India and Global Climate Change

Perspectives on Economics and Policy from a Developing Country

Michael A. Toman, Ujjayant Chakravorty, Shreekant Gupta, Michael A. Toman

• Publisher: Routledge
• Year: 2010
• eBook ISBN: 9781136523182
• Edition: 1
• Topic: Biological Sciences
• Subtopic: Ecology
• Index: Biological Sciences

Though the impact of climate change will most likely be greatest with the already poor and vulnerable populations in the developing world, much of the writing about the costs and benefits of different policies to reduce greenhouse gas (GHG) emissions is by Western scholars, working in advanced industrialized economies. Drawing the majority of its contributions from authors based at Indian universities and other research centers, India and Global Climate Change provides a developing world perspective on the debate.

With a population of over one billion, and an economy that is undergoing substantial restructuring and greatly increased economic growth after a number of years of stagnation, India has an exceptional stake in the debate about climate change policy. Using the Indian example, this volume looks at such policy issues as the energy economy relationships that drive GHG emissions; the options and costs for restricting GHG emissions while promoting sustainable development; and the design of innovative mechanisms for expanded international cooperation with GHG mitigation.

CHAPTER 1

Introduction

Michael A. Toman

IN THE PREFACE TO THIS VOLUME, I attempted to explain why my coeditors and I believed a volume on climate change from the analytical perspectives of various Indian experts would be a valuable addition to the already voluminous literature on climate change economics and policy. In this introductory chapter, I first discuss why India is an important object of study in this context. I then introduce the various chapters that comprise the remainder of the volume.

Climate Change

With more than one billion inhabitants, India is the world's second most populated nation. Carbon dioxide emissions in the year 2000 totaled about 250 million metric tons of carbon equivalent, and these emissions are expected to grow rapidly in the future as the economy advances (DOE 2000). India accounts for only about 3% of the world's total energy use, however, and energy use and carbon emissions per capita are much lower than the world average. This is attributable to a low standard of living and high levels of poverty for many citizens. During the past decade per capita income has risen for many Indians, and the country now has the largest middle class in the world. Many Indian citizens, both rural and urban, still endure relatively underdeveloped conditions, however. For example, much of the population does not have access to electricity connections or appliances, piped water, modern cooking fuels, modern transportation, proper ventilation and heating systems, or basic infrastructure such as schools and hospitals.

Since 1991, India has been confronting a number of its policy obstacles to improved standards of living, both material and environmental. Many of these measures relate closely to energy efficiency, accessibility, and availability. Examples include deregulation of pricing, corporatization of state energy enterprises, and freer trade. Because these developments affect both energy and technology markets and greenhouse gas (GHG) emissions, the international community is directing much attention to India's current and future energy situation.

These points can be illustrated by referring to India's electricity transmission and distribution system. The system functions so poorly that at peak demand, the country can face almost a 20% shortage. Power supply is so erratic that it is viewed as an impediment to economic progress, and State Electricity Boards are currently experiencing losses each year equaling more than 1% of GDP (DOE 2002). About half of India's generating capacity is lost in transmission inefficiencies or to theft. National or state level regulatory bodies face difficulties in efforts to set tariffs or to oversee competition, a great obstacle to privatization. Finally, as mentioned above, the energy needs of nearly 70% of the population are still met by biomass because of a lack of access to the electricity grid or to electric appliances.

Indian policymakers also are considering policy changes in other areas that would both have salutary local consequences and limit GHG emissions. Stronger environmental measures that encourage clean fuels and energy efficiency are one option. Another area representing a challenge is transport. India is at the forefront of a transportation boom; transport sector emissions are predicted to increase almost fivefold during the 1995–2035 period (Shukla et al. 2003). This raises questions concerning both the fate of public transport and road infrastructure, as well as vehicle fuel efficiency.

Aside from its size and importance in terms of current and future GHG emissions, India is also important as a key actor in the international evolution of GHG policy. India has played an extremely active leadership role in international climate negotiations by advocating for increased pressure on developed countries to reduce emissions, while also advocating for the inherent need of India and other developing countries to increase their emissions as a by-product of economic progress. This has led, for example, to strong advocacy of the idea that long-term GHG emissions should be the same per capita throughout the world—an equal human right to use the global commons (see Agarwal and Narain 1991). Although often vexing to policy leaders in the United States and elsewhere in the developed world, these views have left an indelible mark on international climate policy analysis as well as diplomacy.

India was also one of the countries that were highly skeptical of the idea of “flexibility mechanisms” to promote increased cost-effectiveness in the reduction of GHGs by allowing investment in GHG control wherever it was the least expensive (the effect on climate protection would be the same, unlike the situation with local pollutants). This kind of flexibility was enshrined in the 1997 Kyoto Protocol to the U. N. Framework Convention on Climate Change, which created the Clean Development Mechanism (CDM).¹ Increasingly, however, policymakers and nongovernmental actors within India have been demonstrating interest in the CDM as a potential vehicle for win-win benefits—local economic and environmental improvements together with GHG control. This too has heightened international interest in India vis-à-vis climate change economics and policy.

