[sustran] Re: Fuel prices and inflation

[Madhav Badami, Prof.]

Greetings all,

Last year, I wrote a short article on energy consumption in road transport in India -- among other things, I (briefly) discussed the issue of fuel subsidies:

http://casi.ssc.upenn.edu/iit/badami

As it happens, I quoted one of the late lamented Lee Schipper's papers, plus a World Bank study which makes Carlos's point about removal of subsidies not being necessarily regressive. Indeed: even if they did not constitute a leakage of purported social benefits to the wealthy, as in the case of diesel subsidies which provide them an incentive to purchase, and vehicle manufacturers to market, diesel automobiles, with concomitant adverse health effects, and little if anything to show for in the way of climate change benefits, fuel subsidies impose massive fiscal costs and hamper social spending that could potentially benefit the poor. I say potentially, because how savings from fuel subsidy reductions are chosen to be deployed -- in, for example, public transit and infrastructure and facilities for non-motorized modes -- is vitally important for outcomes for the urban poor, and the poor generally.

One last point: had I more space in my article, I would have also pointed out, as I believe Karthik did, that removing kerosene subsidies (absent cleaner fuel alternatives that the poor can afford) is a dicey business, since it is likely to encourage the increased use of lower quality fuels, thus (massively) exacerbating their exposure to indoor particulate emissions**, and possibly accelerating deforestation.

Cheers,

Madhav

** Indoor PM concentrations as a result of using firewood, dung and other such fuels can be as high as 6000 micrograms per cubic metre, several times higher than even some of the most polluted outdoor urban environments in Asian cities.

************************************************************************

"As for the future, your task is not to foresee, but to enable it." -- Antoine de Saint-Exupery

Madhav G. Badami, PhD
School of Urban Planning and McGill School of Environment
McGill University

Macdonald-Harrington Building
815 Sherbrooke Street West
Montreal, QC, H3A 2K6, Canada

Phone: 514-398-3183 (Work)
Fax: 514-398-8376; 514-398-1643
URLs: www.mcgill.ca/urbanplanning
www.mcgill.ca/mse
e-mail: madhav.badami at mcgill.ca
________________________________________
From: sustran-discuss-bounces+madhav.g.badami=mcgill.ca at list.jca.apc.org [sustran-discuss-bounces+madhav.g.badami=mcgill.ca at list.jca.apc.org] on behalf of Todd Alexander Litman [litman at vtpi.org]
Sent: 25 September 2011 09:47
To: 'Pardo'; 'Aashish Gupta'
Cc: sustran-discuss at list.jca.apc.org
Subject: [sustran] Re: Fuel prices and inflation

For a review of information on the elasticity of vehicle fuel consumption
and travel with regard to fuel prices see:

Todd Litman (2010), "Transportation Elasticities: How Prices and Other
Factors Affect Travel Behavior," Victoria Transport Policy Institute
(www.vtpi.org); at www.vtpi.org/elasticities.pdf.

This analysis indicates that fuel prices do tend to have a significant
impact on vehicle travel and fuel consumption, although it takes several
years for the impacts to reach their full impacts, so short term price
fluctuations have relatively small effects. Some studies indicate that these
price elasticities declined significantly in North America during the last
third of the Twentieth Century (between about 1960 and 2000) but more recent
research indicates that transport elasticities are now returning to more
typical levels. See:

Todd Litman (2010), "Changing Vehicle Travel Price Sensitivities: The
Rebounding Rebound Effect," VTPI (www.vtpi.org); at
www.vtpi.org/VMT_Elasticities.pdf.


For international comparisons of fuel prices see:

International Fuel Prices (www.internationalfuelprices.com) is a website
with information on international fuel price reports from GTZ (a German
international development agency) and other sources. Their lead researcher
Gerhard Metschies has produced a series of reports that examine
international fuel prices and subsidies. If you are interested in these
issues you can ask to receive their email notices.


For analysis of economic subsidies, such as underpriced fuel, see:

Subsidy Watch (www.globalsubsidies.org/subsidy-watch) a project by the
International Institute for Sustainable Development's Global Subsidies
Initiative (GSI) designed to put the spotlight on subsidies and the
corrosive effects they can have on environmental quality, economic
development and governance.


Sincerely,
Todd Litman
Victoria Transport Policy Institute (www.vtpi.org)
litman at vtpi.org
facebook.com/todd.litman
Phone & Fax 250-360-1560
1250 Rudlin Street, Victoria, BC, V8V 3R7, CANADA
"Efficiency - Equity - Clarity"


-----Original Message-----
From: sustran-discuss-bounces+litman=vtpi.org at list.jca.apc.org
[mailto:sustran-discuss-bounces+litman=vtpi.org at list.jca.apc.org] On Behalf
Of Pardo
Sent: September-24-11 2:48 AM
To: Aashish Gupta
Cc: sustran-discuss at list.jca.apc.org
Subject: [sustran] Re: Fuel prices and inflation

Please see the section on fuel prices of www.sutp.org . One of the most
recent publications there discusses that point. There is also the fuel price
survey which has prices from 100+ countries which shows a better reality on
how cheap or expensive fuel is. The middle class argument is not well
founded, deeper research shows that higher fuel prices are better even for
low-income groups.

