{link:http://commons.wikimedia.org/wiki/File:Charminar.jpg}© Rhaessner at the German language Wikipedia{/link}

Transforming the energy system, improving economy and reducing carbon emissions. These are the milestones of the Indian climate challenge. “We are working to become a more modern country and to build an economy where emissions would be significantly lower”, Prof. Shukla says. The solution requires a large portfolio of energy options and a different perception of the problem: “The conventional perception – Prof. Shukla explains – looks at energy related technologies and innovations from the supply side. Now, we are also looking for solutions that are coming from the demand side”. On the path toward a sustainable development, is the 2° target achievable?
Watch at the video interview with Prof. P.R. Shukla (Indian Institute of Management) at the International Workshop “Reconciling Domestic Energy Needs and Global Climate Policy: Challenges and Opportunities for China and India” in Venice

From Copenhagen to Cancun. Toward a Global Agreement

Let’s bring back the focus in the United Nations Framework Commission on Climate Change and let’s use economic forums to reach the necessary target: the global agreement

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Technologies for a Low Carbon Economy: the Indian Portfolio

Innovations from wind, solar and biomass; after the “123 Agreement” signed with United States, nuclear will be an energy option. All the innovations of the India’s  National Action Plan on Climate Change

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Global Emissions. The 2050 Scenario

We need need a different perception of the problem, but the 2 degree target could be reached.  We are a developing country; we are on the transition to a more modern and to an economy where emissions would be significantly lower

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Mitigation costs to reach ambitious stabilization targets are estimated below 5% of GDP (IPCC, 2007). Most models used represent a first based world (optimizing agents with perfect foresight, market clearing equilibrium in all markets, and full utilization of production factors). With such assumptions, the optimal policy is a carbon tax, or a cap and trade system to equalize marginal costs. Any deviation from this is supposed to lead to additional costs and to veer from the optimum. By nature, synergies between development and climate policies and no-regret potential are excluded. The world is on the contrary, full of imperfections that could lead to higher mitigation costs however, they can also provide opportunities for implementing synergies between climate and development. In this article, we analyze the potential for implementing these synergies in a case study focusing on the power sector sub-optimalities in India. To do this, we rely on the modeling framework, Imaclim-R, which is well suited to represent a second best world and to embark sub-optimalities, disequilibrium, and inertia in technical systems.

Institutional and Market Failures of the Indian Power Sector

The Indian power sector is characterised by many institutional and market failures. The most critical symptom of these failures is a restrained access to energy services for both households and productive sectors: while electrification covers only 60% of Indian households (the remaining 40% that are not connected to the grid rely mainly on traditional biomass or on diesel generators), capacity shortage in 2007 reached 9.6% of total demand from the grid reinforcing the use of diesel generators by households and industries.

These power cuts and capacity shortage are caused by structural underinvestment in the power sector. The opening of the sector to the private sector in 1991, failed in absorbing the shortage and in compensating for the constraints on public funding. Less than half of the additional power capacity that had been programmed in the 10th Plan has been built. This underinvestment is largely due to the critically low profitability of investments in this sector induced by a very expensive cross subsidy system.

In 2006, the average level of administrated price covered only 77% of the average production cost: tariffs for households and farmers covered respectively 56% and 12% of the generation costs while industries and the commercial sector were partly compensated because they paid respectively 108% and 122% of production costs. Between 1993 and 2000, subsidies to households and to agriculture more than tripled and reached respectively 0.4 and 1.1% of GDP. In 2000, agriculture uses represented 1/3 of electricity sales in volume but less than 5% of total revenues.

These subsidies are justified by positive externalities on development (access to cheap energy for irrigation to promote food production). Nevertheless, they have significant side effects:

• the combination of critically low prices and of frequent but unpredictable power cuts create a strong incentive to a continuous use of electric pumps for irrigation and induces over consumption (estimated at 30% at least of consumption in agriculture), which increases the magnitude of capacity shortage;
• low revenues from electricity sales induce maintenance under financing and increasing inefficiencies in transmission and distribution, which represented at least 30% of the production in 2005.

Moreover, power sector inefficiencies constrain economic growth: electricity shortages hamper productivity and competitiveness. This reduces government tax revenues, and therefore capital availability to invest in additional power capacity.

