POLICY INSTRUMENTS FOR ACHIEVING LOW CARBON AND HIGH ECONOMIC GROWTH IN INDIA

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POLICY INSTRUMENTS FOR ACHIEVING LOW CARBON AND
HIGH ECONOMIC GROWTH IN INDIA

• U. Sankar
• Madras School of Economics

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contents

• 1. Introduction 2. Climate Change
  Scientific Evidence 3. Multilateral Framework
  for Climate Change
• Policies 4. Policy Options for
  Reducing Greenhouse Gases 5. Indias National
  Circumstances and Nationally
• Appropriate Mitigation Actions 6.
  Policy Instruments for Energy related GHG
• Emissions Reductions 7. Policy
  Instruments for GHG Emissions Reduction
• in Forestry Sector 8. Concluding
  Remarks

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Introduction

• Why interest in climate Change?
• 1. IPCC 4 AR warming of the climate system is
  unequivocal India and its poor vulnerable to
  climate change
• 2. Pressures from USA and other developed
  countries for GHG emissions reductions in China
  and India
• Challenge Sustaining high economic growth while
  addressing climate change
• Opportunities greening economy, co-benefits and
  sustainable development

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Scientific evidence

• The linear warming trend from 1956 to 2005
  (0.130.10 to 0.16 ºC per decade) is nearly
  twice that from 1906 to 2005.
• Global sea level rose at an average rate of
  1.81.3 to 2.3 mm per year over 1961 to 2003 and
  at an average rate of about 3.1 2.4 to 3.8 mm
  per year from 1993 to 2003.
• Satellite data since 1978 show that annual
  average Artic sea ice extent has shrunk by 2.7
  2.1 to 3.3 per decade, with larger decreases
  in summer of 7.4 5.0 to 9.8 per decade.
• Some extreme weather events have changed in
  frequency and /or intensity over the last 50
  years.
• Many natural systems are being affected by
  regional climate changes, particularly
  temperature increases.
• IPCC approach to deal with uncertainty
  range, qualitative assessments

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Greenhouse gases

• . In 2004 the share of CO2 in the total CO2e for
  that year was 76.7 (fossil fuels use
  56.6,deforestation , decay of biomass etc 17.3
  , and others 2.8) the shares of CH4 , N2 O ,
  and F.gases were 14.3, 7.9 and 1.1
  respectively.
• Global GHG emissions due to human activities
  have grown between 1970 and 2004 by 74, from
  28.7 to 49 Gt CO2e .
• The rate of growth of CO2 emissions was much
  higher 1995-2004 (0.92 GtCO2 per year) than
  during 1970-94 (0.43 GtCO2).

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Greenhouse gases

• The CO2e concentration in 2005 was around 445
  ppm (433-477 ppm). After adjusting, for the
  effects of aerosol and land use change, the net
  forcing of human activities would be in the
  range 311 to 435 ppm with a central estimate of
  375 ppm of CO2e.
• IPCC scenarios represent an increase of
  baseline global GHG emissions by a range of 9.7
  to 36.0 GtCO2 e (25 to 90 Gt CO2 e) between 2000
  and 2030.
• Best estimate for the low warming scenario is
  1.8?C (1.1 to 2.9?C), requiring stabilization in
  the range 445-490 ppm. Peaking period 2000-15.
• Growing support for 450 ppm scenario, WDR
  2010

.
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Multilateral framework (1)

• Economics Stern (2006
• Climate change global in causes and consequences
• Global negative externality
• Global public bad free rider issue
• GHG emissions persistent over time- stock
  pollution
• Potential consequences may be non-marginal,
  irreversible
• Uncertainties regarding size, type, timing and
  abatement costs
• UNFCCC
• Objective stabilization of GHGs in the
  atmosphere at a level that would prevent
  dangerous anthropogenic interference with the
  climate system
• Principles atmosphere a common concern of
  mankind common but differentiated
  responsibilities of states according to their
  respective capabilities equity

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Multilateral Framework (2)

