69996 April 6, 2010 TECHNICAL ASSISTANCE TO THE DEPARTMENT OF ECONOMIC AFFAIRS, MINISTRY OF FINANCE, ON CLIMATE CHANGE ISSUES Technical Notes These draft technical notes have been prepared as a part of the Technical Assistance requested from the World Bank by the Department of Economic Affairs, Ministry of Finance (MoF) on Climate Change issues as a run up to the Climate Change conference held in Copenhagen in the second week of December 2009. THE WORLD BANK Table of Contents 1. Technical Note on Financing Mechanisms for Climate Change: Issues and Options for India Prepared by Dr. Shreekant Gupta, Associate Professor, LKY School of Public Policy, Singapore 2. Technical Note on the Fiscal Dimensions of Climate Adaptation Prepared by Dr. Anil Markandya, Scientific Director, Basque Climate Change Research Centre, Spain 3. Technical Note on Climate Change, Technology Transfer and Intellectual Property Rights Prepared by Dr. Aparna Sawhney, Associate Professor, Centre for Trade and Sustainable Development, Jawaharlal Nehru University 4. Technical Note on Energy-Intensive Sectors of the Indian Economy: Options for Low-Carbon Development Prepared by the World Bank Team 2 Part I Technical Note on Financing Mechanisms for Climate Change: Issues and Options for India 3 I. Financing Mechanisms for Climate Change: Issues and Options for India 1. The problem and the global response so far Recent reports of the Intergovernmental Panel on Climate Change (IPCC) highlight the risks that climate change poses to our society‘s future economic and social progress1. More importantly, scientific research suggests it is human activities that are contributing to the rise in global temperatures2. Rapid and deep cuts in greenhouse gas (GHG) emissions are therefore essential to prevent a dangerous increase in global temperature with potentially catastrophic consequences for humankind. Achieving these deep cuts in a relatively short time (next 2-3 decades) and adapting to the global warming that would still occur residually, is a gigantic task and requires efforts on a commensurate scale. Echoing this sentiment Yvo de Boer, Executive Secretary, UNFCCC stated last month at the Barcelona meetings ―a successful outcome at Copenhagen needs to capture a level of ambition that matches the scale of the problem.‖ The key issue is given the global public good nature of GHG abatement these efforts have to be collectively undertaken by all nation states of the world and in a coordinated manner. Thus, while the cost of mitigating GHGs emissions (henceforth simply referred to as mitigation) is borne by individual countries, the benefits of mitigation are global. With regard to countries such as India the need for mitigation has to be balanced with the equally pressing need for economic development. Hence the focus of this paper is on the international and domestic financial architecture for mitigation. With regard to adaptation, the problem is that of a global public bad, namely, the pernicious effects of climate change caused by relatively few countries, most severely impact on many others that did not create the problem in the first place. An extreme example is small island nations with negligible GHG footprint whose very existence is jeopardized by climate induced sea-level rise. Even at this level of generality it is apparent that decisive collective action on mitigation and adaptation is mired in unresolved questions of which country should do what, how much, how soon, and of course, who should pay for it and to whom? The latter issue is compounded by debates on the historical culpability of various nations. Put differently, the problem is about financing GHG mitigation and adaptation efforts in a manner that is acceptable to all parties. Until that happens, a binding international agreement is unlikely to emerge. The international response so for has been in the form of the United Nations Framework Convention on Climate Change (UNFCCC) that was adopted in 1992 with an objective to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous man-made interference with the climate system. In 1997, the Parties to the UNFCCC adopted the Kyoto Protocol in recognition of the need to strengthen the developed countries commitment to the objectives of the Convention. The UNFCCC and its Kyoto Protocol are the only global mechanisms to deal with climate change. Under the protocol, based on the principle of ―common but differentiated responsibilities,‖ articulated in UNFCCC, a number of industrial countries have taken up targets to reduce their GHG emissions below their 1990 levels during the period 2008-2012, also known as the first commitment period (see Annex 1). Although a total of 166 countries and other governmental entities have ratified the 1 The scientific community has reached a strong consensus that the climate is changing. Current projections show further global average temperature increases of between 2.0oC and 6.3oC by 2100, while warming in India is expected to be even higher. 2 The concentration of carbon dioxide (CO2) in the atmosphere—the most important greenhouse gas (GHG)— has increased from approximately 277 parts per million volume (ppm) in 1744 to 384 ppm in 2007. 4 agreement (representing over 61 percent of emissions from industrial countries), a notable exception so far has been the United States which accounts for a large share of global emissions.3 Countries are currently negotiating a second commitment period under the Kyoto Protocol, i.e. emission reduction targets beyond the year 2012. Two years ago at UNFCCC COP13 in Bali in December 2007, there was consensus on the importance of addressing climate change. This culminated in the Bali Action Plan, an agreement to launch negotiations towards long-term cooperative action (LCA) by all countries (see Table 1 for highlights). The framework for negotiations embraced mitigation of climate change (including, for the first time, consideration of reducing emissions from deforestation and land degradation), adaptation, technology development and transfer, and provision of financial resources in support of developing countries‘ actions. But perceptions of countries continue to differ in terms of the global responsibility to mitigate climate change. While it was hoped an ‗equitable‘ and ‗sustainable‘ agreement would be in place by end- 2009 at the COP15 meeting in Copenhagen this did not happen. The reason according to UNFCCC was that in the run-up to Copenhagen little progress had been made on the two key issues of mid-term emission reduction targets of developed countries and finance that would allow developing countries to limit their emissions growth and adapt to the inevitable effects of climate change. As de Boer noted ―without these two pieces of the puzzle in place, we will not have a deal in Copenhagen‖ and events proved him correct With reference to the second piece of the ‗puzzle‘ as de Boer put it, the need for financing is gigantic. Irrespective of the nature of the global agreement that will (hopefully) eventually emerge and the type of financial architecture to support it, one thing is clear, namely, the resources needed to tackle climate change are unprecedented compared to existing development and global public goods financing. To stabilize atmospheric concentrations of GHGs at levels that may be considered ‗safe‘, estimates suggest the additional investment costs for mitigation could be anywhere between US$200 billion to over US$1 trillion per annum (Table 2).4 This amount would be greater if, as a growing body of science indicates, even lower levels of GHG concentrations are needed to avoid catastrophic impacts. In addition, at least tens of billions of U.S. dollars per year should be added to finance the cost of adaptation due to the inevitable amount of warming that the world would experience, albeit the estimates of the adaptation cost are very incomplete and preliminary (Table 3). Suffice it to say that the emerging and yet incomplete cost estimates of additional investments needed in developing countries—from public and private sources—are on the order of hundreds of billions of dollars a year for several decades. Current climate-related financial flows to developing countries, though growing, cover only a miniscule fraction of the estimated amounts that developing countries need over the next several decades (Table 4). Further, most proposals currently on the table are modest, incremental and piecemeal and are clearly not commensurate with generating the flows indicated in Table 2. In Section 5 below we cite large funding commitments made by developed countries, but note that this in the context of the non-binding Copenhagen Accord and whether these flows will materialize is an open question. Meaningful action on climate change thus calls for strengthening the international financial architecture for development at an unprecedented scale. This includes appropriate reforms in development assistance mechanisms in terms of external assistance instruments—loans, concessional 3 In the U.S., President Obama has promised to reduce carbon emissions to 1990 levels by 2020, and to 80% below 1990 levels by 2050 using cap-and-trade programmes. It is, however, unlikely any climate agreement will pass US Congress given domestic compulsions and in the absence of any commitments from large developing countries. 4 While these numbers may pale in comparison to the expected Global GDP of US$76 trillion in 2030 and US$100 trillion in 2050, the burden of mitigation and adaptation is expected to fall disproportionately on developing countries. 5 financing, grants, risk mitigation through equity and guarantees—from bilateral and multilateral sources. Indeed, this paper argues that strengthening and reform may not suffice and a whole new system may need to be put in place. Until an adequate global policy response and a financial architecture are negotiated (one that would send adequate, predictable and long-term signals to leverage public and private resources), it will be impossible to cover the expected financing gap. In the meantime it is also critical to explore innovative mechanisms (eventually tapping new sources of support) to scale up funding to the required level. Slow progress in agreeing on and creating such architecture will delay climate action mitigation in developing countries with catastrophic consequences. The reason is that as the economies of these countries grow and as they eliminate energy poverty, the investment decisions they make could lock them into a high carbon trajectory. 2. The need for sustainable economic development and eliminating energy poverty in India India has ratified the Kyoto Protocol but as a developing country it is not required to undertake binding cuts in GHG emissions under the principle of ―common but differentiated responsibilities.‖ Rather, it is expected to contribute to global mitigation efforts through receiving transfer of technology and additional foreign investments via international financial mechanisms into sectors such as renewable energy, energy efficiency, and reduction of industrial gases that contribute to climate change, and sound transport and waste management and afforestation and reforestation projects. Investment in energy is particularly critical for India to secure economic development and to eliminate energy poverty as a core component of overall poverty alleviation. According to the Energy Development Index (EDI) devised by the International Energy Agency (IEA), India‘s score in was 0.295 compared to 0.808 for South Africa, 0.736 for Brazil and 0.636 for China (IEA 2007)5. This is not surprising since in 2005 about 56% of rural Indian households (about 380 million people) had no access to electricity. Many poor households rural and urban rely heavily on inefficient and polluting traditional fuels and stoves to meet their energy needs for cooking and heating, because they cannot afford modern commercial forms of energy or because it is simply not available. In all 668 million people (of which 89% were rural) relied on biomass for their energy needs (IEA 2007). The World Bank calculates that energy poverty levels such as these can reduce gross domestic product (GDP) growth by as much as 4% annually. In addition, according to the World Health Organization, the use of fuelwood and dung for cooking and heating causes over 400,000 premature deaths in India annually, mostly women and children. India is therefore rightly striving for a quantum increase in energy infrastructure investment over the next two decades to sustain and accelerate its economic growth. In 2007 it was estimated that to meet its future energy needs, India would need to expand its gross capacity to exceed 400GW—equal to today‘s combined capacity of Japan, South Korea and Australia (IEA 2007)6. Thus, it was estimated 5 The EDI uses three indicators: the share of households using cleaner, more efficient cooking and heating fuels (liquefied petroleum gas, kerosene, electricity and biogas); the share of households with access to electricity; and electricity consumption per capita. The third indicator is used to capture the level of overall energy development (IEA 2007). The EDI is on a scale from 0 to 1. 6 This estimate was based on the ‘Reference Scenario’. IEA used a scenario approach to examine future energy developments. Its projection period ran up to the year 2030. The reference or baseline scenario assumed that there were no new energy-policy interventions by governments. But it did take account of those government policies and measures that had already been adopted by mid-2007, regardless of whether they had yet been fully implemented. An ‘Alternative Policy Scenario‘ analysed the impact on global energy markets of a package of additional measures to address energy-security and climate-change concerns. Finally, a third ‘High 6 that India would need to invest $1.25 trillion (approx. Rs 58 trillion) in energy infrastructure in the period 2006-2030 and that more than three-quarters of this investment would be in power infrastructure (Figure 1). The implication was that attracting investment in a timely manner would be essential if economic growth was to be sustained. In order to avoid becoming a major new contributor to climate change means India‘s huge energy investments must also be ―clean‖. This involves, inter alia, using the latest low-carbon and energy- efficient technologies, such as decentralized solar, wind, solar-thermal, bio-energies, nuclear, clean coal (high-efficiency coal-fired power stations coupled with carbon capture and sequestration facilities) and smart grids. 3. Existing financing instruments for climate change: the CDM and its shortcomings Article 17 of the Kyoto Protocol specifically allows emissions trading among Annex B (mainly industrialised) countries as a means of fulfilling their commitment to reduce GHG emissions7. As far as developing countries (or non Annex B countries) are concerned, the Clean Development Mechanism (CDM) is the only Kyoto flexibility mechanism that explicitly attempts to engage them in international GHG abatement efforts8. It is similar in nature to joint implementation (JI) except that JI takes place between developed (Annex B) countries, whereas CDM refers to cooperative agreements in which the host is a developing country. Specifically, under CDM developed countries (or firms in those countries) fund GHG abatement projects in developing countries where abatement costs are much lower. In turn, the developed countries receive credits ("certified emission reductions" or CERs) that can be used to offset their emission reduction obligations. Thus, as far as India is concerned CDM is the key financial instrument for climate change so far. The CDM allows net global GHG emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries. A crucial feature of an approved CDM project is that it has to establish that the planned reductions would not have occurred without the additional incentive provided by emission reductions credits, a concept known as "additionality." As stated earlier, as a developing (non-Annex B) country, India does not have any emission reduction target, but it can sell CERs pursuant to CDM, to large emitters covered by the European Union‘s Emission Trading Scheme (ETS), countries that have emission reduction targets under the Kyoto Protocol, or any other entity that wishes to purchase such CERs for compliance purposes. It can also supply ERs and VERs for the growing voluntary markets. India continues to be major player in the global CDM market which rather small and pales in comparison to EU‘s allowance market--the value of CDM transactions is estimated at approximately US$7.2-7.4 billion with potential leveraging of projects worth US$36 billion and a secondary CDM market of about US$26 billion (Tables 4 and 5). From the beginning, the Government of India has considered CDM to be a market mechanism targeted mostly at the private sector. The government‘s role has been limited to facilitating CDM through capacity building initiatives and the issuance of clear and transparent rules for project approval. As a result, India has demonstrated an early mover advantage and has one of the largest portfolios of carbon finance projects in the world, with more than 700 projects having been approved Growth Scenario‘ incorporated significantly higher rates of economic growth in China and India than those in the Reference Scenario (though still below current rates). For details see IEA (2007). 7 This is also referred to as "cap and trade" since emission caps or limits or quotas are allocated to firms in Annex B countries which can then be traded. 8 Joint implementation (formerly AIJ) and emissions trading being the other two. 7 by the designated national authority (DNA), one of the first steps in the process (World Bank 2008). Of those, 283 have been registered by the CDM Executive Board, which is a step required to bring value to the asset. The size of the portfolio is often used as a measure to demonstrate India‘s success in the carbon market. However, other indicators demonstrate that India is not the market leader in the CDM. For instance, in India was the second largest supplier of emission reductions in 2008 by volume of emission reductions sold but with only 4% far behind China at 84% (Figure 2). By most accounts, India is being outperformed by China, which is clearly dominating the CDM, in part due to the average project size (China has twice the average size than India), and notable absence of both the public sector and the financial players from India (op. cit.). The reasons for this performance are many and varied. This note does not to go into detail about India‘s performance in the CDM market since that has been discussed exhaustively at other places (see for instance, World Bank 2008). It is important, however, to note that the CDM as a financial instrument is intrinsically flawed at a conceptual level. Thus, India‘s relatively weak performance may be a blessing in disguise. 3.1 Shortcomings of CDM First, it should be noted that CDM is implemented on a project-by-project basis--the basic rationale for undertaking a CDM project is the difference in marginal abatement costs (MACs) between the host country and the Annex B country. Unlike the market established under the EU-ETS where EUAs (Eurpoean Allowances) are traded more or less like commodities, in the CDM market it is hard to decouple the CERs generated from the project, per se, (at least in the first instance though secondary trading may take place). Thus, the CDM market is a project-based market and is highly imperfect-- the price for CERs, the basic ‗currency‘ of the market is very ‗nosiy‘ and not necessarily the determined by the equilibrium of demand and supply. In fact, the behaviour of CER prices is imperfectly understood and has not been adequately studied. CER prices are based on a number of factors which affect the project and thereby the value of CERs. These include European Allowance (EUA) prices (the price of allowances or permits under the EU-ETS), the financial position of buyers and sellers of CERs, the terms and conditions of the sale which include delivery guarantees offered, the volume of CERs that are likely to be generated, project validation and registration process, the cost of the Project Design Document (PDD) and who is supposed to pay, sovereign risk, stage of project development, quality risk, delivery risk, registration risk, and finally access to market (TFS Green 2008). Unlike tradable permit markets with an observable price such as the EU-ETS, division of gains from trade (the difference between MACs) is an important issue for CDM projects. Some researchers have suggested that rather than receiving a competitive market price for emission reductions, developing countries may simply be paid the actual cost of abatement, perhaps with some mark-up (Chander 2002). On the other hand, Babu and others (2002) posit that the total gains from CDM as well as the share of developing countries will depend on their relative bargaining power vis-à-vis developed countries. This result holds whether CDM projects take place between individual firms across countries or through bilateral negotiations between governments. Thus, while a project-specific basis for defining and creating CERs under CDM does imply bilateral transactions (betweens firms or governments), a situation where the host country is required to accept payment at its MAC (or a small markup over it) is only one of a set of possible outcomes. The actual outcome depends on how well CDM itself is defined as an institution and how well market institutions (e.g., brokerage for secondary transactions) evolve. As discussed below, it is possible that developing countries produce CERs suo moto and sell them into an active international exchange system. Also while bilateral exchange with monopsonistic rich buyers is a possibility, also eminently possible is a situation in which a big CER supplier (like China) could act like a dominant firm monopolist. In sum, it can be argued that for a variety of reasons that have to do with the nature of CDM, per se, and the working of the CDM market, CER prices are too low compared to the shadow price of CO2 emissions. The average price of a CER in 2008 was €11.46 (US$16.78) and that too reflected a 16% 8 increase over 2007 average price. It does not serve the interest of India to be selling its carbon abatement opportunities at such a low price. If the government had suo moto created and banked its own CERs (if it thought the current price was too low) this would have solved the problem. But that has not happened. More fundamentally, the question facing India in this context is whether to cash in on CDM opportunities now or to wait. Related to the low price of CERs, the second problem with CDM is that if India were obliged to take on emission reduction commitments in the future, implementation of low cost abatement projects (the so-called low hanging fruit) now would leave it with higher cost options later. It is a moot point whether additional ‗low hanging fruit‘ opportunities would keep arising. This would happen only if convergence of technologies between the North and South did not occur. This (lack of convergence) seems unlikely especially with deregulation and globalisation taking place in several economies in the South particularly India and China. Therefore, it seems plausible to view the ‗low hanging fruit‘ as a one time opportunity, all the more reason to not to sell at throwaway prices. It can of course be argued that the main problem with CDM is not that the most lucrative projects would be taken up first (as they should be) but the possibility that the host country receives inadequate compensation. The latter of course, is a function of the way CDM is set up as argued earlier. In any event, it would perhaps be more desirable to have global emissions trading where developing countries such as India could sell their emission reductions at a competitive market price. This is discussed in greater detail below. 4. Criteria for accessing additional finance for mitigation activities by India Any discussion on what must replace the current (clearly inadequate and flawed) financial architecture has to begin with an articulation of basic principles on which the new structure should be based. Elements of these are contained in the position that India and other developing countries have consistently taken at international negotiations. It is useful to collate these principles and to spell out their implications for financing mechanisms for climate change. One clear conclusion is that the focus on the level of India‘s current and projected GHG emissions (and by corollary pushing it towards binding mitigation commitments) ignores the role of past emissions by industrialised countries and also ignores that the global greenhouse commons need to be shared equitably by all human beings irrespective of where they live. These principles can be paraphrased in the well known public finance concepts of horizontal and vertical equity. Thus, ‗vertical equity‘ (interpreted here as ‗inter-temporal equity‘) in the context of climate requires that an agreement must take into account cumulative emissions, whereas ‗horizontal equity‘ requires equity in current (and future) per capita emissions across countries. These are elaborated below. 4.1 Climate change is due to the accumulated stock of GHGs in the atmosphere9 In current discussions it is often forgotten that climate change is caused by the accumulated stock of GHGs in the atmosphere (stated as a concentration in ppm of CO2 equivalent) rather than the flow of GHG emissions per unit time, e.g., per year10. For sure, not much can be done about past emissions and the only option is cut the flow of future emissions. However, to equate current annual emissions 9 In economic jargon this would be referred to as a stock externality and not a flow externality. That is, the externality (side-effect of economic activity) is caused by the stock of GHGs and not by the flow (annual emissions) of GHGs. 10 Given the slow decay rate of CO2 in the atmosphere what this means is that a ton of CO2 emitted 100 years ago contributes to an increase in concentration just as much as a ton of CO 2 emitted today (a CO2 in the atmosphere has a half-life of 100 years). 