Indian Economy, 5th edition (96 page)
Read Indian Economy, 5th edition Online
Authors: Ramesh Singh
The assessment and quantification of the costs of adaptation and mitigation is a difficult task. However, it is clear that these costs are significant and will likely be higher in the future as initiatives are taken in line with the goals outlined in the NAPCC. The preliminary estimates indicate a sum of ‘ 230,000 crore to fulfill the mission objectives under the NAPCC alone, let alone other lower carbon strategies and environment policies and programmes of the government.
The most obvious source of financing for climate change action is government budgetary support. Most of it would come as sectoral finance since some of the resources for adaptation and mitigation are built into the ongoing schemes and programmes. Although mitigation is sometimes an important co-benefit, the deployment of resources for such purposes is largely guided by the overall availability of resources. The Finance Bill 2010-11 created a corpus called the National Clean Energy Fund (NCEF) out of a cess at the rate of Rs.50 per tonne of coal to invest in entrepreneurial ventures and research in the field of clean energy technologies. The government expects to collect Rs. 10,000 crore under the NCEF by 2015. Governments have a range of policy instruments and variables at their disposal to use for generating the enormous resource requirements in this field. This includes a set of price signals, direct and indirect taxes, subsidies, and export and import levies. Theoretically, environment- related taxes have an important role to play in funding green initiatives. At the same time, any government must use these policy tools after serious consideration and analysis as they may have serious repercussions on other sectors of the economy. Preliminary modelling studies by the Ministry of Environment and Forests indicate that even a modest revenue-neutral economy-wide Carbon tax of US$10 per ton of GHG emissions in India would result in a GDP loss of around US$ 632 billion at 2005 prices. At the same time, the government continues to use subsidies to promote the environment.
Carbon taxes
and
subsidy
may not be relied solely as the most viable policy option. Therefore, India is experimenting with a careful mix of market mechanisms together with fiscal instruments and regulatory interventions. On one hand, where the cess on coal is a type of carbon tax being levied in India,
PAT
(Perform Achieve and Trade) and
RPO
(Renewable Purchase Obligation) are examples of cap and trade market mechanisms promoting energy efficiency and the use of renewable energy respectively in India.
The Twelfth Plan, in the particular context, lower carbon strategies will require capital finance for improvements in technology and enhanced deployment of renewable and clean energy technologies. Some of these objectives may be met through regulatory interventions and use of market mechanisms, in which case the required budgetary support may be small. In other cases, adequate financial outlays will be needed to implement policies and measures that can achieve specific mitigation outcomes in the individual sectors. So far, three grants of Rs. 5,000 crore each, for forest cover, renewable energy, and the water sector, have been recommended by the 13th Finance Commission for the state governments.
Considering the large resource requirement, arguments in favour of setting up a
National Green Fund
to finance public and private sector projects/ activities aimed at protecting environment in accordance with the Twelfth Plan objectives have found support. The Fund could also be a vehicle for receiving international support through agreed bilateral and multilateral sources and can finance actions not only at national level but also at state level for agreed priorities and thrust areas.
Carbon offsetting
and its requisite financing require global effort and process. Markets that are operating take signals from international negotiations. Domestic markets and mechanisms alone are neither sufficient for generating resources of the required scale nor efficient enough for reaching the set level of targets and therefore rely heavily on international policy architecture. The second commitment period of the KP has brought some respite and certainty to the carbon markets; however, due to lack of ambition the future of carbon markets could still be in an indeterminate state. India’s actions for climate change will, therefore, need to be financed from a pool of resources consisting of domestic resources, international carbon finance, and multilateral funds.
International Sources and Issues
India, primarily out of its own concerns, has chalked out ambitious plans and policies to tackle climate change and environment issues that reflect India’s strong will to address this global public good. However, given the
scarcity of resources
and competing demands, finding the matching resources is a challenge. The ‘Expert Group on Low Carbon Strategies’ has also stated in its Interim Report that aggressive mitigation cannot be achieved without substantial international financial support, both in terms of financial resources and technology transfer. The Indian PM also echoed similar sentiment in his
Rio+20 Summit
speech
: ‘Many countries could do more if additional finance and technology were available. Unfortunately, there is not enough evidence of support from the industrialised countries in these areas.’
PAT and RPO
The
PAT
(perform - achieve - trade) is a scheme for trading energy-efficiency certificates in large energy-intensive industries under the National Mission for Enhanced Energy Efficiency –
•
Identified industries are required to improve their specific energy consumption (SEC) within the specified period of three years or face penalty provisions.
•
At the same time this mechanism facilitates efficient industries to trade their additional certified energy savings (that go beyond the assigned target) with other designated consumers who could use these certificates to comply with their SEC-reduction targets.
•
In the Twelfth Five Year Plan, the PAT scheme is likely to achieve about 15 million tonnes oil equivalent of annual savings in coal, oil, gas, and electricity (including 6.686 million ton of oil-equivalent energy savings of first phase).
Similarly, the
RPO
(Renewable Purchase Obligation) is creating domestic markets for renewable energy through regulatory interventions at state level.
•
The RPO is the minimum level of renewable energy (out of total consumption) the obligated entities (DISCOMs, Captive Power Plants, and Open Access Consumers) are entitled to purchase in the area of a distribution licensee.
•
The obligation is mandated by the State Electricity Regulatory Commission (SERC). Since the renewable energy sources are not evenly spread across India, SERCs cannot specify a linear level of RPOs for all states.
