This policy brief is based on SANDEE working paper no. 12-05, "Trade-off among carbon emissions, economic growth and poverty reduction in India"Global warming is regarded by many scientists and politicians as one of the most significant challenges facing humanity. There is considerable pressure on developed and developing countries to cut their emissions of greenhouse gases, and many countries will have to start to act sooner than later. This is particularly true for India, which, on account of its size, is the fifth largest producer of carbon dioxide in the world

Prakash Ojha, Vijay

International Development Research Centre: IDRC Digital Library

Number 11-05, December 2005CAN INDIA AFFORD TO TACKLE GLOBALWARMING? – A PEEK AT THE YEAR 2020Global warming is regarded by many scientists andpoliticians as one of the most significant challengesfacing humanity. There is considerable pressure ondeveloped and developing countries to cut theiremissions of greenhouse gases, and many countrieswill have to start to act sooner than later. This isparticularly true for India, which, on account of itssize, is the fifth largest producer of carbon dioxidein the world.A recent SANDEE study looks at how policies to reduce carbonemissions would impact poverty and economic growth in the country.In particular, the study examines the consequences of a domesticcarbon tax policy and of participation in a global carbon emission tradingregime. It concludes that a carbon tax policy that simply recycles carbontax revenues back to households could reduce economic growth andincrease the number of poor in the year 2020. However, participationin a tradable emission permits regime presents an opportunity for Indiato sell surplus permits.  India would then be able to generate revenuesand speed up growth by 2% in 2020 and bring about significantreductions in poverty, while keeping its per capita emissions below the1990 per-capita global emissions level.The study was carried out by Vijay Prakash Ojha from the Rajiv GandhiInstitute for Contemporary Studies, New Delhi, India. It was undertakenbecause the relationship between carbon emission reduction,economic growth and poverty alleviation is of immense relevance toIndia. India is vulnerable to the potential impacts of global climatechange and has a real stake in a global policy regime to stabilize globalcarbon emissions. Indian policy makers are beginning to assess theimplications for India of a Kyoto-type global emissions trading regime.This study looks at the social and economic impacts of carbon taxesand carbon trading regimes. Carbon taxes are based on carbonemissions. A carbon tax is expected to increase the price of coal,refined oil and natural gas. Theextent of the price increase of eachof these fuels is determined by itscarbon content. The price increaseis largest for coal and smallest fornatural gas. Producers respond tocarbon taxes by switching fromcoal towards refined oil and naturalgas as a source of energy. At thesame time, higher energy pricesforce a reduction in overall energyuse. Carbon emissions are reducedon account of both fuel switchingand reductions in fuel use.The tradable permit scheme of thekind envisaged in the Kyotoprotocol allows countries to earnrevenue from selling carbonemission permits if their overallemissions are lower than theiremission allowances. Carbonemission allowances are allocatedon the basis of per capitaemissions. Therefore, under acarbon trading scheme, countrieswith high per capita emissionswould purchase permits fromcountries with low per capitaemissions, such as India.This policy brief is based on SANDEE working paperNo. 12-05, ‘The Trade-Off Among Carbon Emissions,Economic Growth and Poverty Reduction in India’,by Vijay Prakash Ojha from the Rajiv GandhiInstitute for Contemporary Studies (RGICS), NewDelhi, India. The full report is available atwww.sandeeonline.org.SANDEE Policy BriefThese approaches representpotential medium-term strategiesthat India could adopt to addressthe problem of greenhouse gasemissions. The impact of thesepolicies on economic growth andpoverty alleviation is key becausefor a low-income country like India,the most pressing need isachieving poverty reduction ratherthan controlling carbon emissions.IMPLEMENTING A MODELOF THE INDIANECONOMYTo carry out this study, Ojhadevelops a model of the Indianeconomy that allows him tounderstand the impact of changingtaxation and revenue streams onthe country’s Gross DomesticProduct (GDP) and on poverty. Anapproach known as ComputableGeneral Equilibrium (CGE)modeling is used to capture theinteractions among producers,households, the government andthe rest of the world and toinvestigate the impact of increasedTable 1:  Energy consumption and carbon emission trends in IndiaYear 1970 1975 1980 1985 1990 2000 2005Energy consumption (petajoules) 4923 6005 7152 9059 11636 17680 21437Gross carbon emission (metric tons) 129.64 156.59 183.23 230.72 288.99Notes :  Gross carbon emission includes emissions from biomass combustion.Source: Fisher-Vanden et al (1997) & Marland, Gregg, Tom Boden, Robert J Andres (2003).fossil fuel prices on the economy and on the way in which producersand consumers use and save energy.The model breaks the Indian economy down into eleven main sectors. Itincorporates factors such as projected energy-efficiency improvements,the complexities of labour markets and wage rates, and public and privateinvestment inputs. As is usually done in a CGE modeling exercise, abusiness-as-usual (BAU) scenario is first analysed, and then alternativepolicy scenarios are assessed.POLICY ALTERNATIVES UNDER TESTIn this study, eight alternative policy scenarios are developed, four relatedto carbon taxes and four to implementing a carbon trading regime. Forexample, for the carbon tax policy, two policy simulations investigate theimpact of a 10% annual reduction in emissions during a 30-year periodi.e. from 1990 to 2020. In one of these simulations carbon tax revenuesare transferred back to all households.  