Does fuel price subsidy work? Household energy transition under imperfect labor market in rural China

Abstract

Dependence on traditional biomass energy, such as crop residues and firewood, has a number of negative impacts on sustainable rural livelihoods in many developing countries. Subsidizing modern fuels has been adopted by many governments and development agencies to increase the adoption of modern clean fuels, however, its effectiveness on rural energy transition away from traditional biomass energy is rarely investigated. This paper seeks to understand the effectiveness of fuel price subsidies based on a non-separable agricultural household model. We developed a theoretical framework explaining household behavioral responses to price incentives in the presence of labor market imperfections and tested this framework with rural household data in China. We found that the policy interventions focusing on fuel pricing are largely ineffective in promoting household energy transition partly due to imperfect rural labor markets. This finding has important policy implications for accelerating energy transitions. Based on our findings, we recommend that more attention needs to be paid to non-price mechanisms, such as providing technical support (e.g. increasing R&D investment in exploring new energy technologies and providing demonstration projects), constructing accompanying modern energy infrastructures, providing off-farm employment opportunities, and establishing a sound and effective social safety.