Global Environmental Issues: Climate Change: Politics, Process And Economics

Global Environmental Issues: Climate Change: Politics, Process and Economics Prof. A.Damodaran Indian Institute of Management Bangalore

What I Will Cover • • • • • • • •

Basic Economic Concepts Origins of Climate Change Initiatives and the FCCC GHGs and Global Warming and its Consequences Structure of the Framework Convention on Climate Change (FCCC 1992) and Kyoto Protocol US, EC, China, India, and the Situation with Renewables Industry Initiatives: Cases Recent Politics of CC Indian and CC – Viewpoint of CSE

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Basic Economic Concepts • Social Cost of Carbon • Discount Rates • Economics of Emission Trading

FLEXIBLE INSTRUMENTS of FCCC and Kyoto Protocol

Emission Trading: • Trade in GHG or CER Permits – Exchanges, Brokers, Banks and Financial Institutions will play • CO2 and GHG Guzzling Enterprises scramble to buy permits from those who are in a position to sell them • EU is doing this and trade in Emission Reduction Units

Flexible Instruments • Joint Implementation

• Clean Development Mechanism ( CERs are the products)

Model on Global Cost Estimates •

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World Integrated Assessment Gen Equilibrium Model (WIAGEM) of German Based DIW finds that if nothing is done to restrain GHGs annual economic damages could reach US $ 20 trillion by 2100 (expressed in US $ at 2002`prices) or 6-8% of global economic output at that time The same model found that immediate adoption of active climate protection policies could limit temperature increase to 2 degree centigrade by 2100 and eliminate more than half the damage If Climate protection efforts do not begin until 2025 the same model estimates that it will be impossible to limit warming to 2 degree c by 2100 and climate protection will be more expensive the later it starts

Social Cost of Carbon • Once you add up lost lives with property damage, clean up cost, cost of mitigation you get the social cost of carbon • Valuation of human lives was £3.3 million under Clinton Admn and less at £ 2 million under Bush • In 2002 the Govt Economic Service in UK recommended the use of £ 70/tonne of carbon as an estimate of the social cost of carbon (or damage) with a range of £35 and £140/tonne carbon • This is useful to determine whether to go for an alternative fuel ( in terms of R&D expenses) or not • If the cost of avoiding CO2 emission through the alternative fuel is more than £ 70/tonne of carbon it will be worthwhile to look for alternative market based solutions like emission trading/carbon tax etc or curtail your production activities to achieve emission reductions .

Problem with GHGs • GHGs are stock / SPM is flow

• Efficiency for a stock pollutant are more complex than for a flow pollutant (This gives rise to Quadratic Damage functions)

Discount Rates • High discount rates means negligible social costs of carbon or benefits of mitigation • Low discount rate means high SCC for active mitigation efforts • The Stern Panel and the UK Treasury Green Book postulates declining discount rates due to uncertainties about future • This is because the damage function is quadratic • An equation kT2 where k is constant say $ 1.96 million and T is years – it follows that rate of damage will increase exponentially with time than linearly or proportionately . Given this a declining discount rate is required • Exponential damage function is due to the stock nature of GHGs

Regulate or Permit? • Regulatory Analysis Command and control is considered inferior to market based instruments – the question is how? • There are two ways of seeing the utility of a regulatory set-up • One, take the existing pollution standards as given and see how cost –effectively compliance can be ensured by the existing regulatory arrangement

Regulate or Permit? • Alternatively consider how much will any tightening of standards can control pollution in a cost effective manner – • a regulator who sees MAC varying between sectors or firms will for the permit system

Problem with Carbon (Pigovian) Tax) •A uniform emission fee when it is known that pollution damages are dependent on location may not be proper- rather it may be inefficient •This is because the high damaging firm produces more with a uniform Pigouvain tax thus creating more pollution than is warranted •Converse is the situation of a low polluter. He has to produce less which is inefficient •There exists a dead weight loss as a result. •A non uniform Pigovian Tax entails high transaction costs •This is more true when elasticity of MDE /MSE have extreme values

Inefficiency of Uniform Carbon Tax is less if Elasticity of MDE is almost infinity and MS almost Zero (Low Carbon Emitting Sectors)

Economics of Emission Trading or Marketable Ambient Permits • Emission Trading is designed to internalize social cost of carbon which is dependent on discount factors • Differences in Marginal (Private) Abatement Costs is what lies at the base of Emission Trading (a regulator faced with industries with differing MAC may decide to go for the permit system) • Pollutants that accumulate over time are stock pollutants and those that fade away are flow pollutants

Economics of Emission Trading • Pollution also varies with time as they vary with space and will induce different damages depending on when they are emitted.

