Climate Change: America, India and China



 CLIMATE CHANGE: AMERICA, INDIA AND CHINA
By
 V. Ranganathan, Professor, IIM, Bangalore.

Abstract

All the three countries US, India and China have abundant coal and a large coal based electricity program.  All of them face stiff choices between low cost and carbon footprint in their future electricity generation program..  Of this US had maximum Carbon emissions, followed by China and then India.  This year, 2011, has seen the tipping point where China has overtaken the US for Carbon emissions.  For India energy intensity has actually decreased, as evidenced by energy-gdp elasticity figure changing from 1.2 to 0.8 over the last couple of years.  However while China is seen as making efforts to reduce emissions—in fact it has outmaneuvered US industries by offering lower cost emission reduction equipment—India  is often accused of not playing the ball.   The paper addresses  different approaches of the three countries to the Climate change issue and in particular outlines the dilemma that India faces in reaching its twin goals of inclusive economic development, which require low cost energy strategies and compliance to climate change agenda, which requires low carbon energy strategies.

Introduction The concept of sustainable development cautions that mankind should not consume excessively today because it will leave less for our posterity.  Output is created using manmade and natural capital, and while the former is amenable to market logic, the latter is consumed excessively since there is a market failure;  the natural capital has no price tag since it is somewhat a public good, with characteristics of nonexcludability and to a limited extent non-rivalry.  We say limited extent, because upto the point of its absorptive power (of pollution, which indicates its use), nature is a free resource with characteristics of non-rivalry, but beyond this, it becomes a scarce resource, albeit with no market price, and therefore manifests as an external diseconomy.  Pollution being a public (dis)good, and also having a positive correlation with output and GNP, it suffers the fate of the ‘tragedy of commons’, impelled by prisoner’s dilemma behavior: i.e. collectively we realize that pollution is bad but individually we have something to gain by polluting, and inexorably driven to a nonoptimal outcome induced by noncooperative behaviour.   The IGES white paper (2008) gives specific policy guidelines for Asia, emphasizing that climate change policies must align with sustainable development.

 The intergovernmental panel on climate change (IPCC) brought out a report [IPCC AR-4 (2007)]  and made the point that climate change is for real and quick action is called for by all countries acting in concert.  However, the report also came under dim light for some plagiarisms which were deliberately contorted relating to Himalayan glaciers likely to melt by 2035.  In the Climate Change debate, the following questions are pertinent:
  1. Is the temperature rise a real trend? 
  2. Is the temperature rise caused only by human efforts or exogenously? 
  3. Will the temperature rise cause adverse consequences?  If so, what are they at global, national and local levels?  How far is it possible to relate local emissions and global emissions to local (including national) and global consequences?
  4. For mitigating global level adverse consequences, what global level cooperation is required?  (It is here that environment becomes a public (dis)good).


IPCC’s answer to the first question is that it is a real trend.   It has categorized various regions of the world as having temperature  falls/rises and according to IPCC, a 2 to 3o rise in the last 34 years is corresponding to danger levels. According to US National Climatic Data Centre "during the past century, global surface temperatures have increased at a rate near 0.06°C/decade (0.11°F/decade), but this trend has increased to a rate of approximately 0.16°C/decade (0.29°F/decade) during the past 30 years".    
         
IPCC has produced models of causation to prove that human activity has caused the temperature rise.  But other scientists, organizations of NGOs have differed with this assessment.  For instance, the NIPCC (2009) report says that ‘a comparison of ‘fingerprints’ from best available observations with the results of state-of-the-art GHG models leads to the conclusion that the (human-caused) GHG contribution is minor’, and that ‘sun and associated atmospheric cloud effects are responsible for much of past climate change’.  This report damns the IPCC report in every respect, temperature rise, glacier melting, sea ice, extreme weather, biological effects and species extinction.  Thus it is the very antithesis of IPCC report, and has the support of Liberty Institute, a market oriented think tank.  