Last, but certainly not least, India is the largest population center in southern Asia and that region is vulnerable to the future effects of climate change. Admittedly rough projections from the Third Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) indicate that the region could experience a temperature increase on the order of five degrees centigrade by 2080 (IPCC TAR WGII 2001). This could result in serious impacts on agriculture, forest resources, and coastal resources, as summarized in the note by Kavi Kumar found in the appendix to this volume. Other consequences could be an increased incidence of heat-related health stress and of vector-borne diseases such as malaria, as well as changes in water availability that put pressure on urban settlements and concentrate already high water pollution levels still further (IPCC TAR WGII 2001). India clearly has a stake in the future of GHG mitigation and the resulting global climate impacts that follow.

This volume is divided into four parts. Part I deals with the background forces influencing GHG emissions in India—economic growth, modernization, and economic reforms both economywide and in the energy sector. Part II deals with a variety of issues related to GHG mitigation in India. At this time India has no binding legal obligation to limit its GHG emissions, and growth in emissions is in fact an inevitable consequence of needed economic progress. Nonetheless, it is important to understand better where there may be low-cost or even no-regret opportunities for limiting the growth of GHGs—in energy and forest land management—as the Indian economy advances. An understanding of the tradeoffs and institutional prerequisites for more formal GHG policies in the future also is addressed in this section. Part III addresses issues that arise in the context of international negotiations to limit global GHG emissions. One key issue here is the incentives for India and other developing countries to participate in an international mitigation target, in which international equity considerations loom large. Another is the prospect for voluntary project-based mitigation activities, as envisaged, for example, in the CDM. A final section, titled Conclusions, includes short essays that state the views of two leading Indian policy analysts and advisors. In the balance of this chapter, each of these sections is discussed in more detail.

Economic Drivers of Energy Use
and Greenhouse Gas Emissions

This section of the book focuses on those microeconomic and macroeconomic forces that will influence business-as-usual patterns of energy use and CO₂ emissions in India. The next chapter, by P. R. Shukla, Debyani Ghosh, and Amit Garg, links together several simulation models to describe how patterns of economic advance and energy use may affect CO₂ emissions in India during the next 40 years. The authors argue that while emissions will indeed grow, this growth will be constrained by built-in opportunities for improvement in supply-side and demand-side energy efficiency and changes in the energy mix. The analysis thus highlights the importance of considering microeconomic forces in the energy sector as well as macro-level drivers; if efficiency improvement opportunities are smaller, for example, emissions will grow faster with expansion of Gross Domestic Product (GDP). The authors also argue that there are a number of cost-effective opportunities for CO₂ abatement at or below $20/ton of carbon emission avoided, a finding with important implications for the potential size of CDM investment in India.

The third and fourth chapters, by Ramprasad Sengupta and Manish Gupta and by Subir Gokarn, explore various ways in which the kinds of economic reforms in India that have taken place during the past decade and continue to be implemented might affect the evolution of India's GHG emissions. The first of these chapters focuses particularly on the changes that have been observed in India's primary energy and electricity sectors, as well as macroeconomic influences on energy demand. The second of these chapters focuses more on the economywide reform picture. Both chapters present a complex mosaic of influences based on reforms that are still works in progress. For example, increased economic growth and falling poverty have tended to stimulate GHG emissions because of increases in coal-based electricity use, though this has been moderated by increases in less energy-intensive exports. The service sector belatedly is increasing its share of GDP, the electricity sector is making more progress in restructuring and modernization, and the effects of recent energy price decontrol are being felt more widely. The reforms should stimulate more energy efficiency and a reduced energy intensity of overall GDP.

The overall energy intensity trends in India depend not just on what happens in large industry but also on what happens in the “informal sector”—the part of the economy consisting of small-scale enterprises, private transport, fuelwood, and other small or dispersed sources. Gautam Gupta's chapter explores the drivers of emissions in these parts of the economy and some specific technological options that might be used to limit CO₂ emissions while generating cobenefits (reduced local air pollution, less deforestation). After documenting these policies, Gupta notes the need for institutional reform and local and national levels to improve environmental performance in the informal sector, a point echoed in subsequent chapters.

Much of the focus in these chapters has been on the short-to-medium term visà-vis energy economy relationships. The final chapter in this section, by Ujjayant Chakravorty, introduces some first principles of long-term depletable resource scarcity in the context of endogenous substitution among energy forms with different carbon contents. Chakravorty notes, for example, that although coal clearly is plentiful in India, it is possible at a regional scale that natural gas, with a lower carbon content, could substitute for oil and even for some coal use—if the needed infrastructure investments for gas supply are made and the appropriate energy use technologies (driven by economic and environmental desiderata) are in place.

Options for Greenhouse Gas Mitigation

The chapters in this section of the volume include both sectoral and economy-wide analyses of technical options and policies for limiting GHG emissions in India. The chapter by Khanna highlights how business-as-usual CO₂ emissions from Indian electricity sources are much higher than needed because of a series of institutional and policy distortions, and that these distortions in turn would blunt the effectiveness of any incentive-based domestic policy measures that India might someday choose to implement to reduce GHGs (e.g., a tax on carbon emissions). Corrections of these distortions would reduce GHGs and increase economic efficiency; a combination of corrective measures with a carbon policy could still yield significant GHG reductions at little cost.