Emission Trading • Price of Carbon Futures Ranges from Euros 520 /ton – if prices shoot up the Govts will have release more permits • Prices shoot up if governments slash CO2 emission levels (say by a whopping 9% as Italy did it in 2005) • According to an estimate, emission trading reduces economic costs by 70% as compared to achieving the Kyoto targets through domestic action

Clean Development Mechanism • CDM is hosted in developing countries and can be financed through a wide variety of sources • A key criterion for CDM eligibility is additionality of emission reductions ie project should have reduced emissions beyond what might have happened if the project activity did not exist • There is a national CDM authority in India since 2002

An Ideal CDM Project • Large Wind Mill Project designed to produce renewable energy (say 31.5 MW capacity) to feed the national grid on sale prices negotiated through PPAs will state that the project will achieve GHG emission reductions of say 55,650 tonnes CO2 e per year or 55,600 CERs by avoiding CO2 emissions from fossil fuel power plants • You can claim credits for this reduction • But it should also give details of IRR to attract commercial financing

CER • China is reported to be demanding Euro 6.10 for CERs generated from projects in China • Unissued CERs that are maturing carry the risk of non delivery and are quoted E 4 – 9 if buyer takes the risk of non delivery and E 7-11 if seller takes risks and commands a price of E 11-13 is it is an issued one free from risks

The Process of Climate Change Convention and the Kyoto Protocol

The First World Climate Conference and The IPCC • THE FWCC was held in Geneva in 1979 took note of global warming scenario • The United Nations Environment Programme and the World Meteorological Organization set up the IPCC in 1988 with a three-fold mandate: (a) assessment of the state of existing scientific knowledge on climate change (b) examination of the environmental, economic, and social impacts of climate change and to formulate response strategies.

Second World Climate Conference 1990 • WMO and UNEP took the lead and was held in Geneva • The First Assessment Report of the IPCC was presented here • Led to the First International Negotiation Committee for FCCC • Draft Convention Framed and Convention opened for signature at UNCED 1992

Ratification of FCCC & the Kyoto Protocol • • • • •

The Convention was signed at the Rio Summit It entered into force on 21 March 1994 by which time 166 countries had ratified the Convention ( India ratified in November 1993 and the FCCC entered into force for India in March 1994) The Convention has 196 members as on April 2007 The Kyoto Protocol was opened for signatures in 1998-99 ( As on April 2007} KP has 183 members ( 64 % emissions)including UK,China,India, Russia, Bangladesh. US not member) The Protocol came into force on 16th February 2005, the ninetieth day after at least 55 Parties to the Convention, incorporating Annex I Parties which accounted in total for at least 55 % of the total carbon dioxide emissions for 1990 from that group, deposited their instruments of ratification, acceptance, approval or accession.(India ratified KP in August 2002 and it entered into force in Feb 2005)

Framework Convention on Climate Change (FCCC) 1992 ♣ FCCC, 1992 Earth's climate and its adverse effects are common concern of humankind ♣ Objective of FCCC is to stabilise GHG (Green House Gases) at satisfactory levels to prevent global warming, sea level rise, atmospheric pollution and food insecurity,

What is CC? The FCCC View • As per the United Nations Framework Convention on Climate Change (UNFCCC), where climate change refers to a change of climate that is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and that is in addition to natural climate variability observed over comparable time periods.

The IPCC View • Climate change in IPCC usage refers to a change in the state of the climate that can be identified (e.g. using statistical tests) by changes in the mean and/or the variability of its properties, and that persists for an extended period, typically decades or longer. • It refers to any change in climate over time, whether due to natural variability or as a result of human activity.