•
Renewable Energy Certificates (RECs) under the RPO mechanism is an instrument that enables the obligated entities to meet their Renewable Purchase Obligation by trading surplus or deficit RECs among themselves with the owner of the REC being able to claim to have purchased renewable energy.
Source:
Economic Survey 2012-13,
MoF, GoI, N. Delhi, p. 265.
In the context of making finances available to developing countries, in the recent past, much of the talks under the UNFCCC revolved around two numbers, namely US$ 30 billion between 2010 and 2012 as
FSF
(Fast Start Finance) and US$ 100 billion annually by 2020 as long-term finance. These were the two finance figures that the developed world collectively pledged as climate change finance in 2009. These pledges need to be new and additional. The term
‘new and additional’
in the context of provision of finances by developed countries can be traced right from the text of the Convention to various COP decisions. In this sense ‘new and additional’ refers to provision of financial resources that represent new commitment, rather than those that are diverted from flows that have already been earmarked for some other form of development assistance.
However, in the absence of an agreed definition of additionality in climate finance, the developed and developing countries have diverging views. In the backdrop of these differences, together with great uncertainty in finance flows, complex web of channels, and lack of transparency and reporting practices, the actual additionality on FSF turned out to be a matter of great contention
(given below in the box).
These differences more recently led to demand from developing countries on the need for a mechanism to
MRV
(
measure, report, and verify
) climate finance flows.
Assessing the US$ 30 Billion FSF Commitment (2010-2012)
Many studies echoed serious concerns on the way FSF was implemented, at the time the FSF came to an end in 2012. There are lessons to be learnt so that these issues are addressed when we implement long-term finance by 2020. As a part of the FSF assessment, an
Oxfam
study
The Climate Fiscal Cliff
reveals five numbers that speak for themselves on the delivery of funds under FSF –
i.
Only 33 per cent of FSF appears to be new money;
ii.
Only 24 per cent of public finance was additional to existing aid promises;
iii.
Only 21per cent went for supporting adaptation in spite of promises to balance it with mitigation;
iv.
Only 43 per cent was provided as grants and the rest as loans; and
v.
Only 23 per cent was channeled through multilateral funds.
Almost all assessments on FSF point to the core problems as being (a) that it was recycled money either diverted from ODA or made up of funds delivered or planned before the Copenhagen promise in 2009; (b) that the most vulnerable were not prioritised, with minimal funds spent on adaptation and (c) net transfer of resources to developing countries was not even half the amount promised as more than 50 per cent was in the form of loans that have to be repaid. Therefore, an important takeaway in the context of the long-term finance flows are lessons on transparency, coherence, and consistency in reporting and verifying climate finance flows.
Source:
Economic Survey 2012-13,
MoF, GoI, N. Delhi, p. 266.
As a part of the
finance package
in the Doha Conference, the MRV of finance was an important element of the deal. It is satisfying that elements of MRV will be taken up by the Standing Committee on Finance under the COP. The Committee will consider ways of strengthening methodologies for reporting, measuring, and tracking climate finance. Talking about other finance elements, the Conference did not take ambitious or meaningful decisions especially on the demand for finance for the period between 2013 and 2020. The final decision encourages developed country Parties to increase efforts for at least maintaining the average annual 2010-2012 level of finance between 2013 and 2015. On the other hand, it is reassuring that the work programme on long-term finance started in COP17 in Durban has been extended with a view to continuing discussion on likely sources of finance in the long term. To sum up, finance negotiations and outcomes at Doha were in the nature of small slow steps rather than big strides.
Simultaneously, there have been efforts to build the requisite infrastructure for enabling and facilitating the flows of climate finance under the Convention. This is because only scaling up of finance will not suffice. The money should be put to efficient use and generate results. To this effect, work on operationalising the GCF progressed. The Republic of Korea has been selected as the host country to house its secretariat. The GCF is expected to be instrumental in channelling a significant share of the US$ 100 billion expected annually to be mobilised to developing countries by 2020 for addressing climate change. The vision, structure, and strategy of the Fund to carry out its function are a crucial priority on the agenda of the GCF Board. The Board should not rush with the ‘standard’ solutions sometimes proposed by outside interests but focus on ultimate goals and results on the ground with accountability and transparency.
Meanwhile, there are other Funds under the UNFCCC which continue to function. Collectively, the climate focal area of Global Environment Facility (GEF), the Special Climate Change Fund, the Least Developed Countries Fund, and the Adaptation Fund disburse around less than US$ 1 billion per year (Report on the workshop of the work programme on long-term finance 2012). The GEF, which is also an operating entity of the financial mechanism of the UNFCCC like the GCF, provides project grants for addressing global environmental issues while supporting national development initiatives. Till date, India has accessed about US$ 438 million of GEF grant of which US$ 269.5 million is for projects under the climate change focal area. At the same time, the
CIF
(Climate Investment Fund) – a collaborative effort among the multilateral development banks is offering its funds to be used for climate action on the basis of agreed terms and conditions. India has agreed ‘in principle’ to accessing the CIF, provided it is not treated as part of the climate change finance flows under the Convention and no GHG emission reduction related conditionalities are associated with the funds. The Trust Fund Committee in May 2012 has approved the allocation of the first tranche amounting to US $ 263 million for four projects contained in India’s Investment Plan.
Carbon Markets and Private Sector
Visible disappointments with the Doha outcomes on finance, many observers warned that we are heading towards a climate fiscal cliff. In this context, the private sector and global carbon markets are being increasingly emphasised. While not sufficient in themselves, the private sector and carbon markets have shown significant potential in mobilising finance for climate change especially for mitigation action.