The chapter by Haripriya Gundimeda summarizes some detailed calculations of the potential for increased carbon sequestration in India and the associated costs. The costs of such investments per ton of carbon stored are not trivial, in part because of the opportunity cost of land and in part because of startup costs—though there are some cost-effective opportunities associated with both, in particular increased natural forest regeneration. Some nearer term investments in social forestry, while more expensive in terms of carbon stored, also generate more immediate collateral benefits for the many people living in proximity to and dependent on forest lands. Both the Clean Development Mechanism internationally and local land management practices come into play in determining how much cost-effective and socially beneficial forest-based carbon sequestration can be accomplished.

The chapter by R. Ramanathan takes this reasoning regarding cobenefits of GHG abatement one step further in his discussion of multicriteria approaches to policy evaluation. The author introduces these approaches and then applies them to three different sets of GHG control options with cobenefits: different power generation technology choices, options for demand-side management in electricity, and technologies for reducing both CO₂ and conventional pollutants in the transport sector. The results illustrate both the application of the methods and the sensitivity of the findings to the weights put on the different criteria for evaluating options. But this problem arises ubiquitously in the evaluation of policies in which aggregation of benefits is difficult for technical or political reasons, so these techniques provide a way of making the tradeoffs among criteria more explicit.

The final two chapters in this section span the range of policy analysis from modeling to institutions. The chapter by P. R. Shukla and Ashish Rana uses computational general equilibrium models to assess baseline CO₂ emissions and the implications of policy to restrict emissions through a carbon tax over the long term (the next 50 to 100 years). Such long-term models abstract from the immediate economic distortions confronted in a developing country such as India, and they depend on critical assumptions about future technology and other factors driving relative input choices (in particular energy intensity versus capital intensity) and output composition. Nonetheless, the analysis does illustrate a key point related to India's participation in international GHG control: such participation could be quite expensive for India if the target is onerous, and acting in its own self-interest India would naturally not be expected to accept such a constraint. Such a finding has important implications for the evaluation of options for international cooperation in abatement in Part III.

The final chapter in this section, by Shreekant Gupta, reviews the many different issues India must face in undertaking proactive measures to reduce domestic GHG emissions. The CDM provides a means for benefiting from voluntary reductions, without assuming a national target, but problems can arise in practice in ensuring that the GHG reduction credits are priced properly and that transactions costs can be managed. If India did decide to go toward a more comprehensive economywide approach to GHG control, it could move past no-regrets measures such as reduced energy subsidies to an approach such as a carbon tax. Depending on the national target the necessary tax could be modest or huge; and the net effect on the economy depends on what is done with the tax revenues—as has already been shown for the United States and other developed countries, there could be a substantial “double dividend” associated with using carbon tax revenues to alleviate distorting taxes elsewhere in the economy. To move to any economywide approach, however, India would need to make substantial additional investments in the infrastructure to track emissions (or fossil fuel use) and compel compliance with regulatory targets.

International Climate Policy

This part of the volume opens with two theoretical chapters, by Parkash Chander and by Sudhir A. Shah, concerned with international agreement on the allocation of GHG control responsibility. Chander shows that if countries could agree on a fair set of “reference” emission levels, then it would be straightforward in principle to construct from those reference levels a set of emission control responsibilities that every country would accept. The reallocation could be achieved either through international emissions trading or through (more politically difficult) direct monetary transfers. The problem, as Chander points out, is that there is nothing especially compelling about current or projected future emissions in terms of fairness. However, if the scope for international trading can be broadened beyond the voluntary project-based approach envisaged in the CDM, the institutional basis for proceeding beyond some initial agreement on baseline emissions is thereby strengthened.

The chapter by Shah starts where the Chander chapter leaves off in the sense that it posits an international regimen in which direct or indirect international transfers to induce global participation are not possible. Shah also considers a situation of extreme economic power disparity in that rich countries control all the private investment capital and social capital for mitigating climate damages in the global economy; these capital decisions can be used to influence the outcome of the climate target negotiations. Although obviously extreme and stylized, these assumptions serve to illustrate the broader problem of negotiation between parties with unequal economic power that is characteristic of actual climate negotiations.

The chapter by Sujata Gupta and Preety M. Bhandari takes a different tack from the theoretical considerations in the previous two chapters. These authors propose a specific international CO₂ allocation system and then investigate its potential consequences in terms of GHG permit cost, carbon permit trading volume, and international financial transfers. The system proposed is a variant of the equal-per-capita carbon allocation system in which developed countries (with high current carbon emissions per capita) have a transition period for lowering their emissions per capita, while the developing world is allowed to experience growth in emissions per capita but without the opportunity for a windfall that would accrue if...

Table of contents

• Front cover
• Title Page
• Copyright
• About Resources for the Future and RFF Press
• Contents
• Contributors
• Preface
• 1. Introduction
• PART I Economic Drivers of Greenhouse Gas Emissions
• PART II Options for Greenhouse Gas Mitigation
• PART III International Climate Policy
• PART IV Conclusions
• Afterword
• Index