Source: Annual report 2008-2009. Ministry of Power, India Click to enlarge

These sub-optimalities namely, power generation shortage, under-investment, tariffs not reflecting costs and T&D losses¹ are implemented within the Imaclim-R² hybrid recursive modelling framework. Imaclim-R has been developed to account for sub-optimalities and inertia in technical systems. Underinvestment in the power sector is represented by a gap between the estimated need of investments and realised investments in the power sector. The induced power generation shortage is represented by over utilisation of generation capacities, as Imaclim-R allows for endogenous disequilibrium due to inflexible characteristics of equipment vintages available at each period (putty-clay technologies). In case of underinvestment, in the short term, the main available flexibility lies in the rate of utilization of capacities, which may induce shortage of production factors, entail extra generation costs³, and raise the electricity usage cost.
Whether these sub-optimalities will persist or not is a determining factor for defining climate mitigation strategies.

Deadlock of a Carbon Price

Even if the demand decrease in the power sector for a 450ppm CO2 stabilization objective is large enough to absorb the power shortage and to remove over costs of generation due to over-utilization of capacities, persisting energy inefficiency in power production, transmission, and distribution coupled with over-consumption habits for farmers will introduce a substantial delay in the potential pace of decarbonization in the power sector⁴. A carbon pricing policy will then impact for a longer time the usage cost of electricity for households and industry.

As a result, a carbon price only scenario will induce prohibitive macroeconomic costs for India (-20% of the baseline GDP in 2030) even if GDP losses decrease after 2030 because of a faster technical change induced by the carbon price and of less vulnerability of the Indian economy to oil prices rising. The increased usage cost of electricity has a very important eviction effect for households on other goods consumptions. It induces a decreased competitiveness of Indian production due to the higher energy share in industrial production costs compared to other regions.

Financial transfers from a cap and trade system could reduce these losses. Indeed, with a contraction and convergence rule, financial transfers amount to 1.5% of GDP in 2020, and more than 2% of GDP between 2030 and 2040. On the long term, GDP is 15% higher than in the baseline due to the income effect of financial transfers and to the induced technical change. But on the short term, transition costs persist and India still loses 6% of its GDP in 2015 compared to the baseline. Organizing higher financial transfers to alleviate transition costs have little chance to be accepted by industrialized countries.

Looking for Synergies Between Climate Policies and Development

An alternative approach is investigated to enlarge the spectrum of climate policies to domestic policies targeting sub-optimalities in the power sector:

• the progressive reduction of subsidies to electricity consumption for the agricultural sector, accompanied by demand side management (improvement of irrigation pumps, evolution of consumption habits⁵);
• the implementation of a program to reduce electricity T&D losses to 15% over a 20-year period;
• the revenues following the partial removal of electricity consumption subsidies in the agricultural sector are used to finance all of these components. Remaining additional revenues are rebated to households through lump-sum transfers.

These measures are implemented within the same contraction and convergence allocation and result in GDP losses limited to 2% of the reference scenario during the first three years after the implementation of policies. The main reason for this is the decrease in the electricity usage cost induced by the reduction of T&D (transmission & distribution) losses and by demand side management. These measures lead to a reduction of energy budget share for households and less crowding-out of other goods consumption; in industry these measures lead to a substitution from fossil fuels to electricity and a reduced share of the energy budget.

Therefore Indian products lose relatively less competitiveness than in other simulations, and salaries are less squeezed to restore commercial balance: wage levels are 9% higher in 2020 and 2030. A positive income effect stems from higher wage levels. More wages increase due to more overall activity, and transfers to households coming from the remaining revenues generated by subsidies decrease. They are not used to finance the policies. Climate policies focusing on the alleviation of sub-optimalities constitute a win-win solution for climate and development.

Conclusion

From a methodological point of view, modeling frameworks are able to represent second best world characteristics in order to embark specificities of each national economy and to exhibit no regret potential. Possible synergies between climate policies and development policies should be used for mitigation cost assessment.

From a political point of view, the future international climate agreement should support the implementation of specific policies such as no-regret potential and energy efficiency measures to account for the heterogeneity of the real world instead of only dictating the implementation of a cap and trade system.