9 to climate change is to ignore the role of past emissions. Thus, two countries with identical per capita emissions at present but with very different historical emissions cannot be said to have contributed to the problem in the same amount. The issue of allocating GHG reduction obligations amongst the Parties to UNFCCC, is known as differentiation of future commitments. As part of the negotiations of the Kyoto Protocol, the delegation of Brazil had presented one approach for allocating these reductions among OECD countries and economies in transition (Annex I Parties) based on the effect of their cumulative historical GHG emissions from 1840 onwards, on global average surface temperature. While the Brazilian Proposal was initially developed to further discussions on differentiation of commitments among Annex I countries, it can also be used as a framework for allocating emission reduction burdens across Annex I and non-Annex I countries. The assumption is that it is possible to apportion the contributions to the change in an indicator (say temperature) between a number of sources and emitters (e.g. nations, regions). Although it was not adopted during the Kyoto negotiations, the Brazilian Proposal did receive support, especially from developing countries, and the Third Conference of the Parties (COP-3) requested the Subsidiary Body on Scientific and Technical Advice (SBSTA) to further study the methodological and scientific aspects of the proposal. Country-level estimates of CO2 emissions from fossil fuels go back as far as 1850. Based on that record, the United States ranks first and the EU second in cumulative emissions. In most cases, a country‘s historic share of global emissions differs from its current share. For most industralised countries, the historic share is higher, in many cases significantly so. The EU, with 16 percent of current fossil fuel emissions, accounts for nearly 27 percent of cumulative emissions. For the United Kingdom, an early industrialiser, the difference is even more pronounced: its historic share is nearly three times its current share. Conversely, the historic share for many developing countries is sharply below their current share of global emissions. China and India‘s cumulative shares (7.6 percent and 2.2 percent, respectively, since 1850) are only half their current shares. Overall, developing countries, which generate 41 percent of current fossil fuel emissions, have contributed only 24 percent of cumulative emissions. 4.2 Equity in per capita emissions This principle has been articulated consistently by India. Thus, at the G8+5 summit in Heiligendamm in Germany in June 2007, Indian Prime Minister Dr. Manmohan Singh clearly stated, ―We wish to engage constructively and productively with the international community to preserve and protect the environment. We are determined that India’s per-capita GHG emissions are not going to exceed those of developed countries even while pursuing policies of development and economic growth.‖ (emphasis added). The importance of this statement cannot be over-emphasised. In effect, what it means is that India is willing to negotiate on the basis of equal per capita emissions. The corollary of the statement is equally important. It means that India is willing to accept binding targets consistent with per capita emission levels in developed countries (which at current astronomical levels is clearly a non-binding constraint). But this puts the ball firmly in the court of developed countries to lower their per capita emissions and force India to follow suit. If, for instance, the G8 countries were to commit to deep emission cuts that translated into low per capita emissions levels (say as low as 3-5 tons of CO2 per capita) India is committed to match them. It is also significant to note that responding to the Indian PM‘s statement, German Chancellor Angela Merkel in principle agreed to ‗contraction and convergence‘ (i.e., where G8 emissions contract and where the per capita emissions of developed and developing countries converge)11. 11 In a recent working paper by India’s Ministry of Finance, the authors state “Such ideas should be developed further into practical and pragmatic strategies within the ambit of UNFCCC in accordance with the principle of 10 To elaborate, the (implicit) Indian position is that it would be agreeable with a global cap and trade system of GHG emissions as long as the baseline was set on equal per capita allocations. The problem is that this has not been translated into a concrete proposal on which a new financial architecture can be based. This issue is addressed in Section 7 later. More immediately we review recent developments with regard to climate finance at COP15 as well as different financing instruments that have been proposed (or in other words ‗are on the table‘). 5. Potential international funding mechanisms 5.1 Developments at COP15 The 15th Conference of Parties to UNFCCC (COP 15) concluded at Copenhagen in December 2009. While a legally binding agreement for mitigation actions post-2012 did not emerge, some countries including India (and China) have agreed to the so-called Copenhagen Accord12. Without going into details on the agreement, we note its salient features with regard to climate finance. While the Copenhagen Accord is a legally non-binding political agreement it is an input into the UN two-track negotiating process. What is also noteworthy is that the agreement was authored by the United States as its first major engagement with the UNFCCC process post-Kyoto. Given that the US is the world‘s biggest contributor to the stock of GHGs and is also by far the world‘s economy, the provisions of the Copenhagen Accord vis-à-vis climate finance have significance. Thus, the agreement commits developed countries to provide $30 billion over three years (2010-12) through international financial institutions for adaptation and mitigation13. Under the accord these countries also commit to provide $100 billion per year by 2020 ―to address the needs of developing countries.‖ But it is important to note these flows are to come from ―a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.‖ (emphasis added) Thus, it is moot whether some of these funds may constitute a zero sum with existing multilateral and bilateral flows including FDI, portfolio investment/FII and ODA to developing countries. A High Level Panel is to be set up ―under the guidance of and accountable to the Conference of the Parties (COP) to study the contribution of the potential sources of revenue, including alternative sources of finance, towards meeting this goal‖ (Copenhagen Accord, Para 9). The timeline and next steps for setting up this panel, however, have not been announced so far. Similarly, the accord mentions a Copenhagen Green Climate Fund to channel these proposed large flows. Again, further developments on this Fund are awaited. 5.2 Other potential funding mechanisms14 common but differentiated responsibilities and respecting capabilities and specific national circumstances.� (Prasad and Kochher 2009, p. 19) But they do not elaborate on it. 12 India‘s agreement to be ―associated‖ with the accord was conveyed to UNFCCC this month (March 2010). 13 Para 8 of the Copenhagen Accord states, ―(S)caled up, new and additional, predictable and adequate funding as well as improved access shall be provided to developing countries, in accordance with the relevant provisions of the Convention, to enable and support enhanced action on mitigation, including substantial finance to reduce emissions from deforestation and forest degradation (REDD-plus), adaptation, technology development and transfer and capacity-building, for enhanced implementation of the Convention.‖ 14 This discussion is based on a briefing note prepared by the World Bank for the Department of Economic Affairs. 11 In this section we explore the scope for other financing instruments that have been proposed. While these ideas may be preliminary they are important nonetheless as representing ‗out-of-the-box‘ approaches. (a) The Tobin tax (named after its late proponent Nobel Laureate James Tobin) is a tax on the value of all foreign currency conversions, whether on trade or capital accounts, short- or long-term. Its advocates see it as having the beneficial effect of reducing exchange rate volatility by raising the price of, especially, short run movements into and out of currencies and using the resources to finance global public goods. Given the vast scale of currency transactions, the potential yield of even a low tax is considerable. A tax of 0.1 percent could thus generate about $300 billion a year (assuming 250 trading days). To be effective, however, the Tobin tax would have to be applied at the same rate, and on the same base, by all countries15. A major issue with the implementation of such as a tax is that an unprecedented degree of administrative cooperation is likely to be required. Countries committed to the scheme would need assurance not only on the statutory rates are set appropriately elsewhere, but that the tax is properly collected. There is also the danger that the tax could be avoided by using financial instruments that are not subject to the tax to effect foreign exchange transactions. For example, if the tax is defined in terms of the exchange of bank deposits, trading could take place through Treasury bill swaps in currencies with liquid T-bill markets. It is also suggested that the Tobin tax would certainly not prevent speculation against misaligned exchange rates, as the expected profits (should the speculative attack succeed) are typically several multiples of any reasonable level of the tax. By reducing the volume of trade, the tax may even increase exchange rate volatility. (b) A global carbon tax would be based on the carbon content of fuels mainly coal, oil and natural gas16. Since private decisions by firms and households on energy use do not factor in their effects on climate change, a tax would serve to correct this ‗negative externality‘ and reduce CO2 emissions. Moreover, since the social costs of CO2 emissions in any country are to a large degree borne by other countries, no country acting alone has proper incentives to set the corrective tax high enough (this is the problem of GHG abatement as a global public good discussed at the beginning of this note). The revenue raised by a tax set at a level to have a significant impact on emissions would be substantial. It has been estimated a global tax of $10 per ton of carbon content, for example, would raise about $55 billion in its first year of operation. There are, however, a number of issues that need be considered with regard to its implementation. First, a carbon tax would alter the use of capital, labor, energy, and other inputs as firms and households would substitute fossil fuels by other inputs (e.g., capital, labor, and non-fossil energy). The speed and extent of substitution would, of course, depend on the short-run and long-run elasticity of substitution in different sectors and industries. The net effects would certainly be to reduce economic activity and raise prices on the whole (with some sectors gaining and other losing) Secondly, within any country a carbon tax (like most commodity-based taxes) would be regressive and have potentially serious distributional impacts—both across regions and industrial sectors—for two reasons. First, poor households spend a higher fraction of monthly expenditure on energy than other income classes. Secondly, since energy production, use, and cost vary by region some parts of a country would bear a higher tax burden than others, putting them at an economic disadvantage. Carbon taxes would also fall most heavily and directly on energy producing sectors and on industries that depend on coal as well as other fossil fuels. 15 The Tobin tax would be subject to evasion and avoidance, like any tax. Individuals could move their transactions to jurisdictions that do not impose the tax, just as many banks now operate out of off shore centers to escape taxation. 16 In principle, a system of tradable permits or regulatory control could achieve the same outcome as a carbon tax. Tradable permits could also raise the same revenue (from their initial sale or auction). 12 Similarly, across countries relatively high users of fossil fuels would be most adversely affected. As importers of energy intensive manufactures (primarily capital goods), developing countries could end up bearing the burden of a carbon tax applied to emission generating activities. In general, it is commonly perceived that unless accompanied by compensatory transfers, the relative costs of action are likely to be higher for developing countries, given that their relative contribution to the accumulation of greenhouse gases is expected to grow faster than that of the OECD countries over the next century. (c) An international aviation tax has also been discussed extensively as a source of finance for development or as part of CO2 mitigation17. On policy and administrative grounds the case for increasing taxes on international aviation is strong: the indirect tax burden on international aviation is very low, yet it contributes to GHG emissions and other forms of pollution (local air quality, noise)18. But the manner in which aviation taxes would be levied matters: a tax on aviation fuel would address the key border-crossing externalities most directly; a tax on final ticket values would have greater revenue potential, and perhaps some distributional advantage; and departure/arrival taxes face the least legal obstacles, but are much blunter instruments. It has been suggested a fuel tax of $0.20 per gallon or a 2.5 percent as a ticket tax would raise a little under $10 billion annually if levied worldwide and almost $3 billion per year if levied in Europe alone19 (the EU is in any case bringing all airlines domestic and foreign using its airports under the EU-ETS). Many countries, however, including large, high-income countries with substantial share of the aviation market and smaller, low-income countries heavily reliant on tourism, are strongly opposed to any tax on aviation. In any event, the current economic downturn, uncertain future fuel prices and precarious airline finances makes such a tax unlikely in the short- to medium-term. 7. A new financial architecture and instruments for climate mitigation: a paradigm shift The role of markets in sending appropriate signals through prices that alter behaviour is crucial. Simply put, a zero price signals that the resource is free whereas a positive and rising price is a strong signal and (creates) an incentive for conservation. Studies have shown that countries with low energy prices also display higher energy intensity (Newbery 2003). The same is the case for carbon. This role of markets cannot be substituted by piecemeal and incremental project financing. Nor can it be substituted proposals from developing countries for x% of the GDP of developed countries to be transferred to them. The problem with the x% proposal (recently a figure of 1% was proposed by India) is that the figure is not based on a analytical framework and can be countered by a fraction of x. The basic problem is that x is by definition ad-hoc and arbitrary. To put it bluntly, the situation reduces to bargaining (haggling?) whose outcome is based on a number of non-transparent and unpredictable factors. To be effective, we need a market price of carbon emissions that reflects the social costs of carbon emissions. Moreover, to be efficient, the price must be universal and harmonized in every sector and country. Participants in the global economy (millions of firms, billions of people making trillions of 17 There are strong arguments for a globally coordinated tax on aviation since currently taxes are inefficiently low as a result of tax competition. Acting independently and rationally, countries set taxes lower (than they would if they acted in concert) in order to avoid jeopardizing domestic carriers and/or passenger volumes. 18 Burning aviation fuel (mostly kerosene) like other fossil fuels contributes to CO 2 emissions. At present aviation accounts for about 3-4 percent of global carbon emissions. But this share is expected to rise significantly and steadily reflecting projected faster growth in aviation relative to other economic sectors. [reference to be added] 19 Michael Keen and Jon Strand (2006). Indirect Taxes on International Aviation, IMF Working Paper, WP/06/124. 13 decisions) need to face realistic carbon prices (compared to the zero price at present) if their decisions about consumption, investment, and innovation are to be correct. This view is echoed by IPCC in its latest report: “An effective carbon price signal could realise significant mitigation potential in all sectors. Modeling studies show global carbon prices rising to 20-80 US$/tCO2-eq by 2030 are consistent with stabilisation at 550 ppm CO2-eq by 2100. Induced technological change may lower these prices ranges to 5-65 US$/tCO2-eq in 2030.� (IPCC, 4th Assessment Report, 2007, Summary for Policymakers, p. 18) A global GHG emissions trading system where the initial allocation of national emissions targets is based on a per capita entitlement to the global atmospheric commons (and also factors in historical emissions), would be consistent with the principles of horizontal and vertical (inter-temporal) equity articulated above. This would be an opportunity to combine the efficiency of the market (an institution often espoused by developed market economies), with the principle of equity or fairness. Thus, working back from a ‗safe‘ concentration level of GHGs (say 450 or 550 ppm) to a ‗safe‘ level of warming (say 20C), total GHG emissions consistent with these targets can be estimated. For CO2 alone it is estimated that emissions would need to be halved by 2050. In per capita terms from a (highly unequally distributed) average of 7 tons annually20 (over 6 billion people) this would imply about 2-3 tons per capita in 2050 (9 billion people). The working of a stylised global GHG emissions market is shown in Figure 3. The figure depicts (differing) marginal abatement cost (MAC) curves for GHG emissions for two regions--the industrialised North and the developing South with the global emission budget fixed as the length of the horizontal axis. MACN is higher than MACS. Emissions in the North emissions are measured from ON and increase to the right. Thus, maximum unconstrained emissions for the North are ONN and its marginal abatement curve (MACN) is drawn sloping up from N. The South‘s emissions are measured from OS and increase to the left and its marginal abatement cost is MACS. Since aggregate business-as-usual emissions (ONN+OSS) would violate the global emission budget (assumed at 20 here for illustrative purposes), under a permit system both regions would move up their MAC curves to where they were equal with a corresponding emissions tax/permit price P*. The North would be a net buyer of emissions from the South. In reality, the initial allocation of the total budget (assumed 20 here), of course, would not be 10+10 as shown in the diagram but the South would get a much higher quota on the basis of equal per capita entitlement. Since it is a zero sum, the North would therefore get a lower initial quota of the fixed emissions. 8. Conclusion A paradigm shift in India‘s proposals for a new financial architecture for climate change mitigation would eschew the current incrementalist and bargaining based approach in favour of a transparent market-based approach. Under this approach India should propose participating in a global cap-and- trade system, but one where the emission targets for each country are derived from a per capita entitlement and take into account historical emissions. What this means in practical terms is that India‘s emissions targets in per capita terms would be significantly higher than its current levels and would also be consistent with the principle of contraction and convergence articulated earlier. The decoupling of this system from current ODA and similar multilateral and bilateral forms of assistance would be clear and unequivocal. The new arrangement is not about ‗aid‘ or ‗assistance‘. It is about a fair division of the global GHG commons based on accepted norms of equity. Hence the use of the word ‗entitlement‘ is key to the discourse. What a global GHG trading system does is that it creates an asset which is allocated equitably across nations. In effect, it then creates a fair and 20 US per capita CO2 emissions at present are approx. 20 tons, EU 10 tons, China 3.5, and India 1.3 tons. 14 transparent mechanism for re-distribution of wealth and one that is not predicated on ad-hoc and arbitrary x% rules. This is the only constructive and meaningful way forward for India. 15 Table 1. Highlights from the Bali Action Plan The Bali Action Plan was formulated by member countries of the UNFCCC at COP 13 in order to enhance the implementation of the Convention and negotiate further actions for a post-2012 period. While reaffirming that socio-economic development and poverty reduction are global priorities, the Bali Action Plan calls for: 1. Enhanced action on mitigation of climate change: o nationally appropriate, measurable, reportable and verifiable mitigation commitments or actions, including quantified emissions limitation and reduction objectives by all developed countries, taking into account differences in their national circumstances; o nationally appropriate mitigation actions by developing countries in the context of sustainable development, supported by technology and enabled by finance and capacity building in a measurable, reportable and verifiable manner; o policy approaches and incentives relating to emissions reductions from deforestation and forest degradation in developing countries; o cooperative sectoral approaches and sector-specific actions, as well as market-based approaches. 2. Enhanced action on adaptation to climate change: o international action to support implementation of adaptation actions; o risk management and risk reduction strategies, including risk sharing and transfer mechanisms such as insurance; o disaster reduction strategies; o economic diversification to build resilience. 3. Enhanced action on technology development and transfer to support mitigation and adaptation: o effective mechanisms for scaling-up the development and transfer of affordable and environmentally- sound technologies to developing countries, and ways to accelerate their deployment and diffusion; o cooperation on research and development of current, new and innovative technology; o mechanisms and tools for technology cooperation in specific sectors. 4. Enhanced action on the provision of financial resources and investment to support mitigation and adaptation: o improved access to adequate, predictable and sustainable financial and technical support and provision of additional resources, including official and concessional funding for developing countries; o positive incentives for developing countries to enhance mitigation and adaptation actions; o innovative means of assisting developing countries that are particularly vulnerable to adverse impacts of climate change, including financial and technical support to capacity-building; o incentives to implement adaptation via sustainable development policies; o mobilization of public and private sector funding and investment, including facilitation of carbon- friendly choices. 16 Table 2 Global Estimate of Costs and Investment Requirements for Mitigation Study Estimate Basis WBG, Clean Energy US$30 billion/ annum for power sector in Investment estimate, assuming stabilization at 450 ppm, on top of US$160 billion Framework21 developing countries per year for electricity supply in developing countries over 2010–30, of which 04/2006 currently only half is financed Stern Review22 US$1,000 billion/annum Annual global macroeconomic cost; central estimate by 2050, consistent with 11/2006 stabilization at 550 ppm; represents 1% of global GDP by 2050, ranging from net gains of 1% global GDP to reduction of 3.5% UNFCCC23 US$200-210 billion/annum Estimate of annual global investment and financial flows by 2030, broadly 08/2007 consistent with stabilization at 550 ppm IPCC24 5.5% to -1% (gain) reduction in global GDP Estimate of annual macroeconomic costs to global GDP, ranging from 3% to small 11/2007 increase by 2030 and from 5.5% cost to 1% gain by 2050 for targets between 445 to 710 ppm OECD Environmental Outlook US$350-3,000 Annual global macroeconomic cost, central estimate, consistent with stabilization at to 203025 billion/annum 450 ppm; represents a 0.5% loss to global GDP by 2030 and 2.5% by 2050 or an 05/2008 average 0.1% slow down of growth IEA Energy Technology US$400-1,100 Global cumulative additional investment needs between now and 2050 for energy Perspectives 200826 billion/annum sector estimated at US$17 trillion, or 0.4% of global GDP (~550 ppm), and 06/2008 for energy sector US$45trillion, or 1.15 of global GDP (~450 ppm) 21 World Bank. 2006. Clean Energy and Development: Towards an Investment Framework, available at http://siteresources.worldbank.org/DEVCOMMINT/Documentation/20890696/DC2006-0002(E)-CleanEnergy.pdf. 22 Stern, Nicholas. 2007. The Economics of Climate Change: The Stern Review. Cabinet Office - HM Treasury, available at http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_Report.cfm. 23 UNFCCC. 2008. ―Dialogue on long-term cooperative action to address climate change by enhancing implementation of the Convention,‖ Dialogue Working Paper 8, available at http://unfccc.int/files/cooperation_and_support/financial_mechanism/ financial_mechanism_gef/application/pdf/dialogue_working_paper_8.pdf. 24 IPCC. 2007. Fourth Assessment Report Synthesis Report, available at http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf. 25 OECD. 2008. OECD Environmental Outlook to 2030, available at http://www.oecd.org/environment/outlookto2030. 26 IEA.2008. Energy Technology Perspectives 2008: Scenarios and Strategies to 2050, available at http://www.iea.org/w/bookshop/add.aspx?id=330. 