The Indian Economy Blog

June 20, 2007

Mitigating Climate Change: Prospects For India

Filed under: Energy,Environment,Growth,Politics — Dweep @ 9:27 pm

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.

 

1 Comment »

  1. Your analysis of Carbon trading is very naive

    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.

    You are assuming that this carbon tax will work as a flat and equal tax on all companies which is not so. The company which pollutes more will have to buy more expensive carbon credits and will end up selling costlier products to consumers. Obviously, consumers will punish such company by voting with their wallets. By your logic, there is no incentive for Walmart to improve its supply chain efficiencies as it can always pass on the costs to its consumers.

    Don’t you see a logical paradox here, Dweep?

    Comment by Himanshu Gupta — June 21, 2007 @ 10:57 am

  2. Yes, I do see a logical paradox. What you say works very well in theory. However, as the paper points out that theory fails in practice in India. In India producers are highly constrained in adopting low-polluting technology (high cost, unavailability). As a result, they are more likely to maintain the status quo. Price differentials may result but the aim of reducing emissions will not be achieved because moving to low-carbon technology is simply not an option for many companies. I suggest you read the paper.

    Comment by Dweep — June 21, 2007 @ 12:16 pm

  3. Dweep, this is a fascinating paper. Thank you for referring to it.

    1) It looks like the paper focuses on one sector – industrial production. However, carbon taxes could still work in other sectors transport and household. In the case of transport, people may simply consume less, that is cut down on discretionary transport. Also people may move to alternative modes of transportation such as public transportation. It may also force auto manufacturers to increase mileage. Carbon tax may simply cut down household consumption also. I personally think personal auto (especially the 4 wheelers) are not appropriate for India’s transport given the population and environmental effects. Same with Aviation sector as a means for regular travel. Why do we need aviation when we have reasonably good train transport. Why can’t we do some social engineering here ? Lets implement Rs 100 petrol for personal cars and tax air travel big time ! You bet that will reduce carbon emissions !

    2) “Instead, producers will simply treat a carbon tax as a regular tax and pass on the expense to consumers, leading to inflation.”

    OK, let them ! Let the market place decide whether people are still willing to buy a product at the higher price. Maybe that product will go out of business. Let it ! It means that product does not fit into a sustainable development model. I hope we are not starting out with an assumption that we need to save all industries including massively polluting ones. This is a very important point. This the whole point of carbon tax. Either get efficient or die if people are not willing to pay the higher price for your product.

    Also, we need to be careful about stating that increasing price of some products will lead to inflation. There’s this whole money supply thing. If prices on some rise due to increased costs, and people buy them because these products are necessary, the price of other goods may fall because demand for them falls as people have less money to spend on them. what does it do to overall inflation ?

    3) By the way, the authors don’t conclude anything yet, the paper ends with this statement:

    “Therefore, much detailed, extensive and meticulous analysis is required to reach at any conclusion regarding the role of carbon tax as an instrument for reducing carbon emissions in the country”.

    Comment by chaitanya — June 21, 2007 @ 3:04 pm

  4. Dweep, I am not sure I agree with the paper on why incentives won’t work in India.

    “In India, the replacement cost of old technology is high and there are constraints on the supply of green technology.”

    This doesn’t make any sense. These constrains are self-imposed. As with any non-military-product, any company in the world will sell green products to Indian companies if India is open to trade. An Indian company can easily buy a CO2 scrubber from South Africa or Germany – usually it’s the Indian government that imposes tariffs and restricts trade. Green tech doesn’t have to be home grown. Surely it would be nice to green technology leaders in India, but it’s not necessary as during the closed socialist days.

    Also I don’t know why replacing old technology should cost more in India? If anything non-material cost in replacing old equipment, such as labour, is less. It’s another matter if Indian companies can’t offered to replace old technology. Depreciation/tax break type incentives can easily propel companies to replace older, more polluting, equipment.

    Himanshu,

    “The company which pollutes more will have to buy more expensive carbon credits and will end up selling costlier products to consumers.”

    I thought the issue is taxes, not carbon credits. But your overall point is valid. Taxes have be differentiated based on source of energy use (there was another post by Kiran at IEB recently about it – see environment tag).

    The most recent Economist magazine has a taxes vs trading article in the recent Economics Focus section. Apparently economists like taxes but politicians like carbon trading. I personally don’t like taxes because once taxes are imposed and the beast grows in size, it’s very difficult to take the food away even if the end goals are met. Also, poor people living hand to mouth, and there are many in our country, will be most impacted.

    Also there is this naive notion among economists that the carbon tax collected will be spent wisely on R&D on green tech. Yeah, right. May be it’ll work in Sweden. Our petrol surplus tax was supposed to be used for building roads. No one really knows where the petrol taxes goes (probably, eventually, into a minister’s pocket), but it surely doesn’t go into roads.

    If we’re going to do this (I am not sure we have to until we grow into a middle income country) carbon trading, even if less effective, is a better way to deal with this issue rather than carbon taxes.

    Comment by Chandra — June 21, 2007 @ 11:23 pm

  5. Himanshu, you’re absolutely right that the paper doesn’t really conclude anything. But its analysis is still very telling, and at least gives some direction to thought.

    Chandra, on the question of techology constraints, I can think of many. 1) cost: cleantech would be expensive in terms of capital required vs. capital available. 2) capacity: there are constraints on what producers can supply, and 3) appropriateness: cleantech is currently being developed primarily for the OECD. So, while India has a medium-wind energy profile, current turbines are meant for high-wind profile countries.

    Finally, you say “I personally don’t like taxes because once taxes are imposed and the beast grows in size”…that is precisely why politicians prefer trading to taxes – the public prefers them :-)

    Comment by Dweep — June 22, 2007 @ 3:15 pm

  6. If one were to choose between dealing with Climate change and farmers suicide. what should get more priority? if one were to choose between exposure from deadly chemicals and substances such as asbestos and radioactive substances and climate change or if one were to deal with the ongoing public health disaster and global warming- does it require superhuman intelligence to figure out what should get more attention? why do we discuss climate change under the influence of Security Council.

    Comment by Gopal Krishna — July 27, 2007 @ 1:32 am

  7. I am a regular reader of your article. And I am very impress with your blog upon Global Warming. Now I am also write a blog upon effects and causes of Global Warming. This blog is collection of news & reviews like the study found that global warming since 1985 has been caused neither by an increase in solar radiation nor by a decrease in the flux of galactic cosmic rays. Some researchers had also suggested that the latter might influence global warming because the rays trigger cloud formation.

    Comment by Tarun K Juyal — August 1, 2007 @ 8:55 am

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