1. By default, tariffs not reflecting costs and T&D losses are expected to persist until 2050
2. For a detailed description of Imaclim-R and of the implementation of sub-optimalities within Imaclim -R, please refer to Sassi et al. (2007) and to Mathy and Guivarch – under review
3. Mean generation costs increase when capacity is overused due to the existence of static decreasing returns due to higher labour costs and because less efficient units are switched on at the last aggregate level. By default, in our model, the increasing factor is attached to wages.
4. In India, 69% of electricity is produced with coal.
5. If the service is improved, the number of unpredictable power cuts will be lower, and farmers will not have to leave their pumps switched on all day long.

Picture from {link:http://commons.wikimedia.org/wiki/User:Deep750}Deep750 at WikimediaCommons{/link}

In the last few weeks, Jairam Ramesh, India’s new Minister for Environment and Forests, has made it just that little bit easier to reach an accord at the upcoming Conference of Parties (COP) in Copenhagen. By promising various domestic measures that would help lower carbon emissions, Ramesh may help change the dynamic that has evolved over the last few years; many developed countries, including the United States and large developing countries, such as China and India, were using each other as excuses not to take the serious action that is required to meet the challenge of climate change. It is therefore with justification that Ramesh claims: “India wants to be a deal-maker, not a deal-breaker.”

Before elaborating on the actual content of these measures and their implications, we review the history of India’s position on climate change. This helps contextualize these pronouncements and appreciate their significance.

“Per Capita” as the Clue of the Emission Enigma

India has consistently argued since Rio that any agreement on the climate must be based on the principle that everyone has the same right to the atmosphere. This means that agreements should only be based on the long-term goal of the convergence of “per capita emissions”. Any agreement should also consider historical emissions of greenhouse gases by the developed world and the development needs of the rest of the world. The United Nations Framework Convention on Climate Change (UNFCCC) also states that the “largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low, and that the share of global emissions originating in developing countries will grow to meet their social and development needs”.¹ In the Kyoto protocol, 37 industrialized countries committed to take “legally binding” reductions in greenhouse gas emissions but developing countries were not required to do so.

Though developed countries had signed on to the Kyoto protocol, there was domestic opposition in some cases to this agreement, and one of their arguments was that future emissions from rapidly growing, developing countries would be very high. In his March 2001 letter to the U.S. Senate, for example, President George W. Bush wrote: “I oppose the Kyoto Protocol because it exempts 80 percent of the world, including major population centers such as China and India, from compliance, and would cause serious harm to the U.S. Economy”. Such statements naturally set the stage for confrontation.

Two More Reasons for The Impasse

Two other factors contributed to the deepening impasse between developed and developing countries in the first decade of this century. The first was the lack of progress on achieving the emission reductions promised under Kyoto by developed countries. The second was the increased awareness of the effects of climate change, including the loss of glaciers and Arctic sea ice, prolonged dry spells and heat waves, disastrous events like Hurricane Katrina, and the risk of catastrophic change like the loss of Greenland’s ice-sheet. This has led a preference for more stringent targets (2°C or 450 ppm CO2e), especially in the EU, and consequently, an increased pressure on developing countries like India and China to have binding commitments. The pressure on India increased further after China switched to becoming much more pro-active about its climate and energy policies, and publicizing these policies in international fora.

This switch should be seen in light of the considerable difference between these countries. India’s per capita emissions are a third of China’s today. According to most projections, in 2030, they are likely to remain lower than China’s today, both in absolute and per capita terms. This is one reason that China is expected to, and is willing, to make stronger commitments in the future.

Fig 1. Energy emissions to gdp intensity of select countries. India’s emissions intensity has been improving steadily in the last 10 years and is comparable to the U.S. or global average though much less than Europe. Cick to enlarge

Awareness, Vulnerability and Steps Ahead

Despite these global developments, until recently climate change did not play a role in India’s energy planning. There was also insufficient attention given to the impacts of climate change on India’s water security, the Himalayan glacier system, the monsoons, and sea level rise. But in the last couple of years, this has begun to change.

Thanks to a combination of international pressure and an increased awareness of India’s own vulnerability to climate change, the Indian government established a national Council on Climate Change. It is composed of a high-level group of experts and senior government officials to advise the government on measures it can take to mitigate and adapt to the climate. In June 2008, this group released the National Action Plan for Climate Change (NAPCC), which proposed eight ‘missions’ with attention to both mitigation and adaptation. The mitigation missions include solar power (20GW by 2020) and enhancing energy efficiency while adaptation missions incorporate ones on conservation of water and making agriculture more resilient. The NAPCC, though a step forward, was not a real plan of action with well-defined objectives.