Parties to FCCC

♣ This includes 35 Annexure – I countries which include 24 advanced OECD countries and 11 former Soviet bloc countries and 134 nonAnnexure – I countries which include the G-77 and China ♣ India belongs to the non-Annexure – I countries ♣ Non-Annexure – I countries per capita share in energy consumption both in absolute and per capita terms is negligible compared to Annexure – I countries ♣ Accordingly the basic principle of the Convention is that of special and differentiated responsibilities whereby non-Annexure – I countries in the developing group are not required to adhere to the key obligations of GHG reductions as envisaged in the Convention

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On GHGs ♣ GHG include CO2, Methane (CH4), CO, CFCs ♣ CO2 is most abundant but lowest GWP • GWP is calculated with CO2 as the base (1) CH4 is 23, Nitrous Oxide 300, HFC 120-12000 and so on ♣ GHG emissions is contributed by fossil fuel combustion mainly by developed countries for industries, transport and services ♣ Main sinks of GHG are forests and plantations ♣ Paddy cultivation is supposed to contribute to CH4 ♣ Small Island States like Maldives affected by sea level rise

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Subsidiary Bodies of FCCC • Subsidiary Body for Scientific and Technological Advice (SBSTA) and the Subsidiary Body for Implementation (SBI) • These bodies give advice to the COP and each has a specific mandate. • The SBSTA and the SBI traditionally meet in parallel, at least twice a year.

History of FCCC COP - 1 was held in 1995 at Berlin COP - 2 was held in 1996 at Geneva COP - 3 was held in 1997 at Kyoto, Japan COP - 4 was held in 1998 at Beunos Aires COP - 5 was held in 1999 at Bonn COP - 6 was held in 2000 at The Hague, COP - 7 was held in 2001 at Marrakesh COP - 8 was held in 2002 at New Delhi

History of FCCC • • • • • • •

COP 9 2003 Milan COP 10 2004 Buenos Aires COP 11 2005 Montreal (COP/MOP 1) COP 12 2006 (November) Nairobi (COP/MOP 1) COP 13 2007 Bali COP 14 2008 Poznan COP 15 2009 Copenhagen

World Scenario

World Scenario • In 1992, a dollar of GDP was associated with the production of 4.8Kg of CO2. In 2002, every dollar of GDP was associated with 2.5Kg of CO2 • CO2 emissions stem mainly from rich countries, with the United States contributing 24 percent of total emissions and the countries of the European Union contributing 10 percent

US Scenario • In the United States most energy use goes towards transportation • Renewable energy makes up less than one percent of energy consumption in the United States • Despite high energy prices, the share of renewable energy used in the United States have fallen since peaking in 2002

China and India • China's carbon dioxide emissions will surpass that of the United States sometime around 2020 • After China and the United States, among major emitters only India is expected to have significant growth of emissions over the next 20 years • China, has increased its emissions by 33 percent between 1992 and 2002, while India’s emissions have grown 57 percent in the same period.

IPCC: The Four Assessments • • • •

First -1990 Second 1995 Third 2001 Fourth 2007

The Third Assessment Scenario (2001) • predicted that the area-averaged annual mean warming would be about 3°C in the decade of the 2050s and • about 5°C in the decade of the 2080s over the land regions of Asia as a result of future increases in atmospheric concentration of greenhouse gases

Latest Scenario- IPCC 4th Assessment 2007 • Future climate change is likely to affect agriculture, risk of hunger and water resource scarcity with enhanced climate variability and more rapid melting of glaciers (medium variability • About 2.5 to 10% decrease in crop yield is projected for parts of Asia in 2020s and 5 to 30% decrease in 2050s compared

Asia • Marine and coastal ecosystems in Asia are likely to be affected by sea-level rise and temperature increases (high • New evidences show that climate change has affected many • Climate change is likely to affect forest expansion and migration, and exacerbate threats to biodiversity resulting from land use/cover change and population pressure in most of Asia (medium confidence).