In the second, tax revenues areexclusively transferred to a target group of the lowest income households.Thus, the second is a progressive policy where there is an attempt tominimize the impact of carbon emissions reductions on the poor.A similar investigation is carried out to understand the implications offollowing an international tradable permits approach. The same tworevenue transfer scenarios are assessed. Thus, revenues from the saleof permits are either transferred to all households or are targeted to thepoor. In the results described below, the permit price is fixed at US$ 6 (Rs100) per tonne. The emissions quota or goal for 2020 is to bring carbonemissions to less than or equal to 1 tonne per capita (based on 1990population figures).SANDEE Policy BriefARE THERE ANY OTHERWAYS TO REDUCECARBON EMISSIONS ININDIA?Apart from carbon taxes andemission trading regimes there area number of other approaches toreducing fossil fuel use and carbonemissions. These include energyefficiency, the development of lowor zero emission energy sourcesand various regulatory measures.However, there are a number ofbarriers to the adoption of theseapproaches in India.Energy inefficiency is a big problemin India. This, in turn, is the resultof the energy subsidies that stillare in place in the country. Energyprice reforms have been institutedin India and subsidies havedeclined since 1991. However, thereforms are far from complete,and they have, as yet, had aninsignificant impact on energyefficiency and on carbonemissions.‘Clean’ energy sources such ashydro-power, wind and nuclearconstitute a very small andstagnant share (about 6-7%) ofthe total energy consumed and areunlikely to grow significantly incoming years. Command-and-control measures are regarded asneither feasible nor desirable. Itis generally felt that suchmeasures are inefficient incomparison to market-basedinstruments. Secondly, becausethey curtail output, such measureswould place an unacceptabledeadweight loss on the economy.Table 2:  Comparing carbon reduction regimes with a no-carbonreduction (business-as-usual) scenario in 2020HOW THE CARBON TAX PERFORMSThe results show that a carbon tax policy can impose heavy costs interms of lower economic growth and higher poverty. In the carbon taxscenario where there is no targeted transfer of revenues and the annualreduction in emissions is set at 10%, the number of poor in 2020increases by 5% compared to the business-as-usual (no carbon tax)scenario. However, this percentage can be considerably reduced if targetedtransfers are made.  In such a scenario, GDP in 2020 is approximately0.88% less than what it would be without a carbon tax and the numberof poor increases in 2020 but by less than 1%. This finding is important.Such a soft emission reduction target is what India needs to set for itself,given that the ten percent annual reduction in aggregate emissions willbring down its per capita emissions to a level far below global per capitaemissions.EMISSION TRADING SHOWS PROMISEIndia gains immensely in terms of higher GDP growth and lower povertyin the tradable emission permits scenarios. In the case of the scenario inwhich the permit price is $ 6 per tonne, GDP increases by an average ofapproximately 6% per year, and the number of people in poverty in 2020is reduced by 19% relative to a situation without an emissions regimeand no targeted transfers.  Moreover, with targeted transfers, poverty in2020 is halved.Percentage change in GDP and numberof poor in 2020 relative to a businessas usual scenario where there are nocarbon taxes or emission tradingPolicy Scenarios GDP (2020) Number ofpoor (2020)Carbon Taxes without targeted -0.76% 5%transfers to the poor1Carbon taxes with targeted  -0.88% 1%transfers to the poor1Emission trading without 1.83% -19%targeted transfers to the poor2Emission trading with targeted 1.86% -50%transfers to the poor21: Carbon targets are set such that emissions are reduced annually by 10%.2:  Carbon targets are set such that in 2020, emissions are less than or equal to1 tonne per capita (1990 population figures).SANDEE | P.O.Box 8975 EPC-1056 | Kathmandu, NepalTel: 977-1-552 8761, 552 6391 | Fax: 977-1-553 6786E-mail: info@sandeeonline.orgWebsite: www.sandeeonline.orgSANDEE SPONSORSSANDEE Policy BriefThis policy brief is an output of a re-search project funded by SANDEE. Theview’s expressed here are not neces-sarily those of SANDEE’s sponsors.SANDEEThe South Asian Network forDevelopment and EnvironmentalEconomics (SANDEE) is a regionalnetwork that seeks to bring togetheranalysts from the different countriesin South Asia to address theirdevelopment-environment problems.Its mission is to strengthen thecapacity of individuals andinstitutions in South Asia to undertakeresearch on the inter-linkages amongeconomic development, poverty, andenvironmental change, and, todisseminate practical information thatcan be applied to developmentpolicies. SANDEE’s activities coverBangladesh, Bhutan, Nepal, India,Pakistan and Sri Lanka.SANDEE’s Policy Brief Series seek to in-form a wide and general audience aboutresearch and policy findings fromSANDEE studies.AuthorVijay Prakash Ojha EditorRufus Bellamy Series EditorPriya ShyamsundarWith this set-up, in 2020, per capita emissions are expected to be 0.73tonnes.  However, it should be noted that India can not perpetually expectto receive money from the developed countries through the sale ofemission permits. Actual emissions increasing faster in the tradablepermits scenarios than in the business-as-usual scenario and it is safeto expect that India will change from being a net seller of permits to a netbuyer of permits before 2050.A UNIQUE OPPORTUNITY FOR INDIA AND THEENVIRONMENTOverall these findings point to the conclusion that, on its own, India isunlikely to take the hard decision of imposing a domestic carbon tax toreduce carbon emissions. This is despite the finding that a carbon taxscheme that produces a very modest reduction in carbon emissions andin which revenues are transferred to the poor is not significantlydetrimental to economic growth and poverty alleviation.The findings point just as strongly to the conclusion that global emissionstrading opens up a unique opportunity for India and other developingcountries, to sidestep the trade-off among carbon emissions, economicgrowth and poverty reduction. Emissions’ trading offers a win-win situationfor both society and the environment.

Can India afford to tackle global warning? : a peek at the year 2020

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Can India afford to tackle global warning? : a peek at the year 2020

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