In terms of impacts, India and other developing countries seem more vulnerable to them;  sea level rise would submerge Bangladesh and even otherwise make its water saline, and cause migration to India.  Erratic monsoons could have catastrophic effects on food production.  But unless all the people are able to see the link between climate change and carbon emissions, the imperative of survival today, will force the developing countries to delay the low carbon trajectories.  For the same reason that poor people do not use compact fluorescent lamps and still use incandescent lamps, even though the former may pay for the incremental cost within about 2 years, people will not use low carbon paths and will opt for emission intensive coal energy to fuel their development.

The plight of the poor developing countries clearly show the answer to the question no.4;  viz. it is the burden of developed countries to reduce emissions to forestall climate change.   The developing countries’ stance is that they have a mandate for development to become as well off as the developed countries, and correspondingly have a right to the common resources of the globe, such as nature, which translates as an implicit right to emit an equivalent quantum of green house gases on a per capita basis.
We now proceed to show how the action has proceeded in tackling climate change at global level, and how the developed world is shirking this responsibility.  Subsequently we will concentrate on the approaches of US, China and India towards tackling this issue.

The Kyoto Protocol was signed in 1997 and executed from February, 2005.  This envisaged mandatory emission reductions for 37 developed countries and voluntary reductions for developing countries, based on ‘common but differentiated responsibilities.’  These reductions could be achieved by countries, by 3 ‘flexibility’ mechanisms, viz. emissions trading, clean development mechanism (CDM) and Joint implementation (JI).  Kyoto expires in 2012, and this is one reason for the Carbon market to collapse, since there is uncertainty about the post Kyoto regime.  

The main tool most governments in the developed world are counting on to cut emissions and drive investment into climate-related industries is carbon trading, also known as cap and trade. The European Union established its system six years ago. Its goal is to cut emissions by one-fifth from 1990 levels by 2020.  Carbon trading has run , into obstacles in Europe, where the system has been rocked by extreme volatility, computer attacks, tax fraud, recycling of used credits and suspicions of profiteering. 
There are two options for cutting down emissions, viz. levying a carbon tax and the carbon trading (cap  and trade).  In the latter, caps of emissions are set, industries are given allowances, and these allowances are traded.  If allowances are auctioned, then the price is the same as carbon tax.  If allowances are given away by Governments, Government does not get the revenue, and therefore there is no compensating effect of reducing other taxes.   Under certainty, both are equivalent.  However, under the real world conditions of uncertainty, Carbon tax will work better than cap and trade, in cutting down emissions.  A carbon tax will work like an advalorem tax, which will shift the supply curve upwards, and thereby reduce the output which has the pollution externality. Using tax to restrict bad things (apart from the traditional purpose of raising revenues to Government) was first suggested by Pigou.  The Carbon tax was strongly advocated by Joesph Stiglitz (2006) and supported by Maniew (2007).    On the other hand, the cap and trade has volatility because the Governments can increase the Carbon quotas for their industries thereby depressing the price of carbon. 
The CDM works on the principle of a carbon trade between developed and developing countries, taking advantage of the low cost of carbon abatement in developing countries.  Even if the system does not reduce actual emission in developing countries, because proving additionality is extremely difficult, it still benefits the developed countries, because once their industries buy the Certified Emission Reductions (CERs), they can use it as a shield and go on themselves emitting carbon.  So, it appears that CDM is a clever trick for the developed countries to pretend that they are reducing emissions, without actually doing so, and paying a small price for it, in buying the CERs.  They are really not interested in finding out if the CERs are genuine or fake.  A good part of the CER money is recycled to the developed countries, as payment to the consultants who will prepare the project report and verify that the reductions are real.  And because the additionality criterion and the corresponding various benchmarks are all too complicated, they ultimately become judgmental and require the MNC consulting firms to navigate through the labyrinth of CDM bureaucracy.   
The Copenhagen Accord in 2009 realized that a legally binding treaty may be impossible to be reached, and instead sought an Accord.   In this context, it is useful to understand the subtle differences between Accord and Agreement.  An accord is a consensus decision reached which is politically and morally binding but not legally binding, whereas an Agreement is one that is legally binding.  Such an agreement becomes a Treaty.  A treaty implies seriousness on the part of countries to comply with its provisions and corresponding incentives and disincentives to achieve the provisions contained in it.  Such a treaty may also be a sine qua non for a carbon market to function.  However, such a treaty is unlikely to be achieved unless developing countries also agree to reduce their emissions.  Fig. 1 shows the CO2 (or equivalent) emission by various countries  from 1990 to 2030.  It is clear that as on 2010, USA and China are the top emitters at 5,000+ million metric tons, then comes OECD Europe followed by Russia and India and Japan are below the level of Russia.   