Asia • Glacier melt in the Himalayas is projected to increase flooding, rock avalanches from destabilised slopes, and affect water resources within the next two to three decades. This will be followed by decreased river flows as the glaciers recede

Bali Action Plan • Enhanced action on adaptation, including, inter alia, consideration of: • (i) International cooperation to support urgent implementation of adaptation actions, including through vulnerability assessments, prioritization of actions, • financial needs assessments, capacity-building and response strategies, • (i) Improved access to adequate, predictable and sustainable financial resources and financial and technical support, and the provision of new and additional resources, including official and concessional funding for developing country Parties;

Bali Action Plan • • • • • • • •

(ii) Positive incentives for developing country Parties for the enhanced implementation of national mitigation strategies and adaptation action; (iii) Innovative means of funding to assist developing country Parties that are particularly vulnerable to the adverse impacts of climate change in meeting the cost of adaptation; (iv) Means to incentivize the implementation of adaptation actions on the basis of sustainable development policies; (v) Mobilization of public- and private-sector funding and investment, including facilitation of climate-friendly investment choices; (vi) Financial and technical support for capacity-building in the assessment of the costs of adaptation in developing countries, in particular the most vulnerable ones, to aid in determining their financial needs;

Bali on Deforestation • Recognizing that efforts and actions to reduce deforestation and to maintain and conserve forest carbon stocks in developing countries are already being taken, • Recognizing the complexity of the problem, different national circumstances and the multiple drivers of deforestation and forest degradation, • Recognizing the potential role of further actions to reduce emissions from deforestation and forest degradation in developing countries in helping to meet the ultimate objective of the Convention, • Affirming the urgent need to take further meaningful action to reduce emissions from deforestation and forest degradation in developing countries,

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In general, Annexure – I and non-Annexure – I countries have been locked in negotiation battles on the sensitive issue of GHG reductions This proposal was successfully contested by non - Annexure – I countries both at Berlin and Kyoto What is more, the non - Annexure – I countries are equally suspicious of other mechanisms such as joint implementation and emission trading since they assume that these mechanisms could endanger the autonomy of their distinct economic development path

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Kyoto Protocol ♣ Adopted in COP - 3 in Kyoto ♣ Decision for a Kyoto-Protocol was motivated by the COP – 2 held by the parties in April, 1995 in Berlin ♣ The Kyoto-Protocol also commits parties belonging to Annexure – I to a collective reduction in GHG emissions of 5.2 % during the period 2008 - 2012 in comparison to the 1990 levels ♣ This conference also highlighted the principle of Quantified Emissions Limitations and Reduction Objectives (QELRO) and the Flexible Mechanisms of Emission Trading andAD/CDM/IIMB//1 Clean

Industry ,Instruments and Climate Change

Industry and Climate Change Two Modes of Involvement • Achieve Abatement through Clean Technologies – CO2 Emission Backstop Technologies or Energy Efficiency Measures • Utilize Flexibilities : Emission Trading and CER in case of Clean Development Mechanisms

CER • Once emission reduction is achieved, verified and certified it becomes Certified Emission Reduction (CER) • CER has a market value and can be used as offset by Annex 1 Countries or companies to meet their commitments to Kyoto Protocol • Expected to hit $ 10 billion to $ 1 trillion by 2010 as developed countries cut GHG emissions as required by the Kyoto Protocol

Economic Issues

India’s Situation

CDM Prospects for India • CDM prospects is stated to be of the order of 500 mt of CO2 equivalent including 90 mMT of renewables • About $ 1 billion is the anticipated inflow of capital expected to India • Small scale Projects in India such as small offgrid electricity generation plants and renewables are supposed to be hot favorites

Some Industry Cases : India • Sagar Sugars & Allied Products Ltd , Andhra Pradesh of Mohan Breweries and Distilleries Group of Companies • Started a cogeneration plant to supply the entire requirements of AP Transmission Company with which it has entered into PPA (Rs 2.25/kwh with 5% escalation) to erect a 132 kVA transmission line and supply power • USAID Assistance/IREDA Loan

Some Industry Cases : India • Benefits Reduced heat rate processing ie less than 6500 kcal/KWH and high net power generation per ton of cane fiber (ie 350 – 520 kWh/to of fiber) Power generation 90- 160 kWh/ton of cane which provides a surplus of 80 – 140 kWh/ton for the grid)

