Timing the Transfer: Liquidity Constraints and the Transition to Clean Fuels

Farzana Afridi, Prabhat Barnwal and Shreya Sarkar ()
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Shreya Sarkar: University of California at Berkeley

No 17104, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study the role of the administrative design of energy subsidy programs aimed at encouraging households' transition to cleaner energy sources. Our context is the universal subsidy for clean cooking gas (LPG) in India - households first purchase LPG at the market price (over-the-counter) and then receive a 'cash-back' subsidy in their bank account. The subsidy varies with the market price such that the effective price (out-of-pocket price net of subsidy) for households does not change. Using exogenous variation in the LPG market price, which varies in tandem with the international price, and administrative data on LPG purchases by one million households, we find that a 1% increase in over-the-counter LPG price causes a 1.4% decrease in LPG purchase by low-income households, even when the effective price remains unchanged. Household survey data show that low-income households substitute away from LPG towards polluting biomass-based solid fuels by 5% in response to a 1% increase in the LPG market price. Consequently, we estimate that the 'cash-back' subsidy design may worsen neonatal mortality and other relevant health outcomes. The adverse impact of the program design on clean fuel usage weakens when households have more cash on hand, suggesting households' short-term liquidity constraint is the key explanation. Our results, thus, show that the design of energy subsidy programs, in particular the timing of transfers, may have significant implications for the energy transition of liquidity-constrained households.

Keywords: subsidy; liquidity constraints; cash transfer; solid fuels; LPG (search for similar items in EconPapers)
JEL-codes: H26 I38 O17 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2024-06
New Economics Papers: this item is included in nep-des, nep-ene and nep-env
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