• 
  Cumulative CO2 emissions
  GHG emissions
• 1850-2002
  share () 2002 share ()
• USA 29.3
  15.8
• EU 26.5
  11.4
• China 7.6
  11.9
• India 2.2
  4.5
• Source WRI(2006)
• Technological transfer, new additional
  resources to meet net incremental costs of the
  projects to non-Annex 1 parties
• Kyoto Protocol Annex 1 parties GHG emissions
  reduction 5.2 below 1995 levels during 2008-12
• Mechanisms ET, JI, CDM
• Bali Action Plan Shared vision for long-term
  cooperation Post- Kyoto mitigation, adaptation,
  technology and finance NAMAs for developing
  countries
• K1
• IIndia
• .9
• 
  

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Multilateral Framework (3)

• COP 15 at Copenhagen Dec 8-18,2009
• For 450 ppm scenario GHG emissions to fall from
  50 Gt to atleast 30 Gt by 2050. Per capita
  entitlement would only be about 3.2 t. Even if
  developed countries agree for 80 cut, developing
  countries can emit only 5 Gt more!
• Emissions reductions announcements by 2020
• EU 20 below 2005 level U.K 26USA 17
  below2005 level
• Brazil 36 voluntarily from BAU
• China reduction in emission intensity 40-45
  (with 10 growth rate absolute emissions could
  increase by 150 - 169!). Chinas per capita
  emissions already more than the world average
• India reduction in emission intensity 20-25
• Collective action Kaul et al (2003)
• Publicness in decision making, participation,
  sharing of net benefits
• Realization of 450 ppm scenario, technological
  transfer, extent of financial assistance ?

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Policy Instruments (1)

• Potential economy-wide instruments with scope
  for establishing a uniform global price for
  carbon cap and trade and carbon tax systems.
• Choice depends on political preference .If
  there is uncertainty about MAC and MB curves,
  carbon tax system has lower welfare loss when
  slope of MAC curvegt absolute slope of MB curve,
  and cap and trade has less welfare loss when
  absolute slope of MB curvegt slope of slope of MAC
  curve Weitzman (1972) In t pure cap and trade
  system volatility in prices is possible and in
  carbon tax system environmental effectiveness may
  not be achieved
• Modification for stock pollutant and
  requirement of chosen emission reduction
  strategy.
• Real world systems accommodate efficiency,
  equity, competitiveness, transaction costs and
  other concerns

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Policy Instruments (2)

• Cap and trade design features
• 1.Scope only CO2 or all GHGs, national or
  sectoral, only large emitters? transaction costs
• 2. Entry point upstream or downstream
• 3. Allocation of permits grandfathering ,auction
  or both
• 4. Cap revision as per the chosen scenario
• 5. Rigid cap or flexible cap with reserve price
• 6. Banking and borrowing
• 7. Offsets domestic and international
• 8. Distributional equity
• 9. Competitiveness concerns carbon leakage,
  import tariffs
• 10.RD support, financial and other assistance to
  the emitters

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Policy Instruments (3)

• Carbon tax system
• 1. Scope
• 2. Entry point
• 3.Tax base
• 4.Tax rate basis generally lower than social
  cost of carbon
• 5. Tax revision
• 6. Distributional equity
• 7. Competitiveness concerns
• 8. Assistance to the emitters
• 9. Use of revenues lowering direct taxes,
  consumer rebates, RD

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Policy Instruments (4)

• Other fiscal instruments
• Elimination of perverse subsidies
• Containing and targeting subsidies to poor
• Accelerated depreciation, investment tax credit,
  tax holidays, tax exemptions and concessional
  loans, to lower user cost of capital to
  facilitate adoption of climate friendly
  technologies
• Differential taxation, green VAT
• R D support for solar energy, new energy
  sources, carbon capture and storage technologies
  , particularly during learning and demonstration
  phases
• Government equity participation and procurement
  for promoting innovation and faster deployment of
  technologies with upfront costs and risky
  outcomes

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Policy Instruments (5)