If Lee Schipper were with us, he would have given us such a thorough
answer...

Pardo

Typed on keyboard projected onto a glass surface. Please excuse typos.

On 24/09/2011, at 4:43, Aashish Gupta <aashu.gupta20 at gmail.com> wrote:

> Dear all
>
> Hello. I have been thinking about this for sometime, and thought I should
> intervene. I do have a few questions, though. What is the evidence on the
> price elasticity of demand for petrol and diesel consumption in private
> vehicles? I think this is an extremely important question. Of course Ashok
> (and I too, along with many others) thinks that raising diesel prices will
> lower demand for private travel, even shift middle class households (or
> others, who might be using two wheelers) to public transport, and while
this
> is an extremely plausible hypothesis, I do want to see the results on
this.
> One could imagine several counters-points to this, for instance by arguing
> that actually, travel demand is inelastic to small price changes, since
> these dont affect the middle class that much; even if they do, they cant
> help it much because they have already brought a car or a motorcycle and
> making changes would require other lifestyle changes, that they are
> "locked-in" to using a car or a motorcycle, etc. Any pointers? If there
> arent enough good studies of this, then this is an excellent topic for
> research, since fuel price hikes are common in india. :)
>
> The other thing, of course, is the impact o inflation on food and other
> prices (of fuel price hikes). I have tried looking around that in the
past, but
> there are several senses of the data. In the past, various economists
> associated with the government of India have claimed (at different points
of
> time) between
.4%<http://www.steelguru.com/indian_news/Macroeconomic_indicators_-_Fuel_pri
ce_hike_impact_June_inflation/223614.html>and
>
1%<http://www.deccanherald.com/content/77451/fuel-price-hike-impact-inflatio
n.html>(or
>
this<http://www.business-standard.com/india/news/fuel-price-rise-inflation-t
o-go-upeffects-uncertain/399478/>)
> percentage points in the inflation rate because of such hikes. Of course,
I
> dont think we should believe the economist's words on these, especially
> because some of them have made really bad statements in the past about
> inflation.
>
> I think members of this community would be extremely interested in this
> report <http://petroleum.nic.in/reportprice.pdf>, specially table P1
> (section 4.2). Just for background, this report provided the basis for the
> change in the policy to allow for "freeing of prices". I also quote from
the
> report,
>
> Even assuming that the truckers, power generators, industrial users
> etc.(other than the passenger car owners) are able to pass on fully the
> additional cost of diesel, an increase of Rs. 4
> per litre would mean an increase of around Rs. 20,000 crore in their cost
of
> diesel which would be around 0.4 % of GDP in 2008-09. This should be
> compared with the inflationary impact of subsidies, which would be
similar.
>
> Overall, of course, this isn't enough evidence on the impact of inflation,
> and if someone can do this analysis or point out independent evidence of
the
> same, that would be just great. I wish I had the econometric prowess to do
> it, but I am just learning, and cant. On the other hand, I do know that
its
> not a very difficult analysis. One just has to regress past inflation
rates
> on changes in petrol prices and some other variables, to find out the
> impact. Again, excellent research topic.
>
> Having said inconclusive things about the most important things in this
> debate, I would like to come to other things mentioned. Karthik, bang on
> target that targetting has failed (horrendously) in India. For instance,
> around 2005, several studies (IHDS, NFHS, NSS) point out that half the
> people in the bottom quintile did not have BPL (below poverty line) cards.
>
> Ashok, that food should not be unduly cheap and that higher prices benefit
> farmers is a very important debate, again, globally. For instance, one
finds
> echoes in this debate on food prices between
> oxfam<http://www.oxfamblogs.org/fp2p/?p=4054>and
>
others<http://www.adamsmith.org/blog/international/oxfam-is-wrong-about-food
-prices/>.
> It is also true that if prices of food or agricultural commodities rise
> because of increase in prices of diesel, farmers dont benefit. You are
right
> on prices reflecting true costs, which would include the cost of
> environmental externalities for diesel or petrol. However, it is because
of
> this notion of true cost that i support subsidies in modern cooking fuels
> for the poor - remember, that there are positive externalities for women
in
> households from smokeless chulhas, lpg, methane or kerosene. Karthik, the
> use of bio-fuels, however, is another blind-spot, mainly because until
very
> recently it was thought that the use of these (things such as wood or
> cow-dung) by the poor is carbon nuetral - the poor are only using carbon
> sequestered recently, and this carbon can be again sequestered by growth
in
> vegetation. Of course, to check whether this is true, one has to compare
the
> rate of consumption with the rate of regeneration. I do agree about your
> analysis of cooking subsidies.
>
> Before I leave, I would also like to mention that diesel has become an