Another signpost in the evolution of India’s position was the declaration of Prime Minister Manmohan Singh in June 2007, where he committed that India’s per capita emissions will, at all times in the future, never exceed the developed world’s emissions. Because this declaration was made at the Heiligendamm G-8 summit, it suggests that the driver may have been international pressure. The declaration, in effect, sets a falling cap on India’s emission levels depending on reductions in emissions by developed countries.

Future Emissions: The Commitment Will Hold Well

What does this mean in concrete terms? According to a recent study sponsored by the Ministry of Environment and Forests, India’s per capita emissions rise from approximately 1.7 t CO2e to somewhere between 2.8 and 5 tCO2e in 2030. Under most projections, India’s per capita emissions in 2030 would still be significantly below today’s global average (about 4.5 tCO2e). However, given India’s population, the total emissions would be comparable to current EU or US emissions. In other words, unless there is a drastic change from current expectations of emissions from developed countries, the Indian commitment will hold well.

This is in part because of various trends that are underway in India, even absent climate change considerations. India’s emissions intensity (carbon per unit of GDP) has been steadily falling for most of this decade, and is now comparable to Japan or Germany. This is primarily due to the growing importance of the service sector, the relatively small and falling contribution of manufacturing, and efficiency improvements driven by the high prices of gasoline and electricity for industries. With climate becoming an increasingly important aspect of policy making, one can hope that these trends will continue.

What has been added in recent weeks has been that even though India continues to believe in a long term goal of international climate negotiations based on a “per capita” formalism, it will also have binding domestic legislation for certain sectors². In addition, it will continue to operate by the Bali road map, specifically that “measurable, reportable, and verifiable” outcomes have to be supported by international funding. India will also annually report all the actions it has taken in the past year, an improvement on the current 5-yearly national communication.

Fig 2. Per capita annual emissions (CO2e) of the world’s top eight emitting countries. Note that India has the lowest (1.7 tCO2e) by a large margin and according to various projections (light green box) it will still be significantly lower than the 2005 global average in 2030. Cick to enlarge

From Delhi to Copenhagen (via Kyoto)

If India is bringing all this to the table, it also expects some measures in order to consider the Copenhagen COP a success. Ramesh recently laid out three key expectations: financial compensation for its afforestation initiatives, extension of clean development mechanism (CDM), and an international agreement on green technology transfer from the developed to developing countries. In addition, there is also interest in agreements on nationally appropriate mitigation actions (NAMA) and an adaptation fund, especially for countries already affected by climate change. While this signals flexibility, India has stated its strong opposition in attempts to replace Kyoto with a new treaty – a key EU negotiating position.

India is often said these days to be a rising global power. And, indeed, in a recent interview to a business newspaper, Jairam Ramesh explained that his trickiest task as the environment minister is balancing growth and environment protection, and that both “are extremely important milestones for India’s rise as a global power”. Though environmentalists have stressed this understanding of the interrelationship between the two for decades, it is only recently that the political and corporate elite has begun to appreciate how vulnerability to climate change will be a leading factor affecting India’s economic development. In June 2008, the investment bank Goldman Sachs warned, “If not given the right priority, environmental sustainability has the potential to become India’s greatest challenge”. This growing realization seems to have played a key role in propelling the shift in India’s position. The role of civil society, in particular, and that of some key analysts and commentators that have been involved in regular discussions with the policy making elite in Delhi have also been very important.

1. For example, the World Resources Institute estimates that in 2005, the per capita emissions of India was 1.7 tCO2e   whereas that of the United States was 20.3 tCO2e. In terms of carbon dioxide emissions from fossil fuel combustion between 1900 and 2005, the United States accounts for 29.4, EU for 25.4%, China for 8.6%, Russia for 8.3%, and India for only 2.4%.
2. This includes legislation on mandatory fuel efficiency standards for automobiles by 2011, appliance and building efficiency norms by 2012, and requiring 20% of energy   from renewable sources  by 2020, and programs that help increase forest cover.