17 Table 3. Estimates of Costs and Investment Requirements for Adaptation in Developing Countries Date Study released Estimate Basis Various academic 1990s on Various Usually sectoral and long term—for instance, end of century—and with widely differing assumptions World Bank 04/2006 US$4–37 Investment to ―climate proof‖ all adaptation-related activities in developing countries (CEIF) as revised billion/annum by the Stern 11/2006 Review IPCC 4/2007 No new estimates, but argue that most studies show a high benefit-cost ratio for adaptive actions Oxfam 5/2007 US$8–33 Costs of immediate priorities similar to those in national adaptation programs of action billion (NAPAs) applied to all developing countries UNFCCC 10/2007 US$28–67 Investment needs for adaptation activities in developing countries in 2030—all sectors, billion in private and public 2030 UNDP (HDR 01/2008 US$86 ―New and additional‖ finance for adaptation through transfers from rich to poor by 2016 to 2007–08) billion/annum protect progress toward the MDGs and prevent post–2015 reversals in human development by 2016 18 Table 4. Existing Resources and Financing Instruments Dedicated to Climate Change Financing Source Role/Scope Mitigation CDM Improves financial returns through long-term purchase agreements for Value of primary CDM transactions: US$7.4 billion in the GHG emissions reductions resulting from climate-friendly 2007, estimated to leverage US$36 billion27 projects GEF TF Finances incremental costs of removing barriers to market US$250 million per annum development of near commercial technologies, institutional (2006–10) development, innovation, piloting, and demonstration Other Grant financing for climate change knowledge products, capacity Trust funds and partnerships housed in MDBs building, upstream project work or pilots Adaptation Adaptation Fund—US$80 million to US$1 billion Funding for the Adaptation Fund will mainly come from a 2 percent million per annum by 2012 (best estimate: US$300 to levy on revenues generated by the CDM US$500 million); LDCF helps in the preparation and financing of implementation of UNFCCC Special Funds (administered by GEF) national adaptation programs of action (NAPAs) to address the most Least Developed Countries Fund ≈ US$180 million; urgent adaptation needs in the least developed countries SCCF supports adaptation and mitigation projects in all developing Special Climate Change Fund ≈ US$90 million countries, with a large emphasis on adaptation SPA is a funding allocation within the GEF Trust Fund whose GEF TF objective is to support pilot and demonstration projects that address Strategic Priority to Pilot an Operational Approach on local adaptation needs and generate global environmental benefits in Adaptation (SPA)—US$50 million till 2010 all GEF focal areas Global Facility for Disaster Reduction and Recovery Partnership within the UN International Strategy for Disaster (GFDRR) Reduction (ISDR), focusing on building capacities to enhance disaster US$8 million in FY07 andUS$40 million FY08 resilience and adaptive capacities in changing climate UNDP Adaptation facilities for Africa: US$90–120 million Other ADB: US$40 million initial capitalization Grants for climate change knowledge products, capacity building, upstream project work or pilots Bilateral resources (e.g., adaptation programs run by national development assistance institutions) CGIAR: Climate-related research for agriculture US$77 million (€50 million) Trust funds and partnerships housed in MDBs Blended Resources for Mitigation and Adaptation Climate Investment Funds ≈ US$6 billion Two trust funds will be created under the Climate Investment Funds:  The Clean Technology Fund will provide new, large-scale financial resources to invest in projects and programs in developing countries which contribute to the demonstration, deployment, and transfer of low-carbon technologies. The projects or programs must have a significant potential for long-term greenhouse gas savings.  The second fund, the Strategic Climate Fund, will be broader and more flexible in scope and will serve as an overarching fund for various programs to test innovative approaches to climate change. The first such program is aimed at increasing climate resilience in developing countries. 27 At this stage, estimates for the future size of the carbon market and potential flows to developing countries are unreliable as they depend on the ongoing UNFCCC negotiation process. 19 EC Global Climate Change Alliance (GCCA) ≈ US$450 million (€300 million)  Thematic Program for Environment and Sustainable Management of Natural Resources (including Energy)—managed by the European Commission Directorate General Development/ EuropeAid (€110 million)  European Development Fund—managed by DEV/AIDCO—budget framework 2008–13 (€280 million) Notes to Table 4: 1. The GEF is the largest source of grant-financed mitigation resources, with about US$250 million per year 28 going to mitigation activities over 2006–10. 2. The CDM unambiguously dominates the project-based market, with more than 1.5 billion Certified Emissions Reductions (CERs) transacted from 2002 onward for a cumulative value exceeding US$16 billion, estimated to have leveraged US$59 billion. JI and AAU/GIS transactions could also contribute to leverage financing for climate action, particularly in Europe and Central Asia countries. There are currently at least 17 funds and facilities managed by MDBs totaling close to US$3 billion, of which a large part (about two-thirds) is already committed. 3. With respect to adaptation, multilateral funds are expected to contribute slightly more than half a billion U.S. dollars over the next few years. Financial resources that will be made available through the Adaptation Fund are difficult to quantify, and could be in the range of US$300–500 million per year until 2012. Adding all possible sources of financing (including bilateral funds and the EC GCCA fund) is difficult due to lack of firm estimates from many new sources, but the total amount appears unlikely to exceed US$1 billion per year in the next several years. 28 In addition, some US$15 million from the Special Climate Change Fund (a GEF-administered UNFCCC Special Fund) are available for technology transfer. With respect to World Bank engagement against climate change, cumulative GEF resources committed to mitigation projects reached US$1.64 billion at mid-FY08, with a leverage (on IBRD/IDA resources) of roughly 2.2. 20 Table 5. Carbon Market at a Glance, Volumes and Values in 2007- 08 Source: World Bank 2009 21 Figure 1. India's Investment in Energy Infrastructure, 2006-2030 Note: Investment in biofuels is negligible and is included in oil. Source: World Energy Outlook 2007, IEA Figure 2. Location of CDM Projects Source: World Bank 2009 22 Figure 3. The working of a global GHG emissions market $ $ MACN MACS t* = p* 0 N = S = 10 N= 12 0 S=8 Emissions North Emissions South Total emissions allowed = 20 23 Part II Technical Note on the Fiscal Dimensions of Climate Adaptation 24 II. Technical Note on the Fiscal Dimensions of Climate Adaptation I. Introduction and Background Adaptation is here defined as by the IPCC as: Adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities. IPCC AR4 glossary (2007). The aim of this report therefore is to focus on adaptation to climate change in India and to examine its fiscal implications, with a view of reducing as much as possible the burden of adjustment on the central and state budgets. Estimates of the global costs of adaptation have been made in a number of studies, and some also provide a breakdown at the regional level. There are none, however, that have attempted to do so at the national level, and none for India, although partial estimates have been made by TERI and BC3 for coastal zones, health and ecosystems (Markandya and Mishra, 2009). This note will use those estimates, along with work done by the World Bank for South Asia, from which estimates for India are inferred. All the work to date is regarded as having several shortcomings (UNFCCC, 2009) and these are noted in the next section. One of the gaps is that the estimates of future costs do not provide information on who is to bear the cost. They refer to the estimates as being essentially for the public sector, although this can be questioned, as some items of expenditure may better be carried out by the private sector, at least in part. Some expenditures may also attract additional external funds and the extent of that is also not known. This study looks for such possibilities and discusses what policies are needed to promote them. The note is structured as follows. Section II presents the available estimates of costs of adaptation, world- wide, for developing countries, for regions and finally for South Asia and India. The estimates need to be qualified in many respects and these limitations are noted. Section III places the estimates for India in the context of the public sector budget, now and as it may evolve in the period to 2050. Adaptation measures are evaluated for each sector in some detail and the scope for transferring the burden to the private sector and to public-private partnerships is discussed. Section IV provides some conclusions and recommendations for further work. II. Estimates of the Costs of Adaptation to Climate Change in India Global Studies There have been a series of previous global studies, with six large-scale assessments which have reported on the global or developing country costs of adaptation. These are not discussed here in detail, as they have been reviewed by the previous OECD study (Agrawala and Fankhauser, 2008), though a summary table of the studies is presented in table 1. The six studies were all rapid assessments, undertaken within a similar period. As reported by OECD, many of them share common or linked methods, and they cannot be treated as independent lines of evidence. The estimates have generally increased over time. 25 Table 1: Previous Estimates of Costs of Adaptation on a Global Scale (OECD, 2007). Study Cost of Adaptation Regional coverage Time frame Sectors World Bank (2006) $ 9 to 41 billion/year Developing countries Present Unspecified Stern Review (2006) $ 4 to 37 billion/year Developing countries Present Unspecified Oxfam (2007) . Min, $ 50 billion/ year Developing countries Present Unspecified UNDP (2007) . $ 86 to 109 billion/year Developing countries 2015 Unspecified UNFCCC (2007) . $ 28 to 67 billion/year Developing countries 2030 See * UNFCCC (2007) . $ 44 to 166 billion/year Global 2030 See ** * Agriculture, forestry, fisheries, water supply, health, coastal zones, infra-structure ** Agriculture, forestry, fisheries, water supply, health, coastal zones, infra-structure Source: OECD, 2008 (Agrawala and Fankhauser, 2008), Table 2.6. The initial work (World Bank, 2006; Stern 2006; UNDP 2007) was clearly a macro approach in which the authors started with an estimate of the level of investment in each country that is climate sensitive and applied a ―mark-up‖ to account for the additional costs of climate change. The estimates are necessarily crude and of course depend on what percentage of investment is taken as climate sensitive and what mark-up is applied (typically 10-20 percent). Based on this method the initial estimate in the World Bank study was in the range of US$9-41 Bn. a year. By taking slightly lower values for the same parameters the Stern Report came up with estimates of US$4-37 Bn. and by further varying the two parameters the UNDP 2007 Human Development Report arrived at US$86-109 Bn. annually. The approach common to all these studies is criticized for (a) the high level of aggregation in the estimation of sector-level investments derived from a poor empirical basis for determining the amount of climate sensitive investment and the mark-up, (b) not accounting for climate-proofing existing stocks (to the extent that they need to be climate proofed faster than they depreciate) and (c) not accounting for non- investment expenditures especially in the areas of health and agriculture (d) not including autonomous expenditures and looking only at planned adaptation measures and (e) not considering the additional investment that will be needed specifically to address climate impacts now. The last point has been stressed by Parry et al (2009) who argue that levels of capital in low income countries are well below what they should be to protect them even against current climate variability and that this deficit needs to be made good. The question of whether making good that deficit should be considered as part of the adaptation to climate change or whether it is really a part of the development program remains a controversial issue. In this study we do not include such investments as part of the adaptation budget, as to do so would amount to including a very large part of the development program as adaptation expenditure. This serves little purpose for a country like India, where development is part of a much larger strategy, and including all of it would swamp the adaptation debate with the development debate. Only when an investment has a specific identifiable adaptation component and when that component is measurable has it been included in the adaptation program. The UNFCCC, 2007 study was a little different from the others. It was more detailed and less top down and consisted of six sub-studies covering agriculture, forestry and fisheries, water supply, human health, coastal zones, infrastructure and ecosystems. Both planned and autonomous expenditures were included. For agriculture forestry and fishers the items included were expenditures at the farm level, for extension services and for research on new cultivars. For water supply the estimates were based on additional investments required to make good any deficit created by climate change. For human health the approach consisted of estimating the increased risk of certain diseases due to climate change and then calculating the expenditures need to address these through preventive and reactive measures (i.e. treatment). For coastal zones a model that optimizes the response to sea level rise was used. The model gives the 26 required investments that provide protection in locations where the level of damages justifies such investments. The reported figures in the report include both the investment costs as well as the residual damages. For infrastructure the study falls back on World Bank (2006) methodology, but attempts to estimates the level of climate sensitive more accurately by using insurance data. The final area of ecosystem a rather cruder approach was taken. It was assumed that protected areas would have to increase by 10 percent due to climate change and the cost of meeting this increased protection was taken. The basis for this increase in terms of climate change, however, remains unclear and indeed the reported estimates exclude ecosystem protection costs. General criticisms of the UNFCCC study by Parry et al. (2009) were: (a) some sectors were not covered (e.g. tourism), (b) investments to make good the adaptation deficit are not included and (c) not all residual damages are included. In addition Parry et al. make a number of specific comments on the sectoral estimates. These are:  Estimates of the amount of additional research needed in agriculture are unfounded  The assumption that water transfers could be made within a country to deficit areas may not be correct  There is no coverage of alluvial flood protection costs  There is incomplete coverage of health impacts and assumed rates of decline in the baseline rates of disease are optimistic.  Assumed levels of sea level rise may be too low and the model does not allow for the increased frequency and intensity of storms.  Estimates of climate sensitive infrastructure are probably too low  Some allowance should be made for ecosystems outside the Protected Area Network (PAN). On the question of the residual damages there are also differences of opinion. While estimates of residual damages provide important information for policy-makers, they are not in the same category as adaptation expenditures and adding the two may be misleading in terms of fiscal implications. Hence it is recommended to separate the two estimates. The World Bank 2009 Study A more detailed assessment of adaptation costs has been made by the World Bank and has just been published. For the purposes of this paper it is particularly useful as it provides a basis for making a first cut estimate of the costs of adaptation in India. The estimates cover what is considered as `planned adaptation`, which result from a deliberate policy decision. They exclude autonomous adaptation but it is not clear whether all planned adaptation should be undertaken using public funds. This issue is investigated further in the next section. There are a number of methodological issues which should be noted upfront: i. The adaptation measures are not chosen in any optimal fashion but to ensure that at least there is no loss of welfare compared to what would have been the level in the absence of climate change. In fact governments may wish to do more or less than that depending on the costs of action and the benefits in the form of avoided damage. No such assessment has been made. ii. In all sectors the bias is in favor of ―hard‖ options involving engineering solutions rather than ―soft‖ options based on policy changes and mobilizing social capital. This is driven by data considerations but it does mean that less expensive actions to change policies have been left out. Where appropriate we revisit this limitation when discussing the fiscal implications of the estimates provided. iii. In some cases the adaptation measures are found to have negative costs. For example climate change may reduce the demand for electricity or water in some regions. This will reduce the 27 required investments in that region resulting in a negative cost contribution. Where there are reasonable estimates of such negative costs they have been included, but in general the estimates of negative costs are less sound than those of the positive costs. iv. Not all sectors are covered. In particular adaptation costs for ecosystems are not included. v. The study provides some quantitative guidance on the degree of uncertainty in making the estimates by considering two climate scenarios. Allowing for these factors the estimated annual costs of planned adaptation for developing countries are put at between US$77 and US$89 billion a year over the period 2010 to 2050. Of this the estimate for South Asia is around US$17-18 billion. India would account for about 70-74 percent of that, depending whether one took a population of GDP basis for the attribution. That would make the costs for India at US$12-13 billion per annum. The annual figure is an average over the period and costs are higher in the later years (US$17-24 billion in the decade 2040-2049) and lower in the earlier years (US$7-8 billion in the decade 2010-2019). The 2010 figure for example would amount to around 3.4% of projected public expenditure at the Union level and 0.5% of GDP. Annual cost estimates for India are given below. A more detail breakdown of the annual costs for India are given in the next section. Estimates for India The estimates for India derived from the World Bank study are given in Table 2 by sector and for different time periods. Estimates are derived by taking the share of South Asia represented by India. The share is based on the average of the share of GDP (70%) and population (73%)29. The estimates indicate a total cost that rises from US$8 billion in the period 2010 to 2019, to US$17-24 billion in 2040-2049. These estimates are rough, but they do provide a first set of figures on likely adaptation costs. They can, however, be slightly modified in the light of complementary work, which is presented below. A joint study by TERI and BC3 is estimating the costs of adaptation for coastal zones, health ecosystems, water and agriculture (Markandya and Mishra, 2009). The work for water and agriculture is still ongoing and so cannot be included here but some estimates are available for coastal zones, ecosystems and health. For forestry and ecosystems an estimate is available, based on non-regret actions, which indicates an outlay of around US$144 million to 2030 covering the 11th 5 Year Plan (2007-2012)30. More detailed actions to combat the impacts of climate change emerge much later (2075 and later) and cannot be developed for the earlier period. For the period to 2050, therefore, we assume a similar pattern as for the 11th 5 year plan – i.e. about US$30 million, gradually increasing to the levels expected in 2075. For coastal zones the TERI study allows for more soft options and is not so tied to the hard options used in the World Bank study. Adaptation options considered are: Beach Nourishment, Shelterbelt plantation, which also includes mangrove regeneration, Cyclone risk mitigation through cyclone shelters, Desalinisation and coastal protection. This compares with the World Bank estimates, which are based on the use of coastal protective measures only (dikes). The resulting estimates, which are specific for India and indicate costs rising from US$1.4 billion (2010-2019), US$1.7 billion (2020-2029), US$2.1 billion (2039-2039) and US$2.2 billion (2040-2049). These figures are a little higher than those of the World Bank but we consider them more reliable as they are based specifically on Indian data. 29 Some cost items such as infrastructure will be more closely tied to GDP, while others such as health will be depend more on population. Yet others such as coastal zones will depend on both. The share of South Asian costs that have been taken here should be seen as indicative. More detailed India-specific calculations are needed, which are provided for some sectors. 30 These include the National Afforestation Programme (NAP) scheme, the Integrated Forest Protection Scheme (IFPS), the Forest Information Management and Resource Assessment Scheme and the Forest Infrastructure Development Scheme. 28 For health a more detailed assessment was carried out than in the World Bank study. Estimates were made by region within India, under different assumptions about spread of diseases and changes in baseline conditions. Estimates were also made under an assumption that no action is taken to address climate change and the assumption that action is taken to stabilize at 550 ppmv in CO2 equivalent concentrations (not quite enough to meet the target of a 20C stabilization in temperature increase)31. Based on this study the estimates for the one year of 2030 appear as follows (Table 2): Table 2: Costs of Adaptation for Health Reasons in India for 2030 (US$Mn.) Unmitigated Scenario 550 PPMV Scenario Optimistic Pessimistic Optimistic Pessimistic Malaria 71 179 71 178 Diarrhoea 79 303 57 218 Malnutrition 19 63 16 51 Total 169 545 144 447 Source: Markandya and Mishra, 2009 The total amounts are between US$170 and US$545 million in the unmitigated case and US$144-447 million in the case that the world is on a track to a stabilization of concentrations at 550ppmv. Since malnutrition is assumed to be avoided through adaptation measures under the agricultural program, we have to exclude that component. Hence we have a range of costs for 2030 of between US$150 and 480 million in the mitigated case and between US$128 and US$396 million in the 550 ppmv mitigated case. We have assumed that we are on track to a mitigation of 550 ppmv and have used the range of values given corresponding to that case in Table 3 below. Replacing these health figures in Table 2 and inserting the estimates for forests and ecosystems, gives us estimates as presented in Table 4. Values for other years are assumed to be in the same ratio to the 2030 values as in the World Bank study. The table shows that the expected additional annual costs of addressing the impacts of climate change range from around US$8 billion in the period 2010-2019, up to US$17-24 billion in the period 2040-2049. These are substantial expenditures and if they had to be financed from the public budget the 2010-2019 expenditures would amount to 3.6% of the 2009-10 Union Budget (taken from Government of India Budget projections). Figure 1 indicates how the adaptation expenditures would change as a share of that budget if the latter grew at 6% per annum in real terms. The share of expenditure declines from around 3.7% in 2010 to 1.2% in 2039. Although there is a decline, the share of public GDP is nevertheless significant and important, given the other high demands on government resources. 31 A 550ppmv stabilization in CO2 equivalent concentrations is about the same as 480 ppmv in CO2. The IPCC states that to 0 achieve a 2 C we need to stabilize concentrations as 450 ppmv in CO2 equivalents. 29 Table 3: Estimated Annual Costs of Adaptation to Climate Change in India (US$Bn.) Climate Model Climate Model Climate Model Climate Model Climate Model CSIRO NCAR CSIRO NCAR CSIRO NCAR CSIRO NCAR CSIRO NCAR Time Period 2010-19 2020-2029 2030-2039 2040-2049 2010-2049 Sector Infrastructure 3/ 1.0 2.7 1.1 4.7 2.8 6.1 6.4 7.6 2.8 5.3 Coastal Zones 1.1 1.1 1.2 1.2 1.3 1.3 1.5 1.5 1.3 1.3 Water Supply & Flood Management 4/ 2.8 1.2 3.0 1.8 5.4 2.3 10.4 2.8 5.4 2.0 Agriculture 5/ 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Fisheries 6/ 0.06 0.14 0.06 0.14 0.06 0.14 0.06 0.14 0.06 0.14 Human Health 7/ 0.6 0.7 0.1 0.3 0.2 0.2 0.1 0.1 0.25 0.33 Forestry & Ecosystem Services 8/ n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Extreme Weather Events 9/ 0.8 0.4 1.8 1.0 2.8 2.1 3.8 3.3 2.3 1.7 Total 7.6 7.6 8.4 10.4 13.8 13.6 23.5 16.7 13.3 12.1 Notes 1 No autonomous adaptation. Only planned adaptation. 2 Focus is on hard adaptation options. 3 Mostly capital costs. Maintenance is 2% of total. 4 Gross Costs taken. Time profile is based on average of infrastructure and coastal zones. 5 Main costs are those of ensuring that malnutrition is avoided. No time profile available. 6 Loss of income to fishers is made up by providing alternative sources of income. 