• Other economic instruments
• Price-based feed-in -tariffs for renewable
  energy sources, price support for solar energy,
  outcome-based price support for carbon removals,
  waste treatment user charges, payment for
  ecosystem services
• Information based reward/ recognition for
  over-compliance with the standards, public
  support for creation of environmental data bases,
  modeling , and awareness creation green rating
  of firms eco labeling
• Legal reforms such as creation and enforcement of
  property/ user rights in forests and common
  property areas shift from criminal law to civil
  law to facilitate application of polluter pays
  principle, creation of tradable markets, levy of
  pollution taxes, charges/ cesses creation of
  access and benefit sharing regime for
  conservation and sustainable use of biodiversity
• Internalization of the externalities in financing
  schemes
• International CDM, GEF, Climate Fund,
  technology transfer

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Policy Instruments (6)

• Regulation
• Technology- based standards at manufacturers
  level or/and subject to regulatory scrutiny,
  implemented and enforced, have lower transaction
  costs and can satisfy environmental effectiveness
  criterion but they do not achieve dynamic
  efficiency gains
• Performance-based standards may have higher
  transaction costs but they can achieve dynamic
  efficiency gains by unleashing entrepreneurial
  activities
• Choice among instruments
• Criteria cost effectiveness, Pareto efficiency,
  dynamic efficiency, environmental effectiveness,
  information intensity, legal and administrative
  capacity, political feasibility, consistency with
  multilateral framework

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Indias National Circumstances and NAMAs

• Per capita GNP in 2008 was12.4 of the world
  average (Atlas method) in terms of PPP 28.9 of
  the world average
• HDI rank 134/182 HPI rank 88/135
• 15 of villages without electricity 57 of rural
  households and 12 of urban households have no
  electricity connection
• Burden of traditional biomass around Rs 300
  billion
• Need for sustaining 8 GDP growth rate , access
  to electricity for all, shift from traditional
  biomass to safer energy necessitate augmenting
  energy supply
• Indias GHG emissions inventory
• GHG emissions in 1994 was 1.23 Gt CO2e
• Shares CO2 65, CH4 31, N2O 4
• Energy 61, agriculture 20,
  industrial processes 8,
• waste 2, LULUCF (net) 1

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Indias National Circumstances and NAMAs

• National Action Plan on Climate Change (NAPCC)
• Indias position
• Per capita entitlement to the global common
• Measures to promote development objectives
  while yielding co-benefits for addressing climate
  change effectively
• International cooperation based on UNFCCC
  objectives and principles equity and CDR
  technical and financial support for GHG emissions
  reduction based on net incremental cost approach
• NAMAs- 8 missions
• voluntary reduction in emission intensity 20-25
  by 2020

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Energy-related emissions (1)

• Integrated Energy Policy report, 2006 Two
  emissions reduction scenarios by 2031-32
• 
  Coal dominant (BAU) Forced scenario
• Primary energy (mtoe)
  1887 1536
• Coal share ()
  54.1 41.1
• Hydronuclearrenewables (share ) 2.6
  14.2
• CO2 emissions (Gt )
  5.5 3.9
• Per capita emissions (t)
  3.6 2.6
• CAGR in CO2 emissions from 2003-04() 6.09
  4.86
• Decomposition of 6.09 4.86 1.23
• Decrease in emission intensity of
  GDP 0.73
• Decrease due to conversion
  efficiency 0.13
• Decrease in share of fossil fuels in
  primary energy 0.37

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Energy-related emissions (2)

• IEA (2009) Reference and 450 ppm
  scenarios for India
• 
  2007 2020 2030
• 
  RS 450 ppm RS 450 ppm
• CO2 emissions (Gt) 1.3
  2.2 1.9 3.4 2.2
• CO2 emissions/population (t) 1.2
  1.6 1.4 2.3 1.5
• Power emission (g/kWh) 942
  698 628 650 376
• Transport emission (g/km) 225
  140 110
• 
  
• 
  2010-20 2020-30
• Incremental investment cost ( of GDP)
  0.9 1.4
• Reduction in local air pollution
• cost relative to RS (b)
  1.0 3.0
• Fuel cost saving relative to (Rs b)
  30.0 90.0

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Energy-related emissions (3)

