WWP: Power-thirsty

The Weekend Working Paper series returns! The fantastic Katrina Jessoe is visiting the Energy Institute from Davis this semester (and - bonus - mentioned that she's looked at this blog...correlated with my choice to highlight her paper this week? I'll let the reader decide), so this weekend, I read her cool new working paper, joint with Reena Badiani. Like me, Katrina and Reena have been thinking about what electricity does to the Indian agricultural sector and to the environment. Unlike me, they have their acts together and have a cool paper draft! 

As a bit of context: electricity in India['s agriculture sector] is in a challenging political economy situation. For historical and social equality reasons, India has a long tradition of providing subsidized electricity to its farmers. For many states, this means that agricultural electricity users are billed (next to) nothing for energy...and on top of that, bill payment rates are quite low. Energy use among farmers is also often unmetered, and with relatively unsophisticated grid-level monitoring systems, it's just really hard to know how much electricity is even going to the ag sector - but with power costs next to nothing, you can imagine that farmers aren't exactly conserving. The economics 101 response would be to price electricity at the social marginal cost, likely with a fixed charge to enable the natural monopoly utility to stay in business (Severin's blog post would be thrilled to tell you all about fixed charges in California). But the Indian equilibrium is pretty far from this (especially in agriculture), and because farmers have a great deal of bargaining power, and because utilities are individually administered by state power boards, enacting change towards economic efficiency is extremely difficult.

An irrigation pump in Punjab. Source.

An irrigation pump in Punjab. Source.

So, given that India's cheap power to farmers probably isn't going away any time soon, it's useful to know what kinds of costs are associated with the energy price subsidies. Here's where Reena and Katrina come in. Energy in India's agricultural sector is largely used for pumping groundwater. You can imagine that subsidized energy prices might cause extra groundwater depletion, relative to marginal-cost electricity prices. But the magnitude of these effects is really important for policy, especially given the current state of India's groundwater.

Reena and Katrina take advantage of variation in state electricity pricing over time to estimate the effect of electricity subsidies on groundwater pumping and yields. They find that lower energy prices cause substantially more groundwater use, which in turn changes the land being used for crops and the water intensity of crops. The bad news is that it looks like these subsidies have also increased the likelihood that groundwater sources are at risk of over exploitation. The good news is that these subsidies seem to be a decent way of transferring government money to farmers. In the authors' own words:

In this paper we estimate the causal effect of agricultural electricity subsidies in India on groundwater extraction and agricultural output. Our empirical approach exploits changes in state electricity prices over time controlling for aggregate annual shocks and fixed district unobservables. Electricity subsidies meaningfully increase groundwater extraction, where the implied price elasticity is -0.18. This subsidy-induced change in groundwater extraction im- pacted both agricultural output and crop composition, increasing the value of water-intensive output and the area on which water-intensive crops are grown. These subsidies also increase the probability of groundwater exploitation, suggesting that they may come at a real and long-term environmental cost.

I'm looking forward to seeing the final version of the paper - and hopefully several more like it, doing further work on these important economic and environmental issues.

PS: For those of you keeping track at home, our heatwave has thankfully passed. Today even showed glimmers of rain!