas were price inelastic at the national level and for urban households. In rural areas, natural gas and LPG were found to be more price elastic compared with urban areas. Fuel expenditures elasticities for all fuels were found to be positive and between zero and one.

Finally, we ran a fairly simple policy simulation to test how much solid fuel use could be reduced by subsidising the cleaner-burning fuels (LPG and natural gas). We found that subsidizing LPG dominates a subsidy of natural gas, producing a greater reduction in solid fuel use at a lower total cost to the government. If the government wants to subsidise only one clean fuel, they should subsidise LPG instead of natural gas. So, while it may be unusual for an economist to advocate in favour of a subsidy, in this case it probably makes a lot of sense, if you want to reduce the burden of disease from indoor air pollution.

Finally, this paper is also the first research paper from Muhammad's PhD thesis, so congratulations to him on that achievement, and I look forward to reporting on his future work in later posts.

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