> important input for farmers as well, especially in areas which dont have
> reliable or any power supply. As is clear, farmers use diesel pumps for
> irrigation. Of course, whether thats enough justification for fuel
> subsidies, is another point.
>
> What I personally find abominable is the response of the left-parties in
> India (but also of others, including the main opposition) on fuel prices -
> things such as food prices are much more relevant to the poor, and the
> solutions for them (such as an expanded PDS) are much nearer in sight than
> this petrol price debate. What is also harrowing is that the environmental
> side of the debate is completely absent: India that way desperately needs
a
> party with a 'green' vision. The reason for this anger by mainstream
> opposition parties on fuel price hike appears clear to me, that is their
> very middle class bases and leadership - the organised labour movement for
> the left (public sector bank or railways employees, eg.) and high caste
> middle class people in the case of the BJP.
>
> Warmly
> Aashish
>
> On 24 September 2011 09:52, Karthik Rao-Cavale <krc12353 at gmail.com> wrote:
>
>> Rutul,
>>
>> This is an excellent question to ponder about, and I am not sure about
the
>> empirical answer either. We do know that the cost of production of most
>> food
>> items (grain, fruit, vegetables) in India is only a fraction of the sale
>> price. We cannot rule out the possibility that the cost of transportation
>> as
>> a fraction of the total sale price is large enough to have a noticeable
>> impact. But there is also the fact that many of the protests at the time
of
>> a fuel hike are organized by the trucking companies and also the
communist
>> parties in India (I vivdly remember the all-India protests by the
Communist
>> Party in July 2008, when my trip to the north-east was punctuated by
>> consecutive strikes in Orissa and Assam) Whose economic interests do
these
>> protesters represent?
>>
>> That said, I feel that the simple counter-argument to the middle-class
>> argument is to say that if we want food prices to be maintained at low
>> levels, then the straight-forward answer is to have larger food
subsidies.
>> The mood in the neo-liberal camp is increasingly in favour of targeting
>> subsidies - here would be an excellent place to start! Why subsidize the
>> owner of a diesel-guzzling SUV if all we want is to keep prices of food
>> low?
>> Why not increase subsidies to the PDS (Public Distribution System)
instead?
>>
>> There is now enough consensus to push for universal PDS and to get rid of
>> the discredited system of targeted food subsidies only for people who
have
>> been identified as below poverty line (essentially, it is impossible to
>> identify people according to economic status, which results a great deal
of
>> exclusion). I once did some back-of-the-envelope calculations and found
>> that
>> savings from removing fuel subsidies could cover as much of 2/3rds of the
>> additional cost of converting the targeted PDS to a universal PDS system.
>>
>> There is also another angle to this. The cost of transportation does not
>> depend on the cost of fuel alone. It also depends on the quality of the
>> infrastructure. What we now have is a transportation infrastructure that
is
>> over-used in cities (and therefore of bad quality) and non-existent in
the
>> hinterland. Fuel subsidies exacerbate the over-use of infrastructure, and
>> my
>> suspicion is that the net effect on transportation costs in some places
>> might very well be to increase it. Another alternative to fuel subsidies
>> would be to focus on improving transportation infrastructure, especially
in
>> the rural hinterland (which includes both rail and road).
>>
>> One important qualifiers: my analysis does not extend to cooking fuel.
>> Subsidizing cooking fuel does have the effect of creating a black market
>> for
>> adulterated fuels. But given the affordability gap, taking away cooking
>> kerosene subsidies will result in a sudden shift towards burning wood,
>> charcoal and dung-cakes, all of which are extremely harmful to female
>> health
>> and also potential causes of global warming. That is not something I will
>> ever recommend.
>>
>> karthik
>>
>> On Fri, Sep 23, 2011 at 10:36 PM, Rutul Joshi <joshirutul at yahoo.co.in
>>> wrote:
>>
>>> Hi all,
>>>
>>>
>>> I have a query - probably a naive one.
>>>
>>>
>>> Every time there is a fuel price hike in India, the complete hoax
>>> starts doing rounds on the social-networking site about 'how fuel is
>>> cheaper in other countries in Asia?' and 'how this rise in fuel prices
>>> is going to affect the economic growth'. The argument put forward by the
>>> middle-class and their friendly media is the links between the fuel
>>> cost and inflation leading to price-rise in the food items and the
>>> shrinking of the food basket of the poor people. Some other people (in
>>> ultra-minority) argue that it is just middle-class propaganda to shield
>>> themselves in the name of the poor. However, I don't know how valid or
>>> in-valid these arguments are. Intuitively, I am with the second group
>>> but I don't really have stronger basis for it. Can some of you who know
>>> these issues in detail, throw light on the same?
>>>
>>> Thanks,
>>> Rutul
>>> --------------------------------------------------------
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