Where India's flagship climate scheme could falter

 On the one hand, Japan and South Korea plan to launch their own versions of national emissions trading scheme (ETS) while on the other, the United States may go ahead with a watered-down version of an energy and climate bill. Even the European Union (EU) is weighing-up to strengthen its flagship ETS. In the midst of all this, half-hearted but encouraging news we now hear is that India too is on-track to launch its domestic policy initiative called the ‘Perform, Achieve and Trade (PAT)’ scheme.

To be launched in April 2011, the PAT scheme — announced under the National Mission for Enhanced Energy Efficiency (NMEE), is touted to be India’s answer to the world as a responsible nation on climate mitigation. As per the newly emerging blueprint of the scheme, specific energy consumption (SEC) targets are to be fixed for large energy-guzzling installations around the country and credits, called Energy Saving Certificates or ESCerts, issued for those exceeding their performance goals. The surplus credits can then be sold to those installations which fail to meet their required cuts, thereby, over a period of time, enabling the formation of a new market-based mechanism.

The coordinating body Bureau of Energy Efficiency with assistance from the German agency GTZ, plans to cover around 714 installations in nine sectors — power stations, cement, steel, fertilisers, aluminium, chlor-alkali, paper, textiles and railways.
Energy savings expected is around 10 million tonnes of oil-equivalent by 2015. Besides, it would aid in energy security, technology upgradation and lower environmental impacts. However, a closer look at the policy design points towards a number of seeming pitfalls which could undermine the scheme and derail it altogether. Let’s have a look at a few of them.

The PAT scheme is to be structured on the basis of benchmarking where SEC (energy used per unit of output) levels are monitored and thereafter targets fixed for each installation. However, the benchmarking concept per se has attracted quite a lot of discomfort among policy makers worldwide. For example, SEC could vary widely across two units making the same product but with different processes; among vintage of plants (old and new); the size of the facilities, on grade of raw-materials used and even the extent of system boundaries selected.

Worse still, a number of older public sector factories are predictably to be included in the same sectoral list with their private competitors. During the course of time, it could so emerge that due to wide performance variation, the public sector units predominantly end-up buying the credits generated from private entities. Any attempts by the BEE to soften targets for public-sector units would only create doubts about fair-play and even lower the price of the certificate, thereby giving lesser of a market incentive.

Discretion needed
Second, as the scheme is devised on energy consumption alone, the impact on CO2 emissions due to type of fuel used is ignored. Consequently, units may not be able to claim their due for using a low-carbon but expensive fuel like natural gas, or for that matter, renewable biomass. One may argue that use of such fuels depends on its availability and necessary infrastructure, but discounting the higher social benefit may only harm the long-term promotion towards low-carbon fuels.
Third, any enterprise would like to assure itself on the return on investment or arbitrage opportunities prior to taking a leap into the PAT bandwagon. Consequently, without an upfront indicative price-band and mechanisms to ensure long-term price stability (or floor price) generating market interest and build-up of resources may not be to the level expected.

While the proposed initiative of the Indian government to demonstrate active participation in international climate mitigation is duly appreciated, a thorough unbiased research may be needed on its environmental, economic and social implications. Prima facie it appears that the problems associated with benchmarking together with the public-private interplay as the single-most disquieting factor. Note that the liberalised western markets do not face this predicament.

A simpler policy for internalising the adverse impacts of fossil energy could therefore be to tax carbon emissions on a facility-level and make the cash inflow revenue neutral, if required, by means of a flat reduction in corporate tax rate or equivalent. While the latter enticement could help please the industrial and political lobby, this alternative scheme would lay a level-playing field and minimise technical or economic distortions (or jugglery) arising out of SEC comparisons.

Initially, to assuage all stakeholders, India could well start with a modest tax rate of say $3 (or Rs 150) per tonne CO2, seamlessly cover much larger number of installations than the 714 now identified and strengthen the price as the ambition moves forward.
The recent announcement by the finance minister on a national clean energy cess levy of $1 per tonne of coal in the 2010-11 budget indicates that the idea of taxation for climate mitigation is indeed not out-of-bounds.
(The writer is an alumnus of University of Cambridge)