When should subsidies be used as a policy tool? Can we use subsidies to encourage ‘desirable’ behaviour’, assuming for a moment that we agree on what it is.
Would encouraging energy saving behaviour be a candidate for a subsidy if it can be shown to be in the larger public interest?
There is an improved lighting technology available today in the Indian market. This is the LED–light-emitting diode—lamp. This technology has been under development for some time, and LED lamps of different kinds are now available in the Indian market. LED lamps last for a long time—more than five years, and they consume very little energy for a given amount of illumination. For example, the illumination we get from a fluorescent lamp of 100 watts is about 18 watts in an LCD lamp, and around 6 watts in an LED one. So we have both lower power consumption for a given amount of light and a longer life for the bulb. This should make it attractive.
They are however relatively expensive. Many people, who have a functioning illumination system tend to postpone upgrading to LED technology when they hear of the cost, which may be three times what the old inefficient technology costs. This is because they have a working system. Replacements of bubs are occasional; and these bulbs are cheaper than LEDs. That they consumer more power per unit of light becomes a matter they ignore. Paying a slightly higher utility bill each month seems far easier then shelling out a considerable amount in the up gradation process. Even those who are buying new flats, tend to opt fr the cheaper, less efficient technology because by the time they come to lighting and fixtures, they are often running shout of funds. So the less efficient technology gets perpetuated even though everyone knows it is inefficient.
Yet it is desirable to encourage such a shift because, from society’s point of view, saving of power is very important. A unit saved is more than a unit generated, as there are no T and D losses. Also we avoid the environmental costs incurred in generating more power. And the utility company can serve more customers at existing levels of capacity because of the grater light efficiency of LEDs.
To me this seems a fit case for government intervention, using the power of subsidies to encourage desirable behaviour. If subsidies can be used to encourage a move to LEDs, more power will be available in the grid—or the same amount of power can be used more efficiently. More customers can be provided electricity without having to generate more. So the question becomes one of designing the subsidy suitably.
The utility company can move in and upgrade lighting systems for its customers. This has been done in countries like Australia. Once the more efficient system is installed, there is a saving in the month utility bill the customer gets each month. From this reduction, a portion is retained by the utility; over a period of time the upgradation pays for itself. The customer gets the benefit of lower bills and the utility can serve more people. It is a win-win situation.
Even if the government chooses to subsidise the cost of installation, say by levying a lower rate of property tax on those using LEDs, we would get an overall improvement.
The government can also choose to reduce excise and other taxes on LED manufacture to reduce the cost to customers, and thus encourage their use. As volumes grow, costs may further decrease.
There may be other ways of designing such a subsidy policy.
The government may choose to use a combination of these methods.
What works in any situation is best determined locally by the different stakeholders involved. In any way, there is an overall social benefit to the switch to LED technology. Of course, once everyone is on board, there may be no more need to continue the subsidy. No subsidy must be for ever.
So why should India NOT choose to use subsidies in this case?
I look forward to discussion
[Disclaimer: Views presented above are those of the author and do not necessarily reflect those of CBPS.]