7 Preventing and treating malaria and diarrhea 8 Not Available 9 Investment in female education to neutralize the additional risks are caculated. Source: World Bank (2009), adapted by the author 30 Table 4: Adjusted Estimated Costs of Adaptation to Climate Change in India (US$Bn.) Climate Model Climate Model Climate Model Climate Model Climate Model Alt1 Alt2 Alt1 Alt2 Alt1 Alt2 Alt1 Alt2 Alt1 Alt2 Time Period 2010-19 2020-2029 2030-2039 2040-2049 2010-2049 Sector Infrastructure 4/ 1.0 2.7 1.1 4.7 2.8 6.1 6.4 7.6 2.8 5.3 Coastal Zones 5/ 1.4 1.4 1.7 1.7 2.1 2.1 2.1 2.1 1.8 1.8 Water Supply & Flood Management 6/ 2.8 1.2 3.2 1.8 5.6 2.4 9.9 2.8 5.4 2.0 Agriculture 7/ 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Fisheries 8/ 0.06 0.14 0.06 0.14 0.06 0.14 0.06 0.14 0.06 0.14 Human Health 9/ 0.38 1.39 0.06 0.59 0.13 0.40 0.1 0.0 0.18 0.61 Forestry & Ecosystem Services 10/ 0.04 0.04 0.06 0.08 0.08 0.13 0.11 0.17 0.07 0.11 Extreme Weather Events 11/ 0.8 0.4 1.8 1.0 2.8 2.1 3.8 3.3 2.3 1.7 Total 7.7 8.5 9.2 11.3 14.8 14.7 23.8 17.4 13.9 13.0 Notes 1 Alt 1 corresponds to CSIRO scenario for infrastructure, water supply and flood management, fisheries & extreme weather events. It corresponds to the optimistic case for human health and low cost for ecosystems. 2 Alt 2 corresponds to NCAR scenario for infrastructure, water supply and flood management, fisheries & extreme weather events. It corresponds to the optimistic case for human health and low cost for ecosystems. 3 No autonomous adaptation. Only planned adaptation. Focus is on hard adaptation options. 4 Mostly capital costs. Maintenance is 2% of total. 5 Estimates are taken from TERI/BC3 study, which included wider range of options. 6 Gross Costs taken. Time profile is based on average of infrastructure and coastal zones. 7 Main costs are those of ensuring that malnutrition is avoided. No time profile available. 8 Loss of income to fishers is made up by providing alternative sources of income. 9 Preventing and treating malaria and diarrhea 10 Estimated from non-regret measures in 11th 5 Year Plan and projected expenses 2075-2085. 11 Investment in female education to neutralize the additional risks are caculated. Source: World Bank (2009) and Markandya and Mishra (2009) 31 Figure 1: Planned Adaptation Expenditures as Share of Projected Public Sector GDP 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Own Projections III. The Burden of Adaptation and How it May be Shared In this section the details of the expenditures under each of the categories described above are given, and options for reducing their fiscal burden explored. Possibilities of external funding for both public and private sectors are covered in greater detail in a companion technical note on Financing Mechanisms. The categories are: infrastructure, coastal zones, water supply and food management, agriculture, fisheries, human health, forestry and ecosystems and extreme events. Infrastructure The breakdown of infrastructure expenditure, which can account for between 13 and 32 percent of total adaptation expenditure in the next decade includes transport, electricity, water and sanitation, communications, urban and social infrastructure such as urban drainage, health and education infrastructure and general public buildings. Adaptation cost is computed as the additional cost of constructing and operating and maintaining the baseline levels of infrastructure services. In addition the extra maintenance costs due to climate change are included where relevant. The additional costs are broken down as shown in Figure 2, with no allowance for possible reductions in demand for infrastructure due to climate change (e.g. a reduction in demand for water or electricity in some areas. We consider it appropriate not to adjust for any such reduction in demand because the basis for it is very uncertain, a view that the Bank, 2009 study agrees with32. 32 The shares in Figure 2 are based on estimates for South Asia as a whole. 32 Figure 2: Shares of Infrastructure Expenditure for Adaptation by Category As the figure shows the dominant category is urban infrastructure, accounting for nearly two- thirds of the total. This is followed by roads and other transport (20%), and health and education (7%). The high figure for urban infrastructure excludes the costs of adapting urban housing, which is considered as an item of autonomous expenditure33. Since these do not have a fiscal impact they are not investigated further in this note, although the amounts could be significant (possibly an addition of around 30% to the infrastructure estimate given in Table 3). The scope for reducing the fiscal burden of these expenditures will depend on how the different sectors are divided between the public and private sectors in the future. For health and education the bulk of the investment and maintenance most likely will remain in the public sector, at least for the next decade. For power and transmission there is more scope for involvement of the private sector (a stated policy of the Government of India) and so one can expect the share of that investment that comes from the private sector to increase over time. The same applies for roads and other transport investment, the major share of this will remain a responsibility of the state, but one there is some scope for public-private partnerships that will transfer a part of the total to the private sector. In the case of urban infrastructure, which includes urban drainage, public buildings and similar assets, the role for private sector involvement can be considered in conjunction with the supply of water and sewerage services. Both depend on whether or not the private sector, either independently or in conjunction through public-private partnerships, can be engaged in making such provision. So far this has been very limited in India. The 11th Five Year Plan (covering the period 2007-08 to 2011-12) gives the share of planned investment in each sector that is set for the private sector. The figures are as follows (GoI, 2008): Power sector 28%, Roads and Bridges 34%, Railways 19%, Water Supply and Sanitation 4%, Ports 62%, Airports 70%, Storage Facilities 50% and Gas Sector 39%. There is no 33 The ability of the private sector to undertake such expenditures is of course varied. In the case of slums it is very limited and some additional costs may be incurred here by the public authorities. Estimates of such costs have not been made. 33 indication how these percentages will evolve over time and there is also mixed data on whether the planned percentages are in fact being achieved. McKinsey & Co., 200X, estimates that while the power sector overall targets are being met (although the Bank‘s assessment does not quite agree with this view those for the roads sector is only half met and that of ports and airports is at 85% and 75% respectively. This refers, however, to the overall target and not to the share that was intended for the private sector. At the end of this section we consider some plausible scenarios for what future private sector targets might be as well as what percentage of those targets would be met. Based on those we estimate the level of the financial burden on public funds. Coastal Zones Expenditure for adaptation in coastal zones accounts for around 14% of the total. It consists of Beach Nourishment, Shelterbelt Plantation, which also includes Mangrove Regeneration, Cyclone Risk mitigation through cyclone shelters, Desalinisation and coastal protection through building of dykes etc. There are two areas where private funds could play a role: desalinisation and cyclone risk mitigation. Desalinisation accounts for 24% of the total coastal zone adaptation budget. Although GoI has a very small role for private sector involvement in water supply and sanitation, this is a niche area where private-public partnerships many be feasible. The plants would provide drinking water to 11 coastal cities. Since the cost of such water (around US$1.0 to US$1.5 depending on the rate of return that the private sector demands34) and given that many would not be able to pay that much for water, it is very likely that some subsidy will be provided to households. This would create a demand on municipal fiscal resources over time. But under a Public Private Partnership (PPP) the capital investment could come from private funds. The amount required would be around US$340-400 million per annum in 2010-2030. For cyclone risk mitigation the study used has only estimated the cost of building cyclone shelters. UNIDR norms prescribe that at least 60% of the total population in high vulnerable areas should have access to cyclone shelters and based on that the number of shelters required has been calculated. The need for such shelters cannot be questioned but it may be worth investigating whether the operations of the shelters could be supported under a combined public private insurance scheme. Under such a scheme different states would combine to pool risks with a private insurer to provide evacuation and other services in the event of a cyclone. The pooling of risks can lower costs considerably and can reduce the burden on the state in the event of a cyclone. Water Supply and Flood Management This is a major category, with costs amounting to 15-30 percent of the total (US$1.2 to US$2.8 billion per annum over the next decade)35. The items included consist of protection against 34 Estimates are based on a recent desalination plant study carried out by the author in Jordan. The lower price would apply for a rate of return of 6% and the higher price for a rate of return of 10% in real terms. India cost data should be available but was not accessible to the author. One desalinisation plant has already been set-up in Minjur, Chennai city 35 The actual costs could be lower in the distant future, when a reduction in demand may reduce the need for reservoirs relative to the baseline. This has not been accounted for here. Such a factor, however, will not have a major impact in the next decade or two. 34 alluvial flooding, as well as additional reservoir capacity to meet future demand under more variable conditions of rainfall. Flood protection accounts for between 22 and 37 percent of the total, depending on which climate model is used (with the model predicting less rainfall the lower percentage prevails). The reservoir cost can be attenuated from a public perspective in two ways. First, many systems of water supply that will need to be supported by more reservoirs are not currently efficient with respect to water losses. Reducing those losses can cost less than building new reservoirs. Yet the ability for doing is limited as loss prevention has to come from the maintenance budget and the degree of cost recovery is rarely enough to allow enough resources for this purpose. Second, the government can increase the role for public private partnerships. The 11th Five Year Plan level of 4% private participation is low compared to some Latin American countries, for example (globally around 10 percent of all water supply provision is from private sources). A higher percentage would allow more of the additional investment to be borne by the private sector. Agriculture In the case of agriculture the main adaptation is by the farmers themselves. The assumption here is that under climate change most will become worse off in the Indian Subcontinent and this will result in malnutrition. Measures are therefore introduced to remove this malnutrition to the fullest extent possible. They consist of more spending on research and development, expansion of irrigated areas, and expansion of rural road networks for lower cost access to inputs and markets. In the case of India the main investments are in irrigation efficiency improvements. The expected annual costs are around US$1.3 billion, although the time profile is not established and the annual figure is simply the total estimate for the period to 2050 divided by the number of years. Hence they should be treated with considerable caution. There may also be some potential for government supported insurance schemes, which would provide protection against malnutrition by pooling risks. As the Department of Economic Affairs Paper (GoI, 2009) notes, there has been some success in using this instrument in countries such as Ethiopia, where the Livestock Productive Safety Net Programme is an attempt to strengthen the capacity of poor households to cope with droughts without having to sacrifice opportunities for health and education. Mention is also made for the Mongolia Index-Based Livestock Insurance, Mexico Catastrophe Bond. The key issue here is the extent to which these programs need fiscal support and how that level of support can be kept to a minimum. For India, the decision on which policies to use to respond to the decline in yields, even after autonomous adaptation has taken place is one that should account for more options than the World Bank and other studies have considered. In particular, development of employment opportunities outside of agriculture, in particular such as agro-processing, could be less costly and more sustainable. Maintaining efficient irrigation schemes in the face of low prices and incomes of farmers has been a long-standing problem in the agricultural sector, often requiring large state subsides. It would be a mistake not to learn from that experience. Related to this, the public sector may also need to act when the private sector actions are inappropriate (i.e. there is ‗mal adaptation‘). An example of such adaptation would be farmers responding to drought conditions by exploiting groundwater unsustainably (a phenomenon that is observed, see IPCC, 2007). In these circumstances the public sector needs to exercise control on this resource while simultaneously developing an alternative way of handling the shortages of water. Fisheries A similar statement holds for fisheries, where adaptation estimates are based on losses in income for future fishers and how those losses can be recovered through alternative sources of employment. The 35 World Bank study from which these estimates are derived admits, however, that the basis for the adaptation cost estimation is shaky. It essentially consists of the loss in the value of the landed catch due to climate change. The overall estimate is between US$60-US$140 per annum. As in the case of agriculture the time profile is not established and the annual value is simply the total cost to 2050 divided by the number of years. As stated, the adaptation measures will include the development of new employment opportunities, but they could include protection from overexploitation through quotas, which are partly allocated to local fishing communities. Then, as the catch is increasingly restricted, what they lose in the catch is compensated by what they gain in the value of their quotas. Human Health For human health adaptation costs are of two kinds: costs of prevention and costs of treatment. Both are largely state costs, although the latter may include an element of private cost. The estimated figure of between US$400million and US$1.38 billion in the first decade declines over time, as development reduces the baseline risks of vector and water borne diseases significantly. There is little scope for transferring these costs to the private sector. Forest and Ecosystem Services The same applies for the forest and ecosystem services, where the estimated annual figure is around US$40 million in the next decade, rising to US$180 million a year by 2040-2049. While these costs will be borne by the public sector, there is scope for revenue generation associated with the measures that have been identified. This is through enhanced sustainable exploitation of forest resources and recovery of the value of ecosystem services such as tourism and watershed protection from the beneficiaries. Extreme Events The estimates of the costs of adaptation to extreme events in the World Bank study are based on the costs of reducing household vulnerability. All the evidence indicates that the impacts and economic costs of such events are highly dependent on this factor, which in turn is influenced by household wealth, the availability of public infrastructure and household education, particularly female education36. The figures reported in Tables 1 and 2 are derived from the increase in female education that would be needed to reduce actual losses from climate-related events to the levels prior to an increase in the potential loss due to climate change. They indicate an annual cost of between US$400 and US$800 million in the next decade, rising to US$5.5-3.8 billion by 2040-2049. In practice female education is only one of the measures for reducing the impacts of extreme events and governments are unlikely to use this policy for this purpose (of course female education serves many other development purposes and is pursued for those reasons). While the estimates can provide an indication of the likely costs the actual measures that would be taken would consist be related to specific risks (flood, drought, earthquake etc.) and would consists of relief funds, emergency shelters, advance warning systems etc. The costs of these can fall heavily on the public sector, but they can also be shared more evenly across the public and private sectors. An important role here can be attributed to insurance. Individuals facing increased risks will, where possible, seek to insure against damages due to extreme events, along with other measures to reduce the impacts on themselves. This is a cost-effective way to adapt to the increased variability as long as the insurance markets are able to take the risk in a competitive market, as long as the individuals are able to 36 The estimates are derived from an equation in which the actual losses from floods are regressed against the potential losses, per capita income and female education. Thus estimates take account of the reduced vulnerability arising from increases in per-capita income. 36 afford the costs of insurance and other adaptation and as long as they do not discount future impacts too highly or under-adapt due to the ‗Samaritan‘s Dilemma‘37 (IMF, 2008). The public sector can have a role to play in: a. Providing limited insurance cover where private insurers are unable to provide it (but only when this is due to market failure and not because the risk is too high – see below), b. Acting to correct market failures that result in the private sector undertaking too little insurance, such as applying to high a discount rate or acting in expectation of the Samaritan‘s Dilemma and c. Subsidizing poor households who are unable to afford the insurance or offering them alternative livelihoods in the light of the increased costs of climate variability. Thus the public sector measures have to be designed in full awareness of how individuals will act. As a general observation from the above we can conclude that public sector infrastructure measures should not be based on assuming no private adaptation, nor should they assume that the public sector has to take full responsibility for the consequences of climate impacts. Given the increased risks of flooding, for example, individuals will choose to relocate and take personal measures in response. If, however, public investments offer protection that assumes no autonomous adaptation, the private sector will not adapt and the overall costs of responding to the change in risk will be much higher than it would be if proper account was taken for behavioural changes at the individual level. Part of the adjustment individuals and companies will make is in response to higher insurance premiums, or even refusal by insurance companies to offer protection against some events in certain locations. If the government measures consist of essentially underwriting all the risks that the private sector will not cover, the costs of meeting a given ―expected consequence‖ target could be very high. Recent experience has shown that an important potential instrument is the catastrophe (cat) bond. This is now starting to be used in the United States and has the feature that some of all of the principal and interest on the bond is waived in the event that the specified catastrophe occurs. By providing a way to securitize catastrophe risk, such a bond enables the latter to be spread beyond the insurance and re- insurance markets, to the wider capital market. There are other possibilities as well. For instance there is the GDP-indexed bond, on which interest payments vary as GDP growth is above or below some reference value. This could provide some relief in times of natural disaster. Although potentially attractive, these instruments could entail high transactions costs. Hence they probably require some support from international financial institutions and even governments to help lower these costs. Examples of a range of possible instruments are given in Box 1. These should be explored further for the application to climate related extreme events. 37 The Samaritan’s Dilemma is the tendency for under-insurance by those who expect external help in the event of adversity: those supplying the help would wish to limit its extent by committing to relatively low support—but their benevolence means they cannot do so credibly. 37 Box 1: New Financial Instruments for Managing Weather and Disaster Risks Catastrophe Bonds: Pay high yields but are subject to default if a catastrophe occurs during the life of the bond. Funds from the sale of the bonds are invested in low risk assets and interest earned reduces the cost to the issuer. Contingent Surplus Notes: These are “put� rights that allow the owner of the note to issue debt too pre-specified buyers in the inevent of a catastrophe. The owner of the note pays a fee to the debt buyers for their commitment to buy the debt. Exchange Traded CatastropheOptions: Provide for the purchaser of the option to demand payment under an option if the claims index exceeds a given level. Catastrophe Equity Puts: The equity puts permit the insurer to sell equity shares on demand after a ajor disaster in return for an up-frnont fee. Catastrophe Swaps: These derivates use the capital markets and counter parties. An insurance portfolio with potential payment liability is swapped for a security and its associated cash flow obligations. An insurer takes on the obligation to pay an investor periodic payments on a specified portfolio of securities that the investor was liable to pay, while the investor assumes the liability of the insurer to make payments in the event of a catastrophe. Weather Derivatives: Provide payouts in the event that some specified number of days exceed some temperature or rainfall trigger value. Source: Adapted from Pollner, 2001 How these instruments will turn out is still to be determined, but one thing that is becoming clear is the need for public and private sector cooperation. The simplest case, which already happens, is when the public sector provides information on climatic variability to the private sector in a timely manner so it can take the necessary actions. More complex cases are ones where national governments may combine to pool risk, which they manage in conjunction with private sector insurers. An example of such an arrangement is the Caribbean Catastrophic Risk Insurance Facility (CCRIF), under which governments of Caribbean countries pool funds into an insurance facility, thus reducing insurance premiums against adverse weather events by 40 percent. The scheme was set up with the support of the World Bank and the donor community but is managed as an insurance scheme, which makes payments to the governments in the event of a major disaster event (World Bank, 2007a). The Facility transfers the risk that it cannot retain through reinsurance or through other financial coverage instruments (e.g., catastrophe bonds). This allows optimal pricing, thanks to economies of scale, and provides a more diversified portfolio of risks. The accumulation of reserves enables the Facility to smooth the catastrophe reinsurance pricing cycle over time. In view of this, the public sector costs of extreme events can be reduced by pooling risks in the way described above. Although individual insurance against extreme events may be more limited, it is not out of the question and some groups of households and businesses may be persuaded to avail of the opportunity. By exploiting these options not only will the total cost of adaptation be reduced, but the share of it borne by the public sector will be lessened. 38 Estimates of Public Financial Needs In this section an attempt is made to estimate the costs of adaptation that will fall on the public sector. Given the difficult additional assumptions required, these estimates only extent to 2020 (i.e. the next decade). They are made for two scenarios: Scenario 1: This assumes that the GoI targets for private sector infrastructure set for the 11th Five Year Plan hold also for the 13th and 14th Plans and no other adjustments are made to reduce the costs given in Table 2. These shares are as follows: power and transmission (28%), roads (34%), other transport (31%)38, water supply and sanitation (4%). We refer to this as the Base Case. Scenario 2: This assumes that a number of additional measures will be taken to reduce the fiscal burden of adaptation. In particular: a. GoI targets for private sector infrastructure will be raised in the next two Five Year plans, as follows: power and transmission (50%), roads (50%), other transport (50%), water supply and sanitation (10%) and urban drainage (10%). These increases would indicate that around 44% of total infrastructure investment would be private, an increase that would be consistent with the trend of 20% private investment in the 10th Five Year Plan and 30% projected for the 11th Plan. b. Half the desalinisation investments under the coastal zone plan will be undertaken by the private sector. c. Risk pooling and increased use of insurance will reduce the burden of the expenditure of extreme events in total by 40% (see World Bank 2007 for the case of the Caribbean Insurance Scheme for an example). This is referred to as the Continued Reform Case. Table 5 provides estimates of the public sector fund requirements under the two scenarios. The Base scenario would add between US$7.1 and US$7.5 billion per year to the public sector budget, while the reform scenario should reduce those figures by around US$700 million. Note that the estimates do not include measures to reduce the overall costs of adaptation, such as less expensive ways of meeting any increase in water demand, looking for lower cost options to mitigate the impacts of extreme events etc. Such an analysis requires more work and was not feasible within the scope of the preparation of this note. 38 The figure for other transport is a weighted average of railways, ports and airports. 