The climate after Paris

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Being a large and fast growing economy gives India an additional responsibility, especially for climate change actions

MK. Gandhi famously said,

“The world has enough for everybody’s need, but not for everybody’s greed.” It was most appropriate that on his birth anniversary, India announced its ratification of a global treaty signed in Paris last December. That global treaty signed by 191 parties will come into force only after at least 55 countries, representing 55% of global emissions of greenhouse gases, have ratified it. India became the 62nd country to ratify. It ratified ahead of the normally enthusiastic European Union. But India was behind the US and China, who jointly ratified it in Hangzhou, exactly a month ago.

Incidentally, the US had never ratified the Kyoto Protocol, the earlier landmark global treaty with similar goals as the Paris treaty. The world has changed since Kyoto. The US under President Barack Obama took a leadership position on climate change. It is also at the forefront in trying to forge a global consensus around this issue, including cooperation in technology and financing. The Paris treaty, among other things, promises funding of $100 billion from developed countries to help developing countries switch to greener technologies. Much of this will have to originate from the US. Whether the next president will be equally keen and passionate about US leadership on climate change remains to be seen.

As India now embarks on meeting its commitments made in the Paris treaty, the following four points may be noted.

Firstly, India is the third-largest emitter of greenhouse gases in the world. The earth’s atmosphere does not care from where a carbon dioxide molecule is emitted. Hiding behind India’s low per-capita emission (one-tenth of the US) is no longer a credible position, for a global public bad such as greenhouse gases. Further, historic sins of the advanced industrialized countries cannot be offset by future sins of developing countries like India and China.

Secondly, India has astutely promised to reduce emission intensity of gross domestic product, i.e. per unit of GDP by around 35% from 2005 levels by 2030. Thus aggregate emissions will increase, but at a slower rate. This should mostly happen in a business-as-usual scenario. Every new investment in the economy, whether in power, buildings or factories is about 30% more energy efficient, thanks to new regulatory norms and to the adoption of new technology. Thus, without energy efficiency norms, India’s aggregate carbon emissions would have risen by around 7% per year. Instead, they will grow at only 4.5% or less. We have to thank the Perform-Achieve-Trade (PAT) and the Renewable Purchase Obligation (RPO) regime for this. More about this below.

Thirdly, India’s National Action Plan on Climate Change was formulated back in 2008, and consists of eight missions. These missions included targets for solar energy, energy efficiency, water-use efficiency, afforestation and so on. So, signing on to Paris was a logical continuation of that ambition. In fact, Prime Minister Narendra Modi enhanced the renewable energy capacity target to an astonishing 175 gigawatts by 2022, which include 100 GW of solar. The current record indicates that the solar target may be achieved ahead of schedule. We now have a run-rate of around 700,000 LEDs being sold daily. Their cost has come down by 94% in the past eight years. Similarly, solar-energy cost is now on a par with coal-based energy, as shown in competitive bidding for new solar projects. While renewables will contribute 50% to our Paris goals, another 15-20% will come from transportation. This involves switching bulk freight movement from road to rail (see Mintcolumn “Correcting The Road-Rail Skew”), and extensive use of coastal and inland waterways.

Finally, on regulatory mechanisms, there are some concerns. The RPO and PAT regime needs more creative enforcement. It also needs fungibility across states since RPO is a state-specific obligation, but not all states are equally endowed with renewable energy potential. The fungibility is achieved by national trading in renewable energy certificates (RECs). However, there is an excess supply of RECs and their price is close to zero. The government needs to intervene and prop up this market and ensure liquidity and reasonable prices until it becomes self-sustaining.

Large renewable energy projects also suffer from risks like inadequate grid connectivity, non-evacuation of their power, or dishonouring of power purchase agreements. All these need attention. We also need to adopt a carbon-pricing framework such as the one planned in China. It is the first country to introduce a national carbon pricing and trading market. We must recognize that with the coal cess, RPO and PAT, there is already an implicit price on carbon. The electricity distribution companies (discoms) are under financial stress owing to past debts and accumulated losses. Hence, they are prominent RPO defaulters, although the Ujwal Discom Assurance Yojana (UDAY) scheme nudges them to comply with RPO. So, Paris fulfilment will not happen without discoms’ compliance.

India is an early champion of environmentalism. Being a large and fast growing economy gives it an additional responsibility, especially for climate change actions. Thankfully, the road after Paris is not only desirable and achievable, but will also improve the investment climate in the country.