Some Cases from the World • Ethanol as a Fuel Oxygenate that allows regular fuel to burn more completely thus reducing tailpipe emissions from vehicles • Shell Greenhouse Project – spends $1 billion on renewables over 5 years • GE’s Ecoimagination which is made of 32 clean technology products with revenues of $10 billion in 2005

Rate of Return for Green Companies • Jeroen Derwall of the RSM Erasmus University in Rotterdam found that the average annual return during 1995-2003 on a portfolio of companies that ranked high in greenery was 12.2% as compared to normal return of companies at 8.9%

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Recent Politics

G 8 and Climate Change • At the 2005, G 8 summit in Gleneagles, Scotland, Britain's Prime minister Tony Blair stated that climate change and Africa as the two most important issues for the heads of state and government to discuss • A year on, the top item on the summit agenda is energy, but from a security rather than climate-change perspective.

G 8 and Climate Change • At Gleneagles, Tony Blair had also invited five heads of state – from China, India, Brazil, Mexico and South Africa – for a "G8+5" dialogue on climate change. • This produced a "Gleneagles plan of action" which was, in turn, given to the then president of the World Bank Paul Wolfowitz, to take forward and report back to the 2008, G8 meeting, to be held in Japan.

Blair Vs Brown • Meanwhile, the Stern Review on the economics of climate change – commissioned by the then Britain's chancellor of the exchequer Gordon Brown has come up with strong action points • Calls for 1% of global GDP to be invested to handle Climate Change • Impose Environmental Taxes

India & Climate Change: CDM as Viewed by CSE • The Clean Development Mechanism (CDM) was created to tackle climate change. It has, instead, become a corrupt and cheap way for the rich North to avoid making real emission reductions, says on-the-ground research by the Centre for Science and Environment. • India should make CDM a part of its future negotiation strategy. It should work towards making CDM socially and ecologically effective.

CDM • The UN designed-CDM procedures make it easy for the rich polluting nations to buy cheap credits for reduction of carbon emissions. • As a result, CDM has turned into not only a cheap development mechanism

CDM • They take on the risk of implementing projects; pay between US $30,000-100,000 for a lengthy certification process to get projects cleared by the United Nations Framework Convention on Climate Change (UNFCCC)

CDM • They enter into ERPA (Emission Reduction Purchase Agreements) that puts the penalty of non-compliance on the South. Yet, the price that developing countries get for credits is a meagre US $5-10 per tonne of carbon dioxide, while carbon credits get traded in Europe for US $27.

CDM • This perversion of CDM’s stated purpose works because rich countries have created a mechanism so that they can get the cheapest deals – buying emission reductions from the developing countries by directly negotiating with private companies, through the involvement of privately hired auditors to certify the projects.

G 8 Summit in Potsdam March 2007: Parties • Environment Ministers of the G8 countries as well as of Brazil, China, India, Mexico and South Africa, the European Commissioner responsible for the environment and senior officials from the United Nations and the IUCN

Climate Change (Post Potsdam): Key Issues • Integrating climate protection with sustainable development and economic growth • Recognizing existing, encouraging and supporting further action by industrialized countries • Realising the full potential of technology • Using a variety of incentive systems

Climate Change : Key Issues • Adapting to the inevitable changes • Reducing emissions from deforestation • Re-linking of biodiversity, climate change, economics and poverty eradication is necessary to adequately address these global challenges.

The Poznan Summit – COP 14 and MOP 4 • To work on a post 2012 successor to the Kyoto Protocol that will be finalized in COP 15 in Copenhagen in December 2009 • Members of the Indian government delegation here have told IANS there is no point in even talking about a Bali roadmap or a post-2012 global pact, when the current phase of the Kyoto Protocol expires. They want the industrialised countries to honour their current commitments before talking about the future.

PoznanSummit • Instead, governments in many industrialised countries are trying their best to renege on their historical responsibilities, and are ready to use the Poznan summit for another round of Sindia (as the China-India combine is being called here) bashing on the plea that these two countries threaten to become the world’s largest GHG emitters in the next decade.

Copenhagen 2009 – COP 15 • • • •

Successor to Kyoto Carbon Capture and Storage Trade and Climate Change Issues Financing

Thank You