39 Table 5: Estimates of Public Sector Adaptation Costs for India (US$ Mn. per annum) Costs 2010 - 2019 Scenario 1 Scenario 2 Sector Alt 1 Alt2 Alt1 Alt2 Infrastructure 909 2467 801 2173 Coastal Zones 1387 1387 1232 1232 Water Supply & Flood Management 2682 1151 2553 1106 Agriculture 1257 1257 1257 1257 Fisheries 57 57 57 57 Human Health 384 384 384 384 Forestry & Ecosystem Services 37 37 37 37 Extreme Weather Events 837 420 502 252 Total 7549 7159 6822 6498 Source: Own Calculations The public sector expenses can be further separated into capital and current and into those that have to be met out of tax revenues and those can be met by raising debt or through external grants. As far as capital and current expenditures are concerned, most of the items, at least in the first decade of the projections will be in the form of capital. As water supply and education and health measures are implemented there will be an increasing amount of current expenditure but the present analysis does not provide us with a breakdown of the two categories. With regard to the financing of expenditures the companion paper on financing mechanisms provides some indication of where the additional funds can be raised. Current projections of finance for public infrastructure investments indicates that GoI is projecting that around 74% of the central government resources and 50% of state resources will come from non-tax sources (internal debt raising or other extra-budgetary sources (IBER). It should be possible for higher percentages of the additional adaptation expenditures to come from IBER. IV. Conclusions and Recommendations for Further Work This note has provided a first review of the likely costs of adaptation to climate change and their implications for fiscal policy in India. To the best of our knowledge no other estimate has yet been made. The estimates are based on the World Bank global study, which has just been released, modified in the light of some estimates prepared by TERI and BC3 as part of an ongoing study. The estimates are very rough and should only be seen as indicators of likely costs. A number of other qualifications apply. First, we should note that they are the additional costs attributable to climate change, overlaid on a baseline in which India undergoes continued development at the pace we have been observing. The implications of this development are that many of the costs that would arise if climate change were to occur right now are mitigated. Health and extreme event costs are considerably reduced, at least to the public sector, when the economy is moiré advanced. The same applies to agriculture. Second, more detailed bottom-up work is needed to obtain better estimates of the options and to select the ones that are more cost effective. The choices presented here are not necessarily the lowest cost ones. By this means one can reduce the costs, possibly by a considerable margin. 40 Notwithstanding these qualifications the rough figures are indicative of considerable burdens to India to adapt to climate change. The next decade should see outlays of around US$7-8 billion per annum going up to US$16-24 billion by the period 2040-2049. In terms of GDP the amounts are relatively small (the 2010-2019 figures would amount to around 0.5% of current GDP), but nonetheless significant. More to the point, they would place a considerable burden on public resources. We estimate the public sector burden of the investment at around US$7.1 to US$7.5 billion a year for the next decade. This compares to for example, with the GoI 11th Five Year Plan projected expenditure of US$143 billion in the last year of the plan (2011-2012). At around 5% of the total it would require reconfiguration of the plans and a search for additional funds. This amount can be reduced if a greater share of the adaptation can be transferred to the private sector and in our view a reduction of the public costs of around US$700 million may be possible. It will, however, require further work to confirm that and to flesh out the required public-private partnerships. 41 References Agrawala, S. and S. Fankhauser (eds) (2008). Economic Aspects of Adaptation to Climate Change. Costs, Benefits and Policy Instruments. Paris: OECD. GoI (2008). Projections in the 11th Five Year Plan: Investment in Infrastructure. Planning Commission, Government of India, New Delhi. GoI (2009). Climate Change and India: Some Major Issues and Policy Implications. Department of Economics Affairs, Ministry of Finance, Government of India. IMF (2008). The Fiscal Implications of Climate Change. Fiscal Affairs Department: IMF: Washington DC. IPCC AR4 (2007). Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson, Eds. Cambridge University Press, Cambridge, UK, 976 pp. Also available at http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg2_report_imp acts_adaptation_and_vulnerability.htm. Markandya, A. and Mishra. A. (2009). The Costs of Adaptation to Climate Change in India. Draft, TERI, New Delhi. Parry, M.L. et al. (2007). Climate Change 2007. Impacts, Adaptation and Vulnerability. Working Group II Contribution to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge: CUP. Parry, M. et al. (2009). Assessing the Costs of Adaptation to Climate Change: A Review of the UNFCC and other Recent Estimates. IIED, London. Pollner, J.D. (2001). Managing Catastrophic Disaster Risks Using Alternative Risk Financing and Pooled Insurance Structures. World Bank Technical Paper No. 495. World Bank: Washington DC. Stern, N. (2006). The Economics of Climate Change: The Stern Review: Cambridge UK: Cambridge University Press. UNFCCC (2007). Investment and Financial Flows to Address Climate Change. Bonn: Climate Change Secretariat. UNFCCC (2009). The Economics of Adaptation. Forthcoming. UNFCCC, Bonn: Climate Change Secretariat. World Bank (2006). Investment Framework for Clean Energy and Development. World Bank, Washington DC. 42 World Bank (2007). The Caribbean Catastrophe Risk Insurance Facility (CCRIF). Brief for Journalists - 22 February 2007, Washington DC. World Bank (2007a). The Caribbean Catastrophe Risk Insurance Facility (CCRIF). Brief for Journalists - 22 February 2007. World Bank: Washington DC. World Bank (2009) (forthcoming). The Economics of Adaptation to Climate Change. UNDP (2007). Human Development Report 2007/08. Palgrave McMillan, New York. World Bank (2009). The Economics of Adaptation to Climate Change. World Bank, Washington DC 43 Part III Technical Note on Climate Change, Technology Transfer and Intellectual Property Rights 44 III. Technical Note on Climate Change, Technology Transfer and Intellectual Property Rights 1. Introduction Climate change mitigation efforts have tried to promote low-emission economic growth around the world, in order to reduce the accumulation of greenhouse gases in the atmosphere. The emissions of greenhouse gases from the industrial sector can be reduced by increasing energy efficiency of output. The single largest contributor to global greenhouse emissions (in particular carbon dioxide, methane and traces of nitrous oxide), however, is by far the energy sector. Energy-related emissions account for an overwhelming 70% of global emissions of greenhouse gases (IPCC 2007), as conventional fossil fuels continue to dominate the global energy consumption. The efforts to promote low-carbon growth have stressed the development and deployment of energy efficient technology as well as alternative clean energy from renewable sources. The genesis of the promotion of renewable fuels, however, dates back to the 1970s and was unrelated to the climate change concerns of more recent origin. The first major drive to develop alternatives to conventional fuel began with the 1970s energy crisis, and was purely market- driven linked to high oil prices and risks associated with future supplies. Several developed as well as developing countries (including India) stimulated domestic search for oil substitutes. However, with conventional fuels having well-established markets with subsidized low prices, the growth of alternative energy forms has been anything but easy over the decades. The heightened climate change concerns in the 1990s and the run-up to Kyoto Protocol saw a stronger revival of efforts in the development and deployment of renewable energy technology. International technology transfer takes place through trade in goods, direct investment and licensing, and movement of technically skilled personnel. The technology transfer in energy sector is primarily driven by economic incentives and international competitiveness, and despite the concerted efforts to promote renewable energy over the last twenty years, renewable energy now accounts for just over 15% of world primary energy supply.39 The economic feasibility of renewable energy forms like solar, wind, geothermal and biomass, are location-specific (costs vary across sites based on the diversity of resources and institutional/ economic conditions); hence their use are dispersed across the globe and remain marginal components in total energy mix. Among renewable energy-based electricity today, large hydro electricity is the most wide-spread and well-established form of clean energy. In 2008, the global installed capacity of renewable energy-based electricity was 1,140 GW (24% of the 4,700GW of total electric capacity), of which large hydro-power constituted 75% of the renewable capacity (REN21 2009: page 24). Indeed, large hydro has one of the most mature renewable technologies, which is able to compete in today‘s energy markets without policy support. Other renewable energy sources including decentralized generation by solar photovoltaic in remote areas/ villages (where providing grid connection is very expensive), wind farms on exceptional sites, solar water heating are also 39 Data pertaining to the year 2004. Among renewable energy forms, traditional biomass constitutes the largest share (7-8%) of the primary energy supply, large hydro (5.3%) and other newer forms barely 2.5%. (IPCC 2007). 45 competitive. The IPCC (2007) noted that certain wind, solar, and bioethanol technologies have become competitive and experienced declining costs due to enhanced learning. For instance, in the US, wind energy generation costs have reduced with the installation of larger more efficient turbines, and over the second-half of 1990s generating efficiencies improved by more than 15% (Bird et al 2005: 1399). Much of the solar energy technology, on the other hand, is still evolving – except for crystalline photovoltaic solar water heating which has wide commercial use, concentrating solar dish (although technologically viable) has immature markets, thin film photovoltaic is in the demonstration phase; and nanotechnology solar cell is still in the technology research stage. Developed country experiences indicate that renewable energy technology advances were made possible largely through supportive government policies and instruments. Thus enabling government policies are expected to help clean technology deployment from developed to developing countries. It is pertinent to note that new energy sources have been able to compete with conventional energy sources on an average cost basis in countries with the most mature markets, especially where environmental externalities and fossil fuel price risks are taken into account (IPCC 2007). So government efforts are required to create an enabling state for the development of clean energy technology especially in countries where market diffusion is slow due to a host of barriers – economic, institutional, and social. For instance, a legal institution to protect intellectual property rights is also required to provide incentive to firms to share their technology in production-sharing contracts in the energy sector. The role of governments in restructuring markets through privatization and liberalization of energy sector has also been significant especially since the 1990s when the competition between global technology vendors became intense (IPCC 2000).40 While developed countries need to significantly reduce greenhouse emissions, being the highest emitters of greenhouse gases, there is equally a need to aggressively promote clean energy in China and India, which are emerging as large energy consumers (spurred by rapid economic growth). The energy-mix in China and India is carbon-intensive as coal continues to be their primary energy source (being the low cost indigenous resource). During 2000-06, it is estimated that about 58% of the global increase in greenhouse gases came from China and about 6% from India (IEA 2007: 55). In India about 80% of the power capacity under construction is coal-based (McKinsey 2009). Evaluation of Alternative Policy Scenario of clean growth trajectory for the global economy, with special focus on China and India, indicate that renewable energy (mostly hydro, wind, and biomass) needs to play an increasingly significant role especially in the power sector, and become the second largest source of electricity after coal by 2030.41 In the EU the indicative target would be to increase share of renewable energy in electricity generation to 38% 40 There has been a marked change in the current nature of technology transfer in the energy sector as well as government roles compared to the 1950s and 1960s, when technology transfer was euphemistic for large scale public investments based on foreign technology and soft loans with minimal knowledge transfer and domestic capacity building. (IPCC 2000) 41 In 2005, renewable energy constituted 18.2% of total energy generated - of which 16.1% was hydro, 1.3% biomass, 0.6% wind, 0.3% geothermal, and solar was negligible. Under the Alternative Policy Scenario (based on current energy/ environmental policies and measures under consideration in different countries), renewables-based electricity generation is expected to rise to 28.6% by 2030 -of which 17.3% would be hydro, 3.7% biomass, 5.8% wind, 0.6% geothermal, and 1.1% solar. (IEA 2007: 213) 46 in 2030, for which 60% of capacity addition between 2006 to 2030 would need to be in renewables requiring an investment of US$603 billion (in 2006-dollars, IEA 2007: 106). A recent study indicates that India can potentially reduce emissions by 30% to 50% by 2030 (equivalent to 2.8 billion-3.6 billion carbon dioxide equivalent) with the use of commercially available and feasible clean technology (McKinsey: 13).42 The maximum potential for this phenomenal emission reduction is offered by a clean power sector, where approximately 0.9 billion tons of carbon dioxide equivalent or 35% of the total potential reduction in emissions can be achieved.43 The emission abatement potential in power sector during the twenty-year period is driven by the use of different technologies to meet base and non-base (i.e. peak) demand: while base-load power demand can be met through clean coal-based generation, hydro, nuclear and bio-mass based generation; the non-base peak demand can be ideally met by renewable sources of reservoir hydro and solar power (especially since solar generation coincides with day- time peak).44 Since solar photovoltaic has witnessed reduction in costs of about 22% for every doubling of cumulative capacity in the last three decades, the cost of solar power equipment is expected to continue to decline which would make this renewable form a cost-effective source of peak power. Renewable energy forms of solar and wind can be potentially increased in the next twenty years in India‘s clean power path: 56GWof solar power (30GW of concentrating solar power, and 26GW of photovoltaic solar power) and 42GW of wind power capacity can replace fossil fuel-based power generation for meeting peak-demand by 2030 (McKinsey 2009: 23). The rest of the paper is organized as follows: section 2 briefly outlines the different barriers to technology transfer and deployment, and instruments that may be used to overcome these barriers. Section 3 discusses the role of intellectual property rights regime in technology transfer in reference to wind and solar power. Section 4 documents the experience of selected countries in developing wind and solar power. The policies adopted in the five countries, namely China, Denmark, Germany, Spain and the United States are highlighted. Section 5 concludes with implications for the Indian economy. 2. Barriers and Incentives in the Transfer of Clean Power Technology Clean technology diffusion is seen as an efficient means to mitigate global warming, whereby countries which are yet to indigenously develop such technology can leap-frog onto a cleaner growth and consumption path. To this effect, means of technology transfer was incorporated in the Kyoto Protocol whereby industrializing countries could benefit from the more advanced 42 The case for emission abatement was assessed with 200 opportunities that can reduce energy consumption and carbon emissions in ten highest energy consuming and emitting sectors. For each option, the study analyzed the potential emission reduction and cost of abatement per ton of carbon dioxide equivalent for the period 2010-2030. It is important to note, however, that a number of options identified for the emission abatement potential for India are based on technologies which are still emerging like solar thermal with storage and LED lighting (whose actual application faces high upfront costs and untested efficacy). 43 This abatement case result in the McKinsey (2009) analysis is based on several assumptions – first, power demand in India would be met completely by 2030; second, power capacity mix will match demand profile effectively; third, power consumption will be improved in other sectors (lowered by about 25%); fourth, coal capacity will be added through more efficient technologies. (McKinsey 2009: 14) 44 Gas-based combined cycle gas turbines, cycling coal-plants, open cycle gas- and oil-based generation are also proposed for meeting peak-demand. 47 technology from Annex I (industrialized) countries through the Joint Implementation projects (Article 6 of the Protocol), and Clean Development Mechanism (Article 12 of the Protocol). Although both these instruments primarily offered a flexible means to Annex I countries to achieve their emission reduction commitments by earning emission reduction units or certified emission reduction credits from developing countries, technology transfer was seen as an integral part within these mechanisms. Technology transfer takes place through equipment (embodied with clean technology design) and/or through services (capital and knowledge and expertise- engineering, design, etc). For instance, wind energy generation is driven by the wind power technology which is essentially composed of three integral equipment-components – gear box, coupling and wind turbine. Similarly, current solar power technology is driven by photovoltaic cells. Foreign direct investment can also bring in clean technology/ skills when multinational firms set up equipment production or build energy systems. Alternatively, domestic firms may license foreign technology and/ or bring in the services of skilled professionals. While liberalization policies may help in access to international technology, the success of technology diffusion in general depends on a range of other enabling factors, particularly the capacity to absorb and improve technologies in the host countries. The appropriate policy for the transfer of technology, say FDI versus licensing, in the host country also depends on the domestic market conditions, and nature of patent protection system - say whether it encourages incremental innovation by small firms, as in Japan (Hoekman et al 2005). Weaker patent systems have been seen to encourage imitation and adaptation of advanced technology in the public domain or available cheaply, as in Korea in the 1970s and 1980s, and as domestic R&D capacity increased the IPR regime was strengthened (ibid). Technology transfer is essentially motivated by economic incentives, and largely takes place in the private sector. Thus the market conditions (like current and potential market demand, market access and expected price) in the host country play a critical role in the export of clean technology by a technology holder. To the extent market conditions are shaped by the underlying institutional factors and government regulations, the latter are also significant factors influencing technology transfer and diffusion. This section gives a brief on the barriers in clean technology diffusion identified in the literature and the corresponding policies to enhance technology transfer. 2.1 Barriers in the diffusion of clean power technology in developing countries: The barriers in transfer of clean climate technology in developing countries are by and large inadequacies in the market demand (i.e. need supported with purchasing power), absorptive capacity and other institutional factors. In particular, renewable electricity from wind and solar continue to be highly subsidized across the globe and deployment poses a greater challenge in developing countries with financial and institutional constraints. The barriers to technology transfer from more advanced countries to developing countries in clean power can be summarized as follows: 48 (i) Credit constraint: Installation of clean energy systems for wind and solar entail high capital costs, and given the risk in market return for the new form of energy, especially with readily available cheaper substitutes (like coal-based power systems), the demand for the clean technology is low. (ii) Institutional constraints: The bias towards conventional fossil fuels is often built-in the system due to government subsidies. This policy-distortion is true for both developed as well as developing countries, where fossil-fuels are the cheaper alternative energy source. The total government subsidy in the global energy sector is about US$250-300 billion/ year and of this 2-3% supports renewable energy (IPCC 2007). (iii) Trade and Intellectual Property Rights regime: In developing countries, additional institutional barriers often exist due to restrictions in the import of equipment related to clean technology; or due to the inadequacy in intellectual property rights regime. For instance, high tariff rates impede transfer of technology through the import of the technology-embodied equipment. In solar electricity systems, photovoltaic cells account for more than half the cost and some developing countries have high tariffs ranging from 10% to 32% (WB 2007: 65). When IPR regimes are weak, the inflow of foreign technology may also be impeded if investors are unwilling to bring in innovations in such recipient countries. (iv) Regulatory gap: Inadequate environmental norms in particular for greenhouse gas emissions and clean energy standards fail to provide the incentive to substitute towards low-carbon technology. Indeed, the development of clean electricity has matured only in economies where clean energy standards and efficiency have been enforced. (v) Deficiency in technical absorptive capacity in recipient country: The clean energy industry, especially for power generation, is knowledge-intensive. Thus technology transfer in recipient developing countries requires the knowledge-base and skill to absorb and innovate on the imported technology for successful diffusion. Countries tend to import international technology more readily where domestic firms have R&D programmes, and sound capacity of technical skills and human capital (Hoekman et al 2005). Absorptive capacity determines the speed at which new technology diffuses through a developing country. The capacity depends on a variety of factors including technological literacy, workforce skill, education, and government institutions (Popp 2009: 16). With regard to solar photovoltaic cell manufacturing which is a technology-intensive process with rapid technology development, the Indian solar sector observes that it is challenging to replicate the success of incumbent manufacturers in the world market due to the technology lag.45 2.2 Policies to enhance clean technology transfer The growth and maturity of the renewable energy industry in the developed countries was driven by government supportive policies, and it is expected that an enabling government role in developing countries could help in the growth of the domestic renewable power sector. For instance, in Germany, which experienced the fastest growing alternative energy technologies in 45 http://www.solarindiaonline.com/solar-india.html 49 Europe, the budget for R&D accounted for 25% of total government energy spending (WIPO 2009: 21). A recent study using patent applications as a proxy measure for development of technological innovations in a cross-section of OECD countries, established that public policies have indeed been significant in inducing innovations in renewable energy during the period 1978-2003 (Johnstone et al 2008).46 In particular, for wind technology regulatory obligations (say, renewable production quota) and tradable certificates were found to be significant policy instruments; whereas for solar power, only investment incentives were found to be statistically significant (supporting the fact that solar installations being capital intensive, investment incentives really matter). To address the barriers listed above and facilitate technology transfer in clean power, developing country government policies need to augment demand for clean technology and also enhance basic domestic knowledge and skill base for absorption and adaptation of the more advanced technology. Cost reduction through scale economies in the generation of clean energy, like solar and wind, is closely linked to market development, government policies, and support for research and development. Demand-pull policies a) Internalizing the environmental costs of dirty energy and removing their subsidies, which would make dirty energy relatively more expensive in the final market. With dirtier forms of energy becoming relatively more expensive, consumers would be incentivized to substitute towards cleaner energy forms. The IPCC (2007) noted that an OECD study indicated that global carbon emissions could be reduced by more than 6% and real income increased by 0.1% by 2010 if support mechanisms on fossil fuels used by industry and the power-generation sector were removed. However, since the removal of subsidies for conventional energy is politically difficult, many developed countries have introduced and/or increased support and grants for renewable energy resources. A recent study on transfer of climate change technology among Annex I countries of the Kyoto Protocol during 1985-2004, found that the greater the commitment to climate change mitigation (measured in terms of relative emissions of 2008-12 to year 1990) greater is the technology transfer (Hascic and Johnstone 2009). Also the more similar the environmental regulations are across countries, lower is the ―regulatory distance‖ and thus greater is the technology transfer across them as observed among Annex I countries in the Kyoto Protocol (ibid). b) Increasing environmental awareness will also enhance demand for clean energy (and therefore technology) among environmentally conscientious consumers and among corporate houses keen on establishing a green market image. Such behavioural change can come with enhanced environmental information and education in society, which 46 The patent counts in different types of renewable energy of wind, solar, ocean, biomass and waste, in each country was modeled to be a function of electricity consumption (proxy for potential market size), price (of substitute electricity), overall patent applications filed across the whole spectrum of technological areas (proxy for scientific capacity and innovation propensity), R&D expenditures and other public policies. The study distinguished between six different public policies, including R&D, investment incentives (e.g. grants, low-interest loans, etc), tax incentives (e.g. accelerated depreciation), price or tariff incentives (feed-in tariffs) voluntary programmes, obligations (e.g. production quotas), and tradable certificates. 