Green formula: exceed to succeed

So far, the world has decided to face the challenge of cutting down on carbon emissions by using market mechanisms under the Kyoto protocol. There is a “cap and trade” system that works by setting limits on carbon emissions across organisations (the cap) and then sets up market mechanisms that allows those organisations to exchange the right to emit with one another (trade). It gives organisations in rich countries the flexibility to either cut their own emissions or fund the cutting of emissions elsewhere, such as in India, at a lower cost.

India is placed in a precarious position. It cannot take part in the Kyoto process by setting caps. India’s stance in has been that, unless developed countries cut their emissions, it will not make any commitments to do so. At the same time, India, as one of the top five emitters in the world, is under tremendous pressure to show that it is taking some action to control its runaway emissions. China produced a national plan last year. In India, a council was set up under the chairmanship of the prime minister to finalise the draft of this plan.

Though the plan shies away from giving away exact numbers for energy-intensive sectors, it does talk of market-based mechanisms to foster energy efficiency. This is a win-win situation. Whereas a cap would have meant crippling the industry, setting up energy efficiency targets is more positive. Since energy efficiency is delivering more out of a unit of energy consumed, it is totally in sync with actions called for under the present crisis of rising oil prices.

In some sense, this new system of “exceed and trade” uses the basic principle of the “cap and trade” system that already exists under the Kyoto protocol. It is more relevant to India’s context as it rewards the industry for a positive action. It is consistent with India’s stand that it would not be willing to set limits on industry to grow or to produce more, and that its first priority is to race ahead on the development path to pull people out of poverty.

With development as a priority, introducing energy efficiency has been a tough nut to crack despite its high potential. A CII study puts the financial value of conservation potential at Rs 12000 crore per year. Energy conservation is called the high potential-low adoption paradox. Despite awareness, the actual adoption of energy conservation has been abysmal. It just means that it is not cost-effective to introduce energy efficiency measures. This “exceed and trade” could be novel among different choices of instruments — such as taxes, trading and standards — that are used within countries.

Norway, for example, uses the carbon tax — a straight fee on fossil fuels based on how much carbon they emit when they burn. Some think it is a simpler way of doing it: at least businesses know what it will cost them if they burn more fuel. But, since it does not directly cap emissions, its relevance is questionable.

The jury is still out on the “cap and trade” system too. India has been very active in the carbon markets, selling credits to the developed world under the Clean Development Mechanism. It has the largest number of registered projects. However, there is serious doubt whether this has led to clean technology transfer from the developed world.

The “exceed and trade” system is still on the drawing board but a beginning has been made. The BEE has already started working with energy-intensive sectors like aluminium and steel to find ways of accessing finances to fund their shift to more energy-efficient technology. Estimates are that, at the end of the XIth plan, there will be a saving of 10,000 MW.

The need is to extend this handholding to something that is more closely linked to the market. Nicolas Stern called the climate change crisis the “fundamental failure of markets”, since those who damage others by emitting greenhouse gases generally do not pay.

India is now in a position to put in place some innovative systems, much needed to help rectify this market failure.

sonu.jain@expressindia.com