Following my previous post on climate change, Nitin pointed me to a paper in the EPW on mitigating climate change in India (also available at GDNet). The authors analyze the impact of economic instruments such as a carbon tax on carbon emissions to conclude that, “the amount of reduction of carbon emissions is not substantial enough to suggest that economic instruments (carbon taxation) would be the right ones for mitigating emissions.” But it is their reasons for this conclusion that are particularly important.
The paper has some weaknesses, but the conclusion if even partly correct is extremely important for Indian policymakers. It means economic incentives – which are at the heart of the Kyoto Protocol and the European Emissions Trading System (ETS) – will not work in India. Instead, producers will simply treat a carbon tax as a regular tax and pass on the expense to consumers, leading to inflation.
Far from weakening the case for India’s acceptance of binding targets, however, it strengthens it. The paper’s analysis of why the incentives don’t work is fascinating and illustrative:
It must be mentioned that economic incentive based mechanisms to limit pollution work effectively under certain assumptions, viz, low replacement cost of old technology and no supply constraints on “green technology”. In India, the replacement cost of old technology is high and there are constraints on the supply of green technology.
This suggests India should move aggressively to negotiate with the rest of the world for a international treaty on climate change friendly to its needs.
Both constraints on India moving to a low-carbon economy are exogenous, i.e. external to our own economy. They can, therefore, only be removed by our involvement in an international framework. They also substantially strengthen India’s case for concessions – in the form of access to clean technology and funding for replacing old technology – in return for that participation.