50 eventually lead to environmentally-conscious citizens driving for pro-environment government policies and green goods and services. c) Establishing carbon efficiency and emissions norms/ regulations, which would create an incentive to reduce carbon emissions per unit energy. The energy efficiency of output has been different in the growth path of different developed countries (the US, for instance, is a higher energy using economy compared to Japan) indicating that carbon- efficiency norms can help steer countries towards a low-emission growth path. The declaration by the Chinese government of an overall emission per unit GDP in the wake of the Copenhagen summit reflects a commitment for adoption of a low-emission growth path for its emerging economy. d) Regulations on energy mix for utilities, which essentially forces utilities to buy energy produced from renewable resources when supplying through the grid to consumers. Several governments enforced such mandatory renewable component in energy mix for utilities to create a minimum demand for clean energy in the system until such renewable forms became competitive in the market. Supply push policies e) Absorptive capacity through funding R&D and/or demonstration projects: Research and development, and demonstration projects help build the knowledge and skill-base required to increase the adsorptive capacity of advanced technology. Demonstration projects also help to showcase the technical viability of the newer technology. In an empirical study on transfer of climate change technology from Annex I countries to developing countries during 2000-2004, the absorptive capacity (proxy estimate being the number of patents for climate change technology invented in recipient country) found to be significant positive factor (Hascic and Johnstone 2009).47 The study observed that local scientific capacity or, domestic innovation seems to ―crowd in‖ imported technology. f) Tax incentives to investors in building renewable energy farms: Since upfront costs of setting up clean energy capacity like wind and solar power constitute the major barriers for investors, special tax incentives for building renewable farms has typically encouraged their establishment. The account of different country experiences illustrate that all governments have offered complementary (to other policies) fiscal concessions for investment in renewable energy capacity, including subsidies, accelerated depreciation and investment tax credits, and in developing countries dependent on technology imports additional concessions are available for custom duties on technology- embodied equipment. 47 The study used the number of patent applications in 13 climate mitigation fields from Annex I (source) countries for protection in (recipient) developing countries as a proxy for technology transfer, using the European Patent Office/OECD World Patent Statistical Database. The regression estimation used a gravity model specification between source (applicant priority office) country and recipient (duplicate patent office) country. The 13 fields included renewable energy generation technology of wind and solar, climate friendly cement, energy conservation in building, carbon capture, etc. Admittedly, the measure used is flawed since an applicant seeking protection for invention in a developing country, at most reflects potential transfer and not actual technology transfer. 51 g) Liberalization and Intellectual Property Rights regime: Open trade regime can facilitate the transfer and deployment of technology through higher market access of associated equipment (environmental goods), design and engineering (environmental services), foreign direct investment and licensing of foreign technology. Enforcing and strengthening intellectual property rights is expected to provide incentives to firms from industrialized countries to transfer clean technology in recipient developing through licensing and foreign direct investment (although market-power related price increase and insufficient transfer remains an open question). An empirical study of factors determining climate change technology transfer from Annex I countries to developing countries found that does not appear to be significantly affected by the strength of the intellectual property rights regime in the recipient country (Hascic and Johnstone 2009).48 h) Public-private joint-ventures/ government provision of venture capital helps to overcome the financial crunch faced by clean energy investors for the high capital cost in new renewable power. i) Feed-in tariffs that ensure a basic price (based on cost) to clean energy suppliers until a self-sustaining market develops. Feed-in tariffs were implemented in Europe and the US through regulatory and legislative measures, which ensured revenue for the renewable power producers and overcome the barrier of market risk and return. Section 4 below recounts this ensured-price policy that has been implemented widely across Europe and other states. 3. IPRs and Technology Transfer in Wind and Solar Power The protection of intellectual property or patents is considered to be an important factor in the flow of technological knowledge across countries with sufficient absorption capacity. Indeed, the transfer of climate change technology in general, and that of renewable energy in particular, occur largely amongst the developed countries. The world renewable energy market is dominated by a few companies with rapidly evolving technological products and designs. For instance, in wind power production capacity (including production of components, installation and construction, but excluding power generation services) the five major companies of Enercon, Siemens (Germany), Vestas (Denmark), GE Wind (US) and Gamesa (Spain) together control about 86% of the world market (WIPO 2009: 79). These firms are also among the leading applicants for wind power technologies. The number of patent applications for solar power technology is higher than for wind power, even though solar technology is still not commercially viable (especially new types of solar cells) compared to wind power (economically viable, cost about half that of solar power). Indeed, the Japanese companies have the highest number of applications for solar energy technology (Canon, Sanyo Electric, Sharp, Matsushita Electric, and Kyocera), although they seem to engage in less technology trade than EU and the US (WIPO 2009). 48 A proxy estimate used to measure the strength of intellectual property rights regime in the study was the overall duplicate patent applications across the whole spectrum of technological areas (not just climate change). 52 A literature review on IPR regime and overall technology transfer indicates that the nature of the industries and countries are important factors in the extent of knowledge trade that takes place. In patent-sensitive sectors, stronger IPR regime increases technology flows in middle-income and large developing countries but not in low-income countries (patents may not increase FDI either).49 Stronger IPR regimes could increase the monopoly rents earned by multinational firms, thereby raising the costs of protected technology for developing countries. This notion has been reflected in the concerns raised by developing countries like Brazil, China, and India in the UNFCC forum that restrictive IPRs could stifle innovation in developing countries, raise the costs of knowledge acquisition and learning, and impede climate change technology transfer. Indeed, the literature shows that strong IPRs are not likely to benefit poorer countries, where increasing basic education and technology training is more critical. Thus poor countries may be better off increasing the access for the import of technology-intensive goods and enhancing the capacity to absorb and adapt technologies (Hoekman et al 2005: 1592). A recent empirical analysis found that the strength of the IPR regime and innovation intensity of recipient country, as measured by total patent applications across the spectrum of technologies, was a significant factor in the transfer of climate change technology across Annex I countries during the period 1985-2004 (Hascic and Johnstone 2009). However, the same was not found to be true for transfer of climate change technology from Annex I countries to developing countries (ibid). This seems to be in line with the conclusion from the earlier literature on the strength of IPR and technology trade. The table below gives a useful general prioritization of domestic policy rankings for international technology transfer based on country classification from Hoekman et al (2005). It is instructive to note that international technology transfer needs support through a range of policies in recipient countries (as well as complementary promotional policies from within developed countries) as listed in the table. For poorer countries increasing technological capacity through education and skill training is far more important than a strong IPR regime. Indeed, the Hoekman et al thumb-rule recommends a less-than TRIPS regime in low-income and lower-middle income countries (which includes India) to support technology transfer. Table 1. Rank and nature of domestic policies for international technology transfer Policy\ Country Low-income Lower-middle Upper-middle country income income Trade in goods 1 1 1 Liberal access Liberal access Liberal access General technology 1 1 1 policy Basic education; R&D support R&D support improve policies; improve policies; improve infrastructure; infrastructure; infrastructure; reduce entry barrier reduce entry barrier reduce entry barrier FDI policy 2 2 3 Non-discriminatory Non-discriminatory Upstream supplier investment investment support programs promotion promotion 49 See Hoekman et al (2005) for references to various studies. 53 Mode 4* 3 4 2 Incentives for Incentives for Encourage two-way education abroad education abroad mobility. and training-related and training-related movement movement Licensing of 4 3 - technology Improve Improve No active policy information flows information; limited about public domain incentives for and mature licensing technologies IPR 5 5 4 Basic protection and Wider scope of IPR Apply full TRIPS minimum standard protection; employ only flexibilities *Temporary movement of natural persons Source: From Table 1 in Hoekman et al (2005) 4. International Experience in Development and Deployment of Solar and Wind Energy Technology in renewable energy of solar and wind has developed in the global energy industry over the last six to eight decades. Experiments with wind turbines for electricity generation were undertaken in Germany as early as 1930s, and the first solar cell was produced in 1954 by Bell laboratories. In the 1970s and 1980s the overwhelming focus was on research and technological development, and in the 1990s the emphasis was on actual implementation. Analysts consider the 1990s to be the beginning of the take-off period in the long-term diffusion of wind turbine and solar cell technologies (Jacobsson and Lauber 2006). The global solar and wind industry grew most rapidly in the last twenty years. In solar energy (photovoltaic and concentrated solar power for electricity, and solar heating and cooling) the highest current public R&D expenditures are in the United States, followed by Italy, Germany, Korea, France, etc. The total worldwide investment in renewable energy in 2008 is estimated at US$120 billion, driven by the investments in wind power 42%, solar PV 32% and biofuels 13% (with biomass, geothermal power and heat at 6%, solar heating at 6% and small hydro 5%; REN21 2009: page 14). The renewable energy investment was led the US (wind and ethanol) with $24billion accounting for 20% of global investment; followed by Spain, China and Germany respectively each having invested in the range of $15-19 billion (ibid). Apart from installation investment, capital investment in the solar PV and wind manufacturing industry exceeded $15 billion in 2008. During 2008-09, several governments set investment goals in renewable energy and generating clean growth and employment: including the US ($150 billion for renewables over 10 years), Japan ($12.2 billion over 5 years), Hungary ($330 million over 7 years), South Korea (package of $36 billion over 4 years), Netherlands ($200 million/ year for 15 years to support offshore wind power), China ($15 billion, much of it for wind power). 54 While developed countries dominate the world market in renewable energy technology, developing countries like India and China have long experience in the use of renewable energy in rural development (over four decades) with small-hydro, biomass, and wind power. Indeed, by year 2008 the total installed capacity of renewable energy-based electricity (excluding large hydro power) was the highest in China driven by small hydropower (see Table 2 for details). In the global renewable energy sector, however, the fastest growing power-generation technology in 2008 was the grid-connected solar photovoltaic, which experienced 70% increase in existing capacity to 13 GW (together with off-grid applications the total installed capacity was over 16GW, REN21 2009). In 2008, the largest new installed capacity in solar PV occurred in Spain with 2.6GW (representing half of the total new global installation), followed by Germany with 1.5GW, United States with 0.3GW, South Korea and Japan with 0.2GW each, etc. A growing market for grid-tied solar PV has also emerged in China and India. The solar PV industry is one of the fastest growing industries today.50 In 2008, the global production of solar PV reached 6.9 GW, with China emerging as the world‘s leading manufacturer of PV cells (of 1.8GW), followed by Germany, Japan (the erstwhile global leader), Taiwan and US respectively (REN21 2009: 15). The German firm Q-Cells has been the leading solar PV producer worldwide for the last two years. On the other hand, in thin-film production, the US is the market leader followed by Malaysia and Germany. In comparison the solar PV technology, concentrated solar power is a small segment within solar energy. The CSP (including troughs, tower, and dishes) technology provides solar thermal power and requires high direct solar radiation. The United States and Spain together represent 90% of the world CSP market (IEA 2009).51 Table 2. Renewable Electric Power Capacity (in GW) of Selected Countries, 2008 Renewable Energy World EU-27 China US Germany Spain India Total renewable excluding large 280 96 76 40 34 22 13 hydro* in GW Of which Small hydropower 85 12 60 3 1.7 1.8 2.0 Wind 121 65 12.2 25.2 23.9 16.8 9.6 Solar PV-grid 13 9.5 0.1 0.7 5.4 3.3 ~0 Solar thermal power 0.5 0.1 0 0.4 0 0.1 0 CSP *Including small hydro, biomass, wind, geothermal, solar and ocean power. Source: From REN21 (2009) Table R4. 50 Solar photovoltaic market can be differentiated into building integrated PV, thin film solar PV technologies and utility-scale solar PV technology. REN21 2009: 12. 51 Since concentrating solar power requires clear skies and strong sunlight, southwestern United States, Mexico, North Africa, Middle East, Central Asia, South Africa, Australia, extreme south Europe, western India and western China are well-suited for CSP technologies (IEA 2009). 55 Wind power also experienced a high growth of 29% in 2008, with the existing wind power capacity reaching 121 GW. The main wind energy investments, in both on-shore and off-shore wind farms, have been in Europe, Japan, China, United States and India. The largest additional capacity in wind power took place in the United States, followed by China and India (see Table 4 for details). Table 3. Wind Energy Capacity in MW of Selected Countries, 2008 Country Cumulative Additional TWh from Share of wind installed MW Capacity in Wind Energy in in electricity in 2008 2008 2008 production 2008 United States 25,170 8,358 52.4 1.90% Germany 23,903 1,665 40.4 6.50% Spain 16,754 1,609 31.5 11.70% China 12,210 6,300 8.8 n/a India 9,645 1,800 11.6 n/a Denmark 3,180 0 6.9 19.30% Source: IEA (2009a) Technology Road Map: Wind Energy The region of European Union has succeeded in emerging with the highest installed capacity of renewable energy, in particular of wind power and solar PV (see Table 2 above), due to the strong government policy initiatives. The strong policy push to increase deployment of renewable energy forms in the European Union is evident from the commitments. The landmark White Paper of the European Commission sought to increase the share of renewable energy production to 12% by 2010. Following this, the Renewable Electricity Directive 2001/77/EC set the target for renewable sources in electricity consumption at 22% for 2010. In 2005, the European Union accounted for 74% of the global wind power production and 90% of total wind power production facilities (WIPO 2009: 28) Fiscal incentives, in particular feed-in tariffs helped to provide a stable return to investors in renewable energy generation in Denmark, Germany and Spain. Germany stands out as a success story in rapid deployment of wind turbines as well as photovoltaic systems. The German and Spanish governments seemed to have effectively balanced technological development with support for market introduction, since economic feasibility of viable technologies is essentially for large scale deployment. 4.1 Denmark The promotion of renewable energy sources began early in Denmark. Wind turbine technology for electricity production was developed in Denmark towards the end of the nineteenth century,52 and by 1918 about 3% of Danish electricity demand was covered by wind power (Meyer 2004). By the end of 1970s, small-scale wind turbines were being produced for the use by private households, and a programme for development of large-scale electricity-producing turbines was implemented jointly by national government and Danish utilities in 1977 (ibid). Solar energy, as 52 Poul la Cour built a practical wind turbine for electricity production in 1891, which provided the basis for further technology development in wind power generation in Denmark in the beginning of the twentieth century. 56 part of the Danish renewable energy policy, has also been covered although on a much lower key. Denmark has the highest proportion of wind energy integrated into its power grid (21.6% in 2006, and in the region of West Denmark the share is even higher), and is the world leader in wind technology (Sovacool et al 2008). In 2005, Denmark exported US$7.5 billion worth of wind energy technology and equipment, accounting for 8% of the country‘s total exports and a third of the total world market (ibid). Various strategies adopted for wind power promotion in the country through the years since the 1970s helped Denmark to emerge as a leader in this field. Government Energy Planning and Ambitious Targets: While official energy plans of the Danish government began in 1976, the energy policy goal on reducing greenhouse gases and promote sustainable energy development took place in 1990. The Danish Energy Plans of 1990 and 1996 aimed to increase the share of electricity generated from renewable energy sources. The specific target for wind power installed capacity was set at around 1,500MW in 2005 and 5,500MW in 2030 –covering 10% and up to 50% of Danish electricity consumption respectively (Meyer 2004: 27). The latter target included 4,000MW offshore wind capacity, which has begun to play a more important role in Denmark, given challenges of land sites. The target of 1,500MW of wind power for the year 2005 was exceeded by a significant amount since by the end of 2003, the installed wind capacity was 3,000MW and covered almost 19% of Danish electricity demand (ibid). In 2007, the government announced a goal to increase renewable energy penetration in the total energy sector to at least 30% by 2025, and doubling wind power capacity to 6,000 MW with additional capacity through off-shore wind farms (Sovalcool et al 2008). Private-system subsidies, net-meteringand support for R&D: In 1979, the Danish government began a subsidy programme for private citizens under which upto 30% of capital cost of installing wind turbines (as also solar and biogas digesters) was reimbursed. Later this investment subsidy was lowered to 10% of the capital cost (purchase price of the renewable energy systems) , and during the period 1979-89 a total of €38 million for the installation of 300MWof rated wind power was paid out under the investment-subsidy scheme. In 1982, a government committee on renewable energy sources established to promote wind, biomass, solar, etc. The committee provided €30 million in total funding over nine years until 1991 (Meyer 2004). In the late eighties, the Committee promoted a new programme for off-shore wind farms, and Denmark was successfully to establish the world‘s first off-shore wind farm. Analysts consider the Danish R&D approach as a bottom-up strategy that allowed for step by step incremental learning in wind turbine development through practical experience (Sovacool et al 2008). During 1980 through 2005, the cost per kWh of Danish wind turbines decreased by 60 to 70%, and commercial turbine output grew 100-fold from 30kW in 1980 to 3MW in 2006 (ibid). Denmark has also undertook several initiatives in solar PV (but does not have any national PV programme), especially for roof-top installations. An investment subsidy of 40% of the turnkey system cost was also offered which helped in installations during 2002-06. By end of 2008, solar PV capacity reached 3.2MW, installed under various projects and demonstration plants (IEA 2009d: 49). In order encourage deployment of solar PV energy, the government established net- metering for privately owned PV systems in 1998 (first on a pilot basis, and then permanently in 57 2005). The net-metering rate of about € 0.25/kWh, however, is not significant enough by itself to increase PV installations (ibid) National test and certification of wind turbines: In order to establish a credible market reputation for the emerging wind-turbine manufacturing industry, in 1978 the government began a machine testing (later a formal certification procedure was added on) at Risø National Laboratory. Analysts have credited this early initiative for preventing sub-standard technologies from being marketed in Denmark and abroad (Meyer 2004). In 1995, the Photovoltaic System Laboratory was established in collaboration between Risø National Laboratory and the Danish Institute of Technology in order to certify the quality of PV systems and their installation, as well as certification of installers (IEA 2009d: 49) Feed-in tariffs and regulations for grid access: The fast paced deployment of wind power was driven by feed-in tariff and government regulations. Since the late seventies, agreements between the Association of Danish Electric Utilities and the Danish Wind Power Associated ensured grid connected wind power. In 1992 the Danish government introduced regulations for conditions for grid connections of wind power and for feed-in tariffs, the latter being fixed at 85% of the utility production and distribution costs. Private wind power producers also received a ―tax refund‖ of 3.7 eurocents/kWh as premium for the environmentally friendly power. The wind power revenue after 1992 was about 8eurocents/kWh, corresponding to a post-tax return of 10-15% on investment, and thus provided strong incentive for the growth of on-shore wind capacity (Meyer 2004: 28). The guaranteed access to the grid also prevented utilities from using their incumbency power to block renewable energy projects on transmission and distribution grounds (Sovacool et al 2008). Essentially these government regulations enhanced the profitability of renewable energy projects and shifted the significant costs of interconnection to the grid from the renewable energy producer to the utility. While the use of feed-in tariffs in Denmark has been successful in encouraging the growth of renewable energy, current Danish policy has shifted away from feed-in tariff model. The Energy Act 2000 introduced a shift away from the feed-in model to green market (with trade in green certificates) in line with Denmark‘s commitment to reduce emissions of greenhouse gases to 55Mt of carbon dioxide equivalent by 2012 (Meyer 2004: 32). The move away from the feed-in tariff model has also been accompanied by stunted growth in wind power in Denmark. Energy and carbon taxes: Electricity prices have been relatively higher in Denmark compared to other European nations of Germany, UK, etc. In 1974 different types of energy taxes were passed in response to the energy crisis, and taxes continued even after fuel prices fell in the 1980s. The relatively higher price of Danish electricity helped to increase energy efficiency in the power market. In 1992 the government levied a carbon tax on all forms of energy and this helped to generate approximately an additional 1.3 eurocents/kWh for renewable energy producers (Sovacool et al 2008). The Danish Energy Act 2000 also introduced a quota for annual carbon emissions (starting with 22Mt in 2001) in order to move the system to a low-carbon path. Transmission and Distribution System: Apart from government policy support and Denmark‘s natural advantage in wind power, the prevalence of high voltage transmission lines is a significant factor for the success an efficient wind power system in the country. This feature 58 keeps transmission and distribution (T&D) efficiency losses for low voltage power over short distance is low (Sovacool et al 2008). The nature of the T&D system is rather unique since it handles three times the power needed for Denmark, and was developed for electricity trade among neighbouring countries. The Nordic countries (Finland, Norway, and Sweden) export hydroelectric power to other European countries through Denmark to meet the peak demand during the day, and electricity flows in the reverse direction to the Nordic countries at night. 