 The Cancun summit in  Dec. 2010 witnessed divisions in agreeing to a legally binding agreement between countries.  US, China and India did not want, while the rest of the countries were for signing legally binding restrictions.  In the BASIC group, consisting of Brazil, South Africa, India and China, which started with a common climate agenda, Brazil and South Africa opted for legally binding agreements isolating China and India which were opposed to that move.  India’s position was that while it will make domestic commitments suo motu, it has not yet reached the stage to make international commitments.  There were also divergences on issues of Measurement, Reporting and Verification (MRV).  US thought that China and India would fudge the figures and hence insisted on presence of external observer, which China did not agree.  India was also cool to the US proposal, but later brought out a mechanism which essentially agreed for transparency to be introduced by external participation.  Essentially major emitters will voluntarily make data on emission available in periodic intervels, through a process called International Consultation and Analysis (ICA);  criticism within India is that this compromise removes the distinction between Annex 1 and non-Annex 1 countries.  (for the latter the reductions are voluntary and domestic).

The broad divergence between developing and developed countries is that it is the latter that were responsible for global warming and so they must cut emissions.  The developing countries are later beneficiaries of development through intensive energy use and so they must have this till they reach developed country levels of standard of living.  Now let us analyse the approach of US, China and India towards the climate change measures.
US, China and India: All the three countries, are rich in coal;  reluctant to give it up.  All three are faulted for the failure of Kyoto Protocol to bring results, US being a non-signitory and China and India being not required of mandatory reductions of GHG.  

Table 1 below presents the Energy-Environment related resource availability and production and consumption for the 3 countries, US, China and India.  The average energy consumption per capita in the US is about four times that of China's. China is   the world's largest producer and consumer of coal, with more than 70 percent of its energy consumption dependent on coal. In contrast, coal accounts for about 20 percent of energy consumption in most developed countries, complementing oil and natural gas.   According to the World Energy Council, as of 2009, China held an estimated 114.5 billion short tons of recoverable coal reserves, the third-largest in the world behind the United States and Russia.  In 2009, China, typically a net coal exporter, became a net coal importer from countries such as Indonesia, Australia, Vietnam, and Russia. In September 2009, the China Coal Transportation and Distribution Association stated that China signed a $6 billion loan-for-coal agreement with Russia for 15 to 20 million tons of coal for 25 years.  While coal consumption fell 0.2% in 2008-09 to 3.28 billion metric tons of oil equivalent, China’s and India’s respective coal consumption rose by 10% and 7% ahead of their GDP growth (Business Week (2010)).

Table 1

Units
US
China
India
Recoverable coal reserves
Billion tonnes
250
114.5
62.3
Coal Production
bt
1.097
3.4
0.613
Coal consumption
bt
1.052
3.5
0.681
Total energy consumption
Quadrillion btu
97.73
85.1
13.5
Per capita energy consumption
Million btu
250
64
17
Energy intensity
Btu/$ (2008/2007)

11,450
6,500
Energy related CO2 emissions
Million tons
5,300
6,534
1,494
Percapita CO2 emissions
tonnes
17.5
4.9
1.31
CO2 intensity
Tones/1000$

