“Stepping Down the Ladder”: The Impacts of Fossil Fuel Subsidy Removal in a Developing Country

Hannes Greve and Jann Lay

Journal of the Association of Environmental and Resource Economists, 2023, vol. 10, issue 1, 121 - 158

Abstract: This paper provides quasi-experimental evidence from Ghana on the impact of fossil fuel subsidy removal on cooking fuel choices. We find that households “stepped down the energy ladder”: modern fuel use decreased, while the use of transition and traditional fuels expanded. Price increases of 50% for liquefied petroleum gas (LPG) and 20% for diesel caused the share of households who mainly use firewood to increase by 3 percentage points. Urban households increased charcoal consumption by around 17%, while LPG expenditure remained constant—indicating that consumption dropped. Back-of-the-envelope cost-benefit calculations suggest that overall welfare costs, including from increased cooking-related greenhouse gas emissions, were slightly higher than fiscal savings. The LPG subsidy removal in particular was likely socially damaging. Our findings highlight the ambiguous impacts of removing LPG subsidies in developing-country contexts, where they contribute to the adoption and use of clean cooking fuels.

Date: 2023
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