4.2 Germany53 Today Germany features among the leading countries in the supply and installation of both wind capacity (wind turbines) and photovoltaic capacity (solar cells). The period 1974 through 1988 was the initial formative period for both wind and solar technologies. In 1985 Germany accounted for less than 1% share of the global stock of wind turbines and solar cells, but by the early 1990s emerged as a prominent player in the world market for these technologies. A third of total wind power produced worldwide is generated in facilities in Germany (WIPO 2009: 26). Although the share of photovoltaic in renewable technology is low within Germany, it is significant as a proportion in the total global installed photovoltaic capacity. Indeed, Germany has had the highest annual PV installations in the world since the year 2004, driven by the Renewable Energy Sources Act of 2000 (amended in 2008) which ensured favourable payment for renewable by the utilities (IEA 2009f: 60). Federally funded R&D of technology and demonstration projects: The first significant move to develop the renewable sector came in the form of government-funded research and development in the seventies and early eighties: annual spending on R&D for off-grid renewable energy technology increased from DM 20 million in 1974 to DM 300 million in 1982. During 1977-89, about 40% of the R&D projects were granted to industrial firms and academic organizations: in wind energy the focus was development or testing of small (like 10kW) to medium-sized (200- 400kW) wind turbines; and in solar energy the focus was on the development of mainly crystalline silicon cell and partly on thin-film technology. This move help build an academic and industrial knowledge base for the two forms of renewable energy technology. The R&D policy also incorporated demonstration programmes through which federally financed wind and solar installations were made in the eighties. Demonstration projects were effective in enhancing the knowledge base through applications among the initial entrants to the industry (14 German turbine suppliers and four solar cell producers received federal funding). Feed-in law and price support: Institutional and regulatory support was provided in the electricity feed-in law for generation from renewable. The electricity tariffs were revised to compensate the generators of renewable sourced electricity over the level of avoided costs. The Feed-in Law made it mandatory for utilities to connect to generators of electricity from solar and wind sources, and buy the electricity at 90% of the average tariff for final consumers. The justification for feed-in law was to offset the external costs imposed by conventional power from sources like coal, and create a market for the renewable power. The law provided financial incentives to wind energy investors, and to a lesser extent to solar power investors (since the costs for the latter were rather high compared to the feed-in rates). Although the Feed-in law faced political challenges in terms of the burden created, it was incorporated in the Act on the 53 Largely drawn from Jacobsson and Lauber (2006) 59 Reform of the Energy Sector in 1997. Interesting in 2005, a tenth of the German electricity came from renewable sources, with 70% being supported by feed-in tariffs. Different renewable energy receives different feed-in tariff rates, for instance, solar energy receives € 0.457- 0.62/ kWh, while wind receives € 0.055-0.09/ kWh (IEA 2009b: 47) Legislation: The Renewable Energy Sources Act of 2000 reinforced the Feed-in Law. It is remarkable how the Act explained that the intention was to reduce the competitive advantage of conventional electricity generators which on one hand imposed the associated social and ecological costs on tax payers and future generations; and on the other hand enjoyed substantial government subsidies that enabled market prices to be artificially low.54 In essence, the legislation upheld the polluter pay principle for carbon emissions in the energy sector. With the new legislative support for feed-in rates, the market for wind turbines in particular expanded considerably and larger firms entered the industry in financing, building and operating wind farms. The Renewable Energy Sources Act accelerated the grid-connected PV installation and also the associated equipment manufacturing firms (about 10,000 companies by 2008). In the last decade German PV production firms emerged as the most experienced manufacturers worldwide (IEA 2009f: 61). Subsidies and green-pricing schemes: Various state programmes provided subsidies to solar and wind power generation. Subsidies were often in terms of low-interest loans to renewable investors. For instance, some states subsidized solar cells for special purposed like schools, and offered cost-oriented rates in buying solar power (though still less than the full costs). The wind power sector took off during the 1990s with the German wind turbine industry becoming the second-largest in the world by 1998, while the take off in the solar power sector followed closely in the early 2000s. The table below provides a comparison between subsidies, R&D funds and environmental costs for the conventional and alternative energy sources in Germany: Table 4. Comparative Government Support and External Costs in Energy Generation Energy Subsidies Govt funded External Costs Source R&D Hard Coal €80-100 bln + tax exemption €2.9 bln (1975- €400 bln in flue gas (1975-2002), €16 bln for 2002) cleaning (1974- 2005-16 2002) 2-4.2€cents/kWh in 2002 4.5€cents/kWh in 2002 Nuclear €14 bln (1974- fission 2002) Wind €0.15 bln (1989-2001) + feed- €0.4 bln (1974- in compensation 2 bln 2002) (including solar) in 2002 54 Contained in the memorandum of the Renewable Energy Sources Act 2000, as quoted in Jacobsson and Lauber (2006): 268. 60 9.1€cents/kWh in 2002 0.05 €cents/kWh Solar (PV) €0.1 bln in 2001 roofs €1.15bln (1974- programme + feed-in 2002) compensation 0.6 €cents/kWh in 9.1€cents/kWh in 2002 2002 Source: Based on information in Jacobsson and Lauber (2006) 4.3 United States As noted earlier, the US is market leader in thin-film solar PV technology, as well as concentrated solar power. The CSP technology development has taken place in southwestern part of the country, where direct solar radiation is abundant and strong. During 1984-91, Luz International Ltd built a series of solar electric generating systems (trough technology) in the Californian Mojave desert for a total of 354 MW of grid electricity, which continues to be in operation today (IEA 2009: 1). By end of 2008, over 60,000 solar electric systems had been interconnected around the US (IEA 2009e: 112). The total installed capacity in solar PV was 1,106 MW by end of 2008, with the state of California accounting for almost 66% of all PV installations in the US, followed by Arizona, Colorado, Hawaii, Nevada and New Jersey (ibid). In wind energy, the US is the global leader in terms of installed wind power capacity today (see Table 2). Wind energy capacity experienced rapid growth of 24% per year at the turn of the century (1997-2002) in the US, driven by a combination of Federal and various State support policies. Renewable Energy Production Incentive, created under the 1992 Energy Policy Act, provided inflation-adjusted cash incentive for generation of renewable energy in publicly owned utilities and cooperatives with no Federal tax liability. On the other hand a Federal Production Tax Credit scheme was offered to other facilities, which was an inflation-adjusted per-kWh credit applied to the output of a qualifying facility during the first 10 years of its operation. For instance, under this scheme, qualifying wind generators earned tax credit of 1.8¢/kWh in 2002 (Bird et al 2005: 1398). Some states, like California, New York and Pennsylvania have created a System Benefits Fund to restructure electricity markets, under which a small surcharge is imposed on electricity customers and placed into a fund used to support renewable energy, energy efficiency and other system benefits that might otherwise not be funded in a competitive electricity market. Renewable Portfolio Standard – policy that requires electricity providers to include in their resource portfolio a specified amount of electricity generated from renewable sources. By 2008, twenty-eight states had implemented the Renewable Portfolio Standard (IEA 2009e: 111). Feed-in tariff under PURPA: For instance the state of California provided an instrument akin to feed-in tariff under the Public Utility Regulatory Policies Act (PURPA). The Act established the tariffs at which small power producers can sell power to the utility grid. 61 Net-metering: This incentive for private consumer renewable energy system has remained a popular instrument for encouraging deployment of renewable energy, including solar power in the US. Net-metering has been implemented in 35 states in the US. Financial Incentives: Additional incentives to the wind energy industry including investment tax credits, and five-year accelerated depreciation schedule 4.4 Spain Spain has emerged as one of the leading nations in the installation of grid-connected wind energy (after the US and Germany) and solar photovoltaic energy (after Germany) as evident from the data in Table 2 above. It has also increased deployment dramatically over the last decade. While early efforts to promote wind energy began in 1979 with a research program, and several small wind projects were taken on during the 1980s, the wind power sector began to take-off only in the 1990s. The rapid growth of on-shore wind power began in 1995 due to a multiplicity of technical and institutional support policies, which made wind energy technically and economically feasible. Regulations, targets and promotion plans: The 1980 Energy Conservation Law, in response to the earlier energy crisis laid the foundation for creating a renewable power sector. Under the law, electricity utilities were required to buy energy produced from renewable sources at a fixed price. Targets for wind energy expansion were set through the years. In 1991 the Energy Savings and Efficiency Plan 1991-2000 set a target of 200 MW by the end of the decade. The 1999 Plan for Promotion of Renewable Energy set a more radical target of wind energy diffusion of 9,000 MW by 2010, and in 2004 revised it upwards to 20,000 MW in view of the rapid growth experienced. The Plan also set a target for solar PV electricity of 400MW in installed capacity by 2010, which was surpassed as the installed capacity was 680MW by 2007-end (IEA2009c). The Royal Decree 1663/2000 laid down technical conditions for grid-connection of low-voltage PV systems, however the PV energy generators were obliged to bear the extra of cost transformers to use the grid (Rio and Unruh 2007: 1508). The year 2008 witnessed dramatic capacity installation, when 2,700MW of solar PV were added bringing up the total solar PV capacity to 3.5GW (IEA 2009c: 94). A new National Renewable Energy Plan will target for renewable sources to supply 20% of total domestic energy by 2020 in line with the EU goal. Feed-in Tariff and price premium: The price support measures in Spain offered renewable power generators two options: a premium on the market price or a fixed price, both of which have been adjusted annually since 1999 (Rio and Unruh 2007: 1503). The Feed-in law was implemented in 1994, and subsequently revised and strengthened through the years. The Royal Decree 2818/1998 set a incentive of 39€cents/kWh for PV installations connected to the grid with a capacity lower than 5kWand 21€cents/kWh for PV installations more than 5kW(ibid: 1507). 62 Tariffs and premiums for electricity produced from renewable energy sources are regulated, differentiated by each kind of facility (under Royal Decree 436/2004 and more recently Royal Decree 661/2007). The favourable solar feed-in tariff of 44cents/kWh (allowed till September 30, 2008), was successful in supporting a dramatic growth in PV power in recent years. The Royal Decree 1578/2008, however reduced feed-in tariffs, and the new tariffs are 32cents/kWh for ground installation and 34cents/kWh for roof installations (IEA 2009c: 94), which is expected to stunt the growth in PV power. Investment subsidies: The Spanish government offers investment subsidies and soft loans, with some regional subsidies providing 15 to 50% of the total investment, however the funding for wind energy seemed more favourable than for solar energy (Rio and Unruh 2007: 1508). Local Content requirement: As Spain was a relative late-comer in the wind power technology, a strategy to bolster local manufacturing capacity included encouraging foreign commercial presence with local content. Several provincial governments used local requirement - in terms of local assembly, manufacture of turbines and components - before granting development concessions to wind turbine manufacturers (Lewis 2007: 9). The growth of Spanish firms like Gamesa, the leading wind turbine manufacturer, benefitted from such support policies. By 2002, Spain ranked second in the world in terms of wind turbine operations. The Spanish PV cell manufacturing is considered to be a high quality, competitive and dynamic industry. Spanish cell manufacturers are among the top producers in Europe, including Isofotón (ranked #1in Europe), BP Solar and Astra solar (Rio and Unruh 1509) In 2008, the industrial production capacity of solar PV was 1000MW with more than 500 firms in manufacture (IEA 2009c: 95). It is expected that with declining PV costs and increasing energy prices, solar energy will reach grid-parity cost (ibid). 4.5 China Today China is the second largest energy consumer in the world after the US, and the increasing energy demand has created pressure to seek out new energy sources in recent years. The environmental problems associated with conventional fossil fuels have also encouraged the promotion of alternative energy sources. The government set medium-term targets for renewables in energy share at 8.5% for 2007, 10% for 2010, and 15% for 2020 (Yu et al 2009). In the 1970s, the Chinese renewable energy projects were targeted for the rural areas.55 The renewable energy projects of the 1990s, however, were driven by energy supply concerns as energy consumption rose sharply with rapid economic growth. Since the 1990s, the Chinese government and international agencies have supported several renewable power projects, including bio-fuel, solar and wind energy. In 2001, the State Development and Planning Commission launched a renewable energy Township Electrification Program, under which almost 700 townships received solar PV stations (totaling about 20MW) during 2002-04, with the Government providing US$240 million in subsidy for capital costs of equipment. During 55 Not motivated by shortage of fossil fuel supply according to Ma et al (2010) since the country was a net energy exporter. Now that China has emerged as a net importer of energy, it has driven the search and promotion of alternative clean energy sources. 63 1999-2004, the manufacturing of solar photovoltaic increased more than three-fold (WB 2007:62). The instruments used by the government to support the growth of renewable energy include a range of financial incentives (subsidy, favourable tax), feed-in tariff, technical R&D policy, within an enabling legislative and regulatory setting, as briefly outlined below: Renewable Energy Law (adopted 2005 and effective January 2006) provided a legislative framework for developing renewable energy – the new law specifically meant to promote exploitation of renewable energy, increase energy supply, improve energy structure, ensure energy safety, and protect the environment, in the pursuit of sustainable development. Overall policy goal: An environmental legislation adopted recently in 2008 to support sustainable development of the Chinese economy, Economy Promotion Law (adopted 2008, effective January 2009) provides an overall policy support to renewable energy development. In particular, this law is aimed at promoting recycling, increasing resource utilization efficiency, protecting and improving the environment in the pursuit of sustainable development. Feed-in tariff: The feed-in tariffs for solar energy and wind energy were 4Yuan/kWh and 0.51- 0.61 Yuan/kWh in 2007-08 respectively, compared to coal-fired feed-in tariff of 0.35Yuan/kWh (Yu et al 2009). The National Development and Reform Commission pricing policy established feed-in tariff for renewable energy power beginning in 2006.56 Local content requirement: A bias towards domestic investors was built in for Clean Development Mechanism projects where development projects needed at least 51% Chinese ownership to avail of Clean Development Certificates from China. This pushed foreign developers to enter into joint ventures as minority partners to for CDM projects. In December 2008 BP, Shell and a few small foreign firms announced their decision to leave the Chinese wind generation market (Yu 2009). The intrinsic Chinese policies used to support the renewable power sector have determined the nature of sector that has emerged in the country. Consider the case of the Chinese wind industry - it is dominated by five state-owned power generators (HuaNeng, HuaDian, DaTang, GuoDian, and China Electric Investment), who together account for more than 40% of installed capacity (Yu et al 2009:3). The big five obtained all the concession projects (>50MW) tenders during 2003-08, and secured more than 90% of the wind market (Yu et al 2009: 3).57 The concession projects have low on-line prices that are financial feasible only with Chinese equipment, especially with the government requirement of at least 70% domestic content (wind turbine 56 For wind power, feed-in tariff is differentiated into two phases of a project‘s lifetime: during the first 30,000full load hours of operation – equivalent to 15 years based on average Chinese wind resources- the feed-in tariff is fixed at the bidding price approved by the government. After the first 30,000 full load hours, the feed-in tariff is adjusted and tiered up with the average feed-in prices similar to the local provincial power market. (Yu, et al 2009: 3) 57 Broadly, there are two types of projects in the wind power sector in China: concession projects with installed capacity >50MW, and non-concession projects with capacities <50MW. Concession project investors are selected by public bidding and approved by National Development and Reform Commission. To boost wind power development, the Chinese government conducted five rounds of concession tendering during 2003-08, under which 49 projects were approved accounting for 8.8GW of wind capacity. (Yu et al 2009: 3) 64 components) for all new wind power projects (ibid). The wind turbine industry was earlier dominated by foreign manufacturers including Vestas (Denmark), Gamesa (Spain), and GE (US), but by end of 2007 Chinese manufacturers accounted for more than half the turbine market. Renewable energy is yet to become cost-competitive with fossil-fuels. Among renewable energy sources, however, wind power is considered to be one of the most economical and state-of-the art energy form in the country and expected to become competitive with coal-generated power by 2015-2020 (Yu et al 2009). The domestic manufacturing of wind turbines and components has matured through the years and China expected to emerge as the biggest producer of wind turbines (surpassing the US) in the coming years. 5 Lessons Learnt 5.1 Solar and Wind Power Policies in India Efforts to promote renewable clean energy began early in India.58 For instance, the Solar Energy Centre was established in 1982 under the Indian Ministry of New and Renewable Energy (then called Department of Non-conventional Energy Sources for development of solar energy technology as a viable alternative energy system. India has abundant solar resource, equivalent to over 5,000 trillion kWh annually.59 Of the total installed power capacity in India of about 1,46,753 Megawatts (MW), more than half is coal-based (54%), a quarter is from hydro (25%), less than a tenth is from renewable sources (8%), and the rest is gas and nuclear-based.60 The current installed solar power capacity of 9.84 MW, is a fraction (< 0.1 percent) of the total renewable energy installed 13, 242.41(as on 31st October 2008, from MNRE). The genesis of the Indian solar industry dates back to the 1973 oil-crisis, after which the government resolved to promote solar technology at home. The Central Electronics Ltd., a public sector company under the Ministry of Science and Technology, was given the mandate to indigenously develop the technology to harness solar energy in 1976 with in-house research. Solar industry in India has grown with private solar voltaic manufacturing, like the joint venture of Tata Power with BP Solar in photovoltaic, and more recently Moser Baer India Limited in both crystalline silicon cell technology and thin-film technology. Although the price of Solar Photovoltaic technology has reduced over the years it continues to be economically unviable for power generation in India. The estimated unit cost of generation of electricity from Solar Photovoltaic and Solar thermal route is in the range of Rs. 12 -20 per kWh and Rs. 10 - 15 per 58 It may be noted that some of the materials (e.g. cadmium) used for producing Solar PV cells are hazardous and other raw materials like plastics used for the packaging of the cells are non-biodegradable, thereby impacting the environment. While part of the waste generated during the manufacturing process is recyclable (e.g. silicon), not all other materials are recyclable and waste disposal poses ecological challenges. Moreover the large amount of land required for utility-scale solar power plants (approximately one square kilometer for every 20-60 MW generated) poses an additional problem in India. 59 Most parts of the country receive 4-7 kWh of solar radiation per square metre per day with 250-300 sunny days or 3000 hours average in a year. India's Integrated Rural Energy Program using solar energy currently serves 300 districts and around 2,300 villages. http://www.solarindiaonline.com/solar-india.html 60 http://www.solarindiaonline.com/solar-india.html 65 kWh respectively. Solar electricity produced through the Photovoltaic conversion route is 4-5 times costlier than the electricity obtained from conventional fossil fuels.61 The Indian government has adopted several policy goals and measures to encourage the development of clean technology power, including solar and wind generated electricity: Goal set for Solar Power: The 11th 5-year plan has aimed at grid connected solar power generation. The current capacity in solar power is about 50MW, which is envisioned to be increased to 20,000MW by 2020. The National Solar Mission aims to achieve parity with coal- based thermal power by the year 2030, and interim grid parity by 2020. The aim is to make solar power commercially viable over the next two decades, such that solar power investors and generators investors would no longer face technical or financial constraints. The capacity goal for 2030 is set at 100 GW, constituting 10-12% of total power generation (and interim capacity goal of 20GW by 2020, PMO 2009).62 The Mission has chalked out the goal-achievement across three time periods, beginning with Phase 1 in 2009-12, Phase II in 2012-17, and Phase III in 2017-20. Supportive policies including obligatory solar power purchase, fiscal investment incentives, subsidies and generation based incentives, and R&D in manufacturing concentrated solar collectors and receivers. To support solar PV manufacturing in special economic zones, the national and state governments have offered capital investment subsidies of 20%. Investment Incentive: For wind power projects including fiscal concessions of 80% accelerated depreciation, concessional custom duty for specific critical components, excise duty exemption, income tax exemption on profits for power generation, etc. (MNRE 2009). The fiscal concessions and tax benefits seemed to have succeeded in enhancing the installed capacity of wind power in the country, with over 10GW installed capacity in 2009 (with Maharashtra leading at 1.9GW, MNRE (2009)). Wind power generation, however, has been dismal with low plant-load factor in existing wind power farms – probably due to lack of incentives in the generation of wind power (CSE 2008). In solar power, under the National Solar Mission, a 10-year tax holiday will be given to utility- scale solar plants (PV and thermal) set up by 2020. Generation based incentive (GBI) and other fiscal incentives for solar power: Under the National Solar Mission, GBI have been proposed at Rs10/Kwh for the first three years with reviews in subsequent years. The GBI would be valid for 20 years (from date of project commission/ generation) in order to ease the burden on utilities from fixed tariffs for solar power. The GBI will be paid by the Central government through State Designated Agencies in different states. Other fiscal incentives include tax rebates and subsidies. Specific capital equipment and project imports will be exempt from customs and excise duties. Concessional loans will be given (10 year loans at 2% interest) to off-grid solar PV of 100Wto 10kW to displace diesel generators, UPS and for invertors with solar base. 61 http://www.solarindiaonline.com/solar-india.html 62 This target is more ambitious than the McKinsey (2009) abatement case discussed in the introduction, which envisioned solar power capacity installation of 56GW and less than 10% of total power generation by year 2030. 