• IPCC 4AR low-carbon options
• Energy efficiency and fuel switch
• Existing Switch to
  Eff gain Emi redn
• 
  () g(CO2/kWh)
  Coal steam engine Pulverized coal adv
  35 to 48 263
• ,, NG Combined
  Cycle 35 to 50 569
• Fuel oil ,steam ,,
  35 to 50 392
• Diesel oil, gen set ,,
  35 to 50 404
• NG single cycle ,,
  32 to 50 207
• Can carbon pricing alone do? CO2 at 20/t means
  0.004 to 0.014 Incentive when electricity
  generation cost is around 0.05?
• For developing countries there are access and
  adaptation costs as well as higher capital cost
  compared with developed countries

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Energy-related emissions (4)

• Substitutes for fossil fuels Cost
  ranges /t CO2 e
• Wind power
  -14 27
• Bioenergy
  -14 54
• Geothermal
  -14 27
• Solar PV and CSP
  57 257
• Hydro
  -14 41
• Nuclear
  -21 21
• The costs of renewable energies vary because of
  location-specific characteristics including
  quality of renewable energy source, plant size,
  cost of capital and government policies.
• Energy cost/MWh in 2005 20 -120, solar 120-
  1600
• 2030 30-100,
  solar 60-250
• IEA 2009 Unleaded premium/litre 0.50 in US to
  1.73 in Turkey
• Electricity price for industry 0.06 in France to
  0.09 in Italy
• Electricity price for households 0.10in Mexico
  to 0.40 in Denmark
• (in India it is lower than Mexico in many
  states).
• WHY SO MUCH VARIABILITY?

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Energy-related emissions (5)

• Are all external costs and co-benefits
  considered?
• Paucity of studies on external costs . A EU study
  estimates external cost eurocent/kWh for energy
  sources from 0.1 for wind to 5.8 for lignite .
  Note that 5.8gtprivate MC of electricity from
  coal!
• A holistic approach to costing is needed.
  Normative costing based on combinatory accounting
  is needed to estimate stand alone and incremental
  costs of energy, reductions in pollutants, and
  co-benefits.

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Coal based power externalities, inefficiencies
and poor price signals (1)

• Mining rehabilitation and resettlement, loss of
  ecology
• overburden, methane and
  particulate emissions
• mine closure (need performance
  bond)
• Quality of coal high ash and moisture content
  30-45
• a 210 MW plant generates 269,000 tonnes
  of ash (20
• deposited as bottom ash 80 as fly ash)
  coal beneficiation
• lowers transport cost, improves plant
  availability, lower solid
• waste, lower CO2 emission the cost as
  of final price between
• 12 and 45 in 2002 Chelliah et al
  (2007) proposed tax rates for
• non-coking coal Rs/t between 50 and 70
  (6 25 of final prices)
• creation of clean coal fund. INERTIA in
  the system
• Status of TPPs in 2002
• Installed capacity 30 2340 MW
• coal kg/ kWh lt0.7 to gt1.0

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Coal based power externalities, inefficiencies
and poor price signals (2)

• Operational efficiency lt25 13, 25-30 42,
  gt30 26
• coal consumption fell from 1.2 kg/kWh at 18
  operational efficiency to 0.60 kg/kWh at 37
  efficiency. Also savings on coal costs, lower
  stack emissions, lower handling and transport
  costs
• Emissions
• CO2 kg/kWh 0.784 to
  1.608 not monitored
• SOx kg/kWh 0.0040 to
  0.473 ,,
• NOx kg/kWh 0.0040 to
  0.0131 ,,
• SPM kg/kWh 0.0006 to
  0.0041 stack reg effective
• Soot gm/kWh o.o486 to
  0.0996
• TD losses 16 -19

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Coal based power externalities, inefficiencies
and poor price signals(3)

• Costing methodology flawed
• - Historical/ actual costs rather than
  current economic costs
• - Cost allocation based on fully
  distributed cost method aim cost
• recovery rather than incentive based
  cost allocation
• - Not all parameters considered in
  estimation of voltage end
• and customer end delivery costs
• - Measurement of subsidies and cross
  subsidies as differences
• between average realized price less
  average system wise costs
• give erroneous information about true
  subsidies and cross
• subsidies
• - Externality costs not accounted properly

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Coal based power externalities, inefficiencies
and poor price signals (4)