0.9
0.48
Source: US Energy Information Administration

From Table 1, it is clear that all three countries have big stakes in coal.  Coal fuels 45% of electricity production in the US, about 60% in India and about 83% in China.   In terms of energy consumption, US and China consume much more energy than India, and this inequality is exacerbated when it comes to per capita energy consumption.  In terms of emissions, China has surpassed the US in absolute energy consumption, while India consumes about a little more than one fifth of China. 
US’s position: The US has an all or nothing approach and says that unless China and India agree to cut emissions, it will not do so and it will not allow even other aspects like funds for GHG reductions to reach a conclusion.  This is articulated by Mankiew (2007)where he says, “Any long-term approach to global climate change will have to deal with the emerging economies of China and India. By some reports, China is now the world’s leading emitter of carbon, in large part simply because it has so many people. The failure of the Kyoto treaty to include these emerging economies is one reason that, in 1997, the United States Senate passed a resolution rejecting the Kyoto approach by a vote of 95 to zero.”  Considering that both electricity and transport sectors contribute significant GHG emissions in the US, their reluctance to reduce emissions is understandable.   The difference between the Bush Jr. administration and Obama administration is one of form, and not of content.  While the former bluntly rejected Kyoto with 100% support of the Senate, the latter is playing the game ‘only if you do first’, especially with respect to China and India. 

China is emerging as a global power and it has to wear two opposite hats.  As an economic powerhouse it would like to take a leadership and statesmanlike role supporting GHG reduction.  But it is also the leader of developing countries, and in this role it has to oppose GHG reduction if it were to champion the cause of developing countries, which incidentally benefits China itself in the process, in economic terms.  Thus there is a conflict between its economic interests and global ambitions to be a leader.   China also sees CDM as an opportunity to seek funds transfer from the West, and is channeling these private sector inflows into Government flows by specific taxes on the CDM recipients and using these tax revenues to subsidize renewable energy technologies to undercut the western manufacturers in the supply of equipment for these technologies.  This has gone to such an extent, that the US administration is looking at bringing a case against China, including accusations about manufacturing subsidies for wind turbines, before the World Trade Organization.  

Investment in clean energy in China rose 30 percent last year, to $51.1 billion — by far the largest figure for a single country — and represented more than 20 percent of the total global investment of $243 billion, according to Bloomberg New Energy Finance.
China is   developing and investing in clean and renewable energies such as solar, wind, nuclear and hydropower but its coal production and consumption are also significantly increasing, as seen in fig. 1.  


Fig. 1

India’s emissions are much lower, a fifth of China and its energy-gdp elasticity is falling from 1.2 to 0.8, its economy being less energy and therefore emission intensive.  The only energy resource available relatively in abundance in India is coal, apart from large hydro potential which is lying unutilized in the North East Bramhaputra basin and in the Northern State of Jammu and Kashmir.  Coal is the preferred fuel for producing electricity whose demand has been rising at around 9% per annum.  India’s emission is one fourth of the global average  (Jyoti and Kirit Parikh (2002)).  

Conclusion:  Thus, while US is using China and India as a shield for its reticence towards emission reduction, China is actually increasing its emissions and at the same time benefitting from the CDM scheme by taxing the profits from these revenues and using these tax receipts to subsidize its renewable energy technologies, which it sees as a growing market.  It is also getting good press because it is effectively competing in green technologies even though it is hurting the Western green industry, which it undercuts.  On the other hand, India though no where consuming energy or emitting pollution as much as China, and far far from the US, it is still seen as a bellicose actor by the global media and is seen as torpedoing the Cancoon process.  Thus there is a great need to improve for India its finesse in handling the energy-environment issues relating to climate change.

References:
Jyoti K Parikh and Kirit Parikh (2002)  “Climate change: India’s perceptions, positions, policies and possibilities” OECD, 2002
  
Mankiew (2007) “One answer to global warming: A new tax” New York Times, Sept 16, 2007
Joseph Stiglitz “A new agenda for global warming” Economists’ Voice , www.bepress.com/ev, july 2006

NIPCC (2009) Climate Change Reconsidered: 2009  (ed.) Craig  Idso and S. Fred Singer, Report of the Nongovernmental Panel on Climate Change (NIPCC), Chicago, IL: The Heartland Institute, 2009.

IGES White paper (2008) Re-uniting Climae Change and Sustainable Development  Institute for Global Environmental Strategies, Kanagawa, Japan, 2008

Business Week.Com (2010.06.09)

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