66 Feed-in tariff: The State Electricity Regulatory Commissions in Andhra Pradesh Gujarat, Haryana, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu and West Bengal offer preferential tariff for purchase of power from wind power projects. Renewable Portfolio Standard / Renewable purchase obligation: The National Tariff Policy 2006 mandated the State Electricity Regulatory Commissions to fix a minimum percentage of Renewable Purchase Obligation (RPO) by utilities based on regional availability of resources. Some Indian states have announced renewable energy purchase obligations to boost the growth in the wind power generation. In particular, the Maharashtra State Electricity Regulatory Commission has passed order for making purchase of electricity generated by renewable sources obligatory for all utilities as well as open access and captive consumers in the state; and the Karnataka Electricity Regulatory Commission has amended earlier Renewable Portfolio Standard regulations on power procurement from renewable sources by distribution licensee and revised the minimum quantum of electricity to be procured by different distribution licensees from 7% to 10% (MNRE 2009). The National Solar Mission would require mandatory solar power purchase under RPO, may be with 0.25% in Phase I and increasing to 3% in Phase III. Government funded demonstration project: In the wind sector, a new demonstration scheme on Generation Based Incentive was initiated in 2007-08 by the Ministry of New and Renewable Energy to attract a large number of independent wind power producers (limited to a capacity of 49 MW), who do not avail the benefit of accelerated depreciation. The investors, apart from getting the tariff as determined by the respective State Regulatory Commissions, would get an incentive of 50 paisa per unit of electricity for a period of 10 years provided they do not claim the benefit of accelerated depreciation. In the solar energy sector, too the Ministry started a new demonstration programme, permitting utilities, generation companies and state nodal agencies to set up grid connected solar photovoltaic plants of 25 kW to 1,000 kWp capacity, for which the scheme provides support of 50% of the basic cost of the plant, subject to a maximum of Rs.10 crore per MWp (available to set up 4 MWp aggregate capacity projects in the country during the 11th plan period) (MNRE 2009). Under the National Solar Mission, government will support the setting up of dedicated manufacturing capacity of poly silicon material as well as solar thermal collectors and receivers. Special Economic Zone-type of incentives will be offered for the establishment of solar technology manufacturing parks. 5.2 Concluding Observations Although India initiated the development of renewable energy as early as the 1970s, solar and wind power generation in the country today remains negligible. India has developed photovoltaic module manufacturing capacity of about 700MW, with commercial production of single and multiple crystalline silicon. The wind power capacity installed is 10GW, but actual power generation has been dismal. However, India has successfully obtained niche markets in wind turbine manufacturing as reflected by exports of turbines and components.63 While the 63 Wind turbine exports to countries like Australia, Brazil, Portugal, Spain, Turkey, US, were worth US$600 million. Export of components including nacelle, hub, bolt box assembly to the US were worth $50 million, and blades to China and Japan some$5.4 million (MNRE, 2009). 67 new set of policy instruments included in the government package (feed-in tariff, obligatory renewable power purchase, etc) to boost renewable energy forms of solar and wind power are similar to those adopted in the EU and the US, these tools have featured only recently and some are yet to be implemented under the National Action Plan on Climate Change. While China‘s initial efforts for renewable energy also dates back four decades ago, and had a rural focus like India, the strides made in the development of the solar and wind power industry in the last decade have been phenomenal. It is notable that the thrust of the Chinese policies to promote renewable energy was set through medium-term numerical targets for energy-mix (like 8.5% by 2007), which increased the onus of complementary policy support. In particular, domestic capacity development in clean technology was largely forced through the local-content condition (in concession projects in wind power) or Chinese ownership condition (in Clean Development Mechanism projects). The Chinese wind turbine industry, in particular emerged due to its ability to produce cheaper substitutes of equipment in the market compared to the European products. The Indian policy instruments have been softer in contrast to the Chinese conditional tools. Moreover, the overwhelming focus on providing investment incentives (say for installation of wind capacity) did little to promote actual generation of zero-emission power in the country. The new generation-based incentives for solar and wind power, R&D incentives, as well as numerical targets for capacity installation and power generation under the National Action Plan on Climate Change ought to promote faster growth of these clean energy forms. The new commitments of the Indian government to move the energy-mix away from coal-based power by 2030, is complemented by both demand-side and supply-side instruments. The literature on IPR-regime and technology transfer clearly indicates that for low-income and low- middle income countries (applicable to India), diffusion of clean technology is primarily determined by the recipient country‘s technological absorptive capacity, market and infrastructure conditions. Stronger IPR regimes have been seen to promote greater technology transfer only in higher income countries. Considering India is TRIPS-compliant, it is more critical to enhance domestic technological capacity and skill especially since the technology in solar and wind power are knowledge-intensive with high innovation rates as evident from the hectic pace of patent grants world-wide. 68 References Bird, Lori, Mark Bolinger, Troy Gagliano, Ryan Wiser, Matthew Brown, and Brian Parsons (2005) ―Policies and market factors driving wind power development in the United States‖, Energy Policy, Volume 33: 1397-1407. Brewer, Thomas L. (2008) ―International Energy Technology Transfers for Climate Change Mitigation: what, who, how, why, when, where, how much... and the implications for International Institutional Architecture‖, CESIFO Working Paper No. 2408. CSE (2008) ―Fanning an Alternative‖, Down to Earth, August 15 issue, Centre for Science and Environment, New Delhi. Hascic, Ivan and Nich Johnstone (2009) The Kyoto Protocol and International Technology Transfer: An Empirical Analysis Using Patent Data, Empirical Policy Analysis Unit, OECD Environment Directorate. Hoekman, Bernard, Keith E. Maskus and Kamal Saggi (2005) ―Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Options‖, World Development, Volume 33, No.10: 1587-1602. IEA (2009) Renewable Energy Essentials: Concentrating Solar Thermal Power, International Energy Agency. IEA (2009a) Technology Road Map: Wind Energy, International Energy Agency. IEA (2009b) Global Gaps in Clean Energy Research, Development and Demonstration, International Energy Agency, December 2009. 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McMahon, Hilary and Remi Moncel (2009) ―Keeping Track: National Positions and Design Elements of an MRV Framework‖, WRI Working Paper, World Resources Institute, Washington D.C. Meyer, Niels I. (2004) ―Renewable energy policy in Denmark‖, Energy for Sustainable Development, Volume VIII (1): 25-35. MNRE (2009) Annual Report 2008-09, Ministry of New and Renewable Resources, Government of India. MOEF (2009) Climate Change Negotiations: India’s Submissions to the UNFCCC, Ministry of Environment and Forests, Government of India. PMO (2009) National Solar Mission, National Action Plan on Climate Change , Prime Minister‘s Office, Government of India. Prasad, H.A.C and J.S. Kochher (2009) ―Climate Change and India: Some Major Issues and Policy Implications‖, Working Paper No. 2/2009- DEA, Department of Economic Affairs, Ministry of Finance, Government of India. 70 REN21 (2009) Renewables Global Status Report: 2009 Update, Renewable Energy Policy Network for the 21st Century, REN21 Secretariat, Paris. Rio, Pablo del and Gregory Unruh (2007) ―Overcoming the lock-out of renewable energy technologies in Spain: The cases of wind and solar electricity‖, Renewable and Sustainable Energy Reviews, Volume 11: 1498-1513. Sovacool, Benjamin K., Hans H. Lindboe and Ole Odgaard (2008) ―Is the Danish Wind Energy Model Replicable for Other Countries?‖ The Electricity Journal, Volume 21, Issue 2: 27- 38. WB (2009) World Development Report 2010, World Bank, Washington D.C. WB (2007) International Trade and Climate Change: Economic, Legal, and Institutional Perspectives, World Bank, Washington D.C. WIPO (2009) Patent-based Technology Analysis Report: Alternative Energy Technology, World Intellectual Property Organization. Yu, James, Fuxing Ji, Ling Zhang and Yushou Chen (2009) ―An over painted oriental arts: Evaluation of the development of the Chinese renewable energy market using the wind power market as a model‖ Energy Policy, Volume 37, Issue 12: 5221-25. 71 Part IV Technical Note on Energy Intensive Sectors of the Indian Economy: Path to Low Carbon Development 72 IV. Energy-Intensive Sectors of the Indian Economy: Options for Low-Carbon Development I Introduction: India’s Current Carbon Footprint and Challenges for Future Development 1. Initiated following the Group of Eight Summit in Gleneagles in 2005, this study was requested by the government of India (GoI) to (1) develop analytical capacity that would help identify low-carbon growth opportunities, up to 2032, in major sectors of the economy; and (2) facilitate informed decision making by improving the knowledge base as well as raise national and international awareness on India‘s efforts to address global climate change. The objective of this synopsis is to give a preliminary account of the modeling results projecting fuel use in energy-intensive sectors and associated carbon dioxide (CO2) emissions between 2007 and 2032. 2. The Indian economy currently has a relatively low carbon footprint. Though India is ranked among the top ten emitters due to the size of its economy and population, the level of its per capita CO2 emissions from fuel combustion, at 1.2 metric tonnes in 2007, was a fraction of the global average of 4.4. In the same year, India‘s CO2 emissions intensity per unit of gross domestic product (GDP), valued at purchasing power parity (PPP), was at the world average (IEA 2009, World Bank 2009). A recent study identifies India as one of the twenty countries in which CO2 emissions intensity declined successively over two sub-periods (1994–96 to 1999–2001 and 1999–2001 to 2004–06), with larger declines in the second sub-period (Kojima and Bacon 2009). 3. India‘s relatively low carbon footprint can be attributed to several factors. The large number of people who still lack access to electricity and modern commercial fuels, and low energy consumption of the poor, contribute to low per capita emissions. There are roughly 400 million people who still lack access to electricity, and the number of people living under $1.25 a day (in 2005 U.S. dollars at PPP) increased from 421 million in 1981 to 456 million in 2005. 4. Another factor is change in the composition of GDP with economic modernization since 1990. Both industry and service sectors have increased their share of GDP at the expense of agriculture, and service more than industry. Because the service sector has a lower energy intensity than industry, although higher than that of agriculture, there is a small overall reduction in total use of energy for a given amount of GDP. More importantly, service and industry sectors have reduced their respective energy intensities significantly, with services as a whole registering a greater reduction. Increased competition arising from the liberalization of the economy, the increase in energy prices, and the promotion of energy efficiency schemes with the introduction of the Energy Conservation Act in 2001 have contributed to reductions in the energy intensities of the service and industry sectors. 5. In the years ahead, India faces several challenges. Electricity supply is both inadequate and unreliable: in financial year (FY) 2007 (April 2007 to March 2008), the overall electrical energy deficit was about 10 percent and peak shortages exceeded 17 percent. More than two- thirds of all Indian households relied on traditional use of biomass as the main source of cooking fuel and one-thirds of households on kerosene for lighting in 2004–05 (NSSO 2007). Any meaningful exploration of India‘s future economic development and CO2 footprint must 73 include as a point of departure the expansion of modern energy availability to the poor, the reduction in chronic energy shortages, and the GoI‘s poverty reduction targets. 6. India is at a unique juncture in its development. Prior to the recent global economic and financial crises, its GDP grew at more than 9 percent per year over the period 2003–7, with high rates of investment and savings and strong export growth. This rapid economic growth has generated substantial potential for public and private investments in development. As outlined in India‘s 11th Five-Year Plan (2007–12), the GoI is aiming to double per capita GDP over 10 years. Such dramatic and rapid income growth for a country as populous as India would require a significant transformation. As with China in the past decade, the scope and speed of India‘s transformation are key questions for the next decade. 7. This paper deals with CO2 emissions from the combustion of fossil fuels in India beginning in 2007 through the 15th Five-Year Plan, ending in FY2031. It focuses in particular on power generation, energy consumption in six energy-intensive industries and non-residential buildings, electricity consumption by households, and fuel use in road transport. Expansion needs for power generation during the study period are vast, with estimated increases between four-fold to as much as six-fold. During the same period, demand for fuel used in road transport may increase more than five-fold. 8. These increases are a natural consequence of income growth as well as greater availability and delivery of basic services. They occur even with investments that improve supply-side energy efficiency—such as greater thermal efficiency in new power plants and reduced technical losses in transmission and distribution (T&D)—and demand-side efficiency improvement through continued industrial modernization and other means. According to this study, moreover, the electricity consumption patterns of Indian households will remain relatively frugal, with even the richest third of urban households in FY2031 consuming only about one-third of the average current electricity consumption in the European Union. For steel, primary aluminium, fertilizers, refined petroleum products, and paper, per capita consumption in India even in 2030 is forecast to be no higher than per capita world production in 2006, despite significant increase in outputs to support India‘s growth. 9. Energy growth on this scale raises obvious questions about the time path of India‘s CO2 emissions which have strong global implications: India‘s CO2 emissions from fuel use in 2007 were less than 5 percent of the world total according to the International Energy Agency (IEA 2009), but its share of the global emissions is likely to increase with economic development. India currently relies heavily on coal for its commercial energy demand (53percent of installed capacity), it lacks sufficient domestic energy resources, and is increasingly dependent on imports of fossil fuels to meet demand. With an expectation of a substantial increase in energy use, reduction in the growth in total CO2 emissions will depend on the extent to which total growth in energy use is offset by a combination of (1) further reduction in energy intensity of GDP, allowing growth and development goals to be met with less growth in energy use and associated CO2 emissions than anticipated; and (2) further reduction in the CO2 intensity of energy use, through greater increases where possible in the share of energy demand satisfied by lower-carbon or even carbon-neutral energy resources. 10. The findings reported in this paper are from a collaborative study by the World Bank and GoI on India‘s potential ―carbon futures‖—how total emissions might evolve out to FY2031 under different broad assumptions about energy supply and demand drivers. It does not in 74 any way recommend a future carbon trajectory; that decision is for India herself to make based on national development considerations and the process of international negotiations on greenhouse gas (GHG) mitigation. Nor does it provide a comprehensive cost-benefit analysis of alternative measures to limit the growth of CO2 emissions. Instead, the study looks at the potential evolution of total emissions from several sectors of the economy to see how these vary with assumptions made in different scenarios. Analytical Approach 11. To compare different carbon futures for India, the study team developed an engineering- based bottom-up model to project future demand for energy in sectors of important consumption and expected growth, to consider different options for the electricity supply mix to meet those demands, and to calculate resultant CO2 emissions under different scenarios. Although a small fraction of the total emissions computed, the model also includes process- related non-CO2 GHG emissions in industry and from vehicle tailpipes. 12. The model includes the following sectors of the economy: Supply  Electricity generation, both grid and captive covering the entire economy (basing demand for the sectors not covered in the study on assumptions about GDP growth and income elasticities) Demand (covering energy consumed by end-users)  Several energy-intensive industries with significant potential for future expansion— (1) iron and steel, further separated into large integrated steel plants and small-scale plants; (2) aluminium; (3) cement; (4) fertilizer; (5) refining; and (6) pulp and paper  Non-residential buildings  Residential electricity use  Road transport comprising vehicles ranging in size from two-wheelers to heavy-duty trucks and buses. The five sectors under study accounted for about three-quarters of CO2 emissions from energy use in India in 2007 (IEA 2009), which is the base year for the study. Agriculture is an important part of total GHG emissions today that are not included in the study, but its share is expected to decline significantly as the Indian economy continues to grow. 13. Although the model focuses primarily on electricity production and use, it also includes direct use of petroleum products, natural gas, and coal for industry and of petroleum products in transport and non-residential buildings. Household fuel use is excluded, as is diesel use for irrigation and powering agricultural equipment. Electricity generated from smaller units by households, shops, and others is also not included. Captive power covers electricity generation from minimal unit size of 1 megawatt (MW) and uses mainly diesel except in industry where other fuels may be used. 14. Projections for future ownership of electric appliances and vehicles by households are based on assumed GDP and population growth rates, household size, distribution of household 75 income (using expenditures as a proxy), and urbanization. Electricity and vehicle fuel use are projected based on the appliance or vehicle size, technology, and hours of use (for electricity) and kilometers traveled (for vehicles). Other demand projections, including industrial commodity sales and building floor space, are based primarily on GDP and population growth, and associated energy consumption on the technology for each application. 15. Capacity addition in the power sector—both technology type and unit size—is based on exogenous scenarios based on Five-Year Plans and others discussed with the GoI. New plants are built as needed to cover the required system expansion and the technological choices associated with these new plants is varied under different supply-side scenarios. At any given time, electricity is dispatched from grid-connected power plants to meet projected demand on a merit order, minimizing costs. 16. As noted, the objective of the study is to explore potential carbon futures under different assumptions that are gathered together into various scenarios. We consider three scenarios and two sensitivity analyses. 17. Scenario 1: A ―Five-Year Plans‖ scenario. This scenario is based on projections of expansion of electricity generation capacity in the 11th (2007–2012) and 12th (2012–2017) Five-Year Plans, the Integrated Energy Policy which outlines projections until the 15th Five-Year Plan (2027–2032), papers by the 11th Plan Working Group and the Central Electricity Authority (CEA), and programs by the Ministry of New and Renewable Energy. The scenario includes planned investments to expand capacity, increase reliability, and strengthen energy efficiency, but takes into account slippages in investments and actual GDP growth rates to date. GDP is assumed to grow at an average rate of 7.6 percent between calendar 2009 and 2031. A sensitivity analysis on scenario 1 explores the implications of reduced GDP growth rate by an average of 1 percentage point to 6.6 percent between 2009 and 2031. 18. Scenario 1 reflects ambitious investments in lower-carbon energy capacity currently planned by India. Technical T&D losses are reduced from 29 percent in 2005 to 15 percent in 2025, significant amounts of older thermal capacity are retired or renovated, and the share of supercritical coal plants is increased from 20 percent in the 11th Plan to 90 percent in later years. Hydropower increases five-fold, approaching the technical limit of what is possible. Other renewable energy sources—including wind power (the onshore capacity of which is taken to the technical limit of what is likely to be achievable), biomass, and small hydro— increase considerably as well, and nuclear capacity more than quadruples. 19. Scenario 2: A ―Delayed Implementation of Supply Measures‖ scenario. This scenario assumes that, relative to scenario 1, there are slippages in several supply-side initiatives:  A delay of five years in the T&D reduction loss program  Hydropower capacity limited to half of what is technically achievable  Supercritical coal-fired power plants built at half the planned rate  Wind, solar, and biomass-based plants built at half the planned rate. Unmet demand would be satisfied by additional captive power generation. 20. Scenario 3: An ―All-Out Stretch scenario.‖ Relative to scenario 1, this scenario includes reducing energy demand through energy efficiency improvement in industry, non-residential buildings, and household use of electricity. For the six industrial sub-sectors, the scenario models an average uptake rate in 2020 of 80 percent of 340 GHG-emission-reducing 76 measures that have been adopted commercially since 2006 in the country and that have a real rate of return of 10 percent or higher (not including the transaction costs that are often incurred with energy efficiency measures).64 They comprise energy efficiency improvement measures for all forms of energy—electricity, coal, oil, and natural gas—as well as a few processes unrelated to energy use releasing GHGs. Compared to scenario 1, CO2-equivalent (CO2e) emissions per tonne of product (such as steel and cement) are reduced by almost 20 percent on average by 2020. For appliance use by households and in non-residential buildings, the scenario considers mandatory minimum efficiency standards of Indian three- star ratings, evolving over time to international standards (such as U.S. Tier 1) with a time lag, which varies from appliance to appliance; where Indian standards do not yet exist, mandatory minimum standards are made to match international standards, again with a time lag for most appliances. 21. For road transport, the all-out stretch scenario assumes more stringent fuel economy standards for light vehicles, matching EU CO2 emissions standards with a time lag of 8 years for cars and 10 years for light commercial vehicles, and additional CO2 savings from modal shifts. On the supply side, the scenario adds 20 gigawatts (GW) of imported hydro and 20 GW from solar announced in the 2008 National Action Plan on Climate Change, accelerates the reduction of T&D losses by five years, and provides additional funding for 13 GW of lowest-efficiency coal plants to renovate them ahead of schedule for life extension and to bring their efficiency levels up to those of new plants. A sensitivity analysis on the all-out scenario considers what scale of ―transformative measures‖ would be needed in additional carbon-neutral electricity capacity to enable total CO2 emissions from power generation to stabilize by the mid-2020s. Findings 22. All scenarios and their sensitivity analyses reported here show CO2e emissions from the sectors studied increasing by a factor of at least 2.6 to as high as 4.3 between FY2007 and 2031. The results specific to each of the five sectors are discussed first, followed by trends in the growth of CO2e emissions and the impact of the timing of the implementation of various