• Pricing
• Based on the flawed costing methodology
• About 30-40 power generated not billed
  agricultural consumption not even metered poor
  subsidy targeting
• Timing and extent of price revisions politically
  determined
• Reliance on quantity rationing rather than on
  using price mechanism for relieving shortages
• Political myopia Need independent regulators,
  price revision on regular basis

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Energy efficient technologies

• Indias high growth path permits induction of
  energy efficient technologies feasible. Super
  critical and ultra super critical technologies
  increase energy efficiency and reduce CO2 and
  other emissions and they need not be costly.
  Unleash entrepreneurship to exploit new
  opportunities
• Example Tata Ultra critical TPP in Gujarat with
  4000 MW capacity using super critical boiler from
  Doosan Heavy Industry (Korea), steam turbine
  generator from Toshiba (Japan), imported coal ,
  finance from IFC and CDM credit has a 25 year
  levellised tariff of Rs 2.21/kWh, closer to
  generation cost from conventional TPPs
• Speed up Indias indigenous development of IGCC
  technology to suit Indian coal with foreign
  collaboration, if necessary
• Natural Gas Combined Cycle plants are in pipeline

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Switch to zero/low carbon technologies

• Indias agreements with USA, Russia and France,
  and entry of large Indian private firms as well
  as NTPC give a boost to nuclear energy
• National Solar Mission with an initial price
  subsidy of Rs20/kWh, mandatory solar power in
  certain applications and foreign technical
  collaborations could facilitate achievement of
  scale economies and learning by doing and thereby
  lower unit cost of power.
• Costs of electricity from renewable energy
  sources like wind power and biomass based power
  are closer to the private costs from TPPs
• but they are infirm. Policies such as
  mandatory purchases by the grids, feed-in-tariffs
  and pricing carbon would increase their supply
• Blending of ethanol with gasoline, bio-diesel
  programme
• New sources like coal to liquid, and coal based
  methane, hydrogen energy diversify fuel supply
  and promote energy security

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Energy savings potential

• Energy saving potentials exist in industrial
  (CII), transport, residential (TERI), and
  commercial (TERI) sectors
• At present the measures are in the forms of
  regulations i.e. building codes, energy
  efficiency norms, energy audit, energy savings
  certificates, fuel economy standards for
  vehicles, and retirement of old vehicles
• Economic instruments such as eco taxes on energy
  inefficient/polluting vehicles, tax credits for
  energy efficient buildings, differential taxation
  for appliances, and creation of markets for
  energy saving certificates among large firms can
  help in achieving dynamic efficiency gains

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Forestry

• Afforestation and reforestation can increase
  carbon sink and enhance livelihoods for forest
  dependent people besides enhancing quantity and
  quality of other provisioning, supporting,
  regulating and cultural services. The output is a
  basket of private goods (marketed and
  marketable), social goods, public goods
  (local,regional and gobal) and intangibles.
  Activities related to enhancing carbon sinks
  yields co-benefits via increased supply of
  private goods , social goods , and local and
  national public goods.
• Negotiate for inclusion of reducing emissions
  from deforestation and degradation (REDD) under
  CDM
• Implement Forest Rights Act, strengthen JFM and
  promote self-governing collective action
  institutions
• Adopt incentive mechanisms for conservation and
  sustainable use of biodiversity, including
  payment for forest ecosystem services
• Efficient use of Finance Commission transfers to
  increase forest cover, forest biomass and
  biodiversity

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Reforms needed

• Declare GHGs as pollutants
• Amend environmental laws to incorporate civil
  liability to create tradable permit markets for
  major pollutants, levy of pollution
  taxes/charges/cesses and penalties increasing
  with violations
• Administrative changes for holistic approach to
  (i)costing and pricing of energy,(ii) forest
  management and (iii) solid waste disposal
• Promote environmental federalism based on
  subsidiarity principle
• Capacity building in climate economics research
  in collaboration with the scientists
  ,technologists and policy makers (i) for RD,
  innovation, deployment and diffusion financing in
  low/zero carbon technologies, (ii) measurement of
  incremental costs and benefits of reductions of
  emissions and valuation of the co-benefits,(iii)
  design of PIs and (iv) analysis of trade-offs
  among competing goals
• Capacity building for proactive role for
  government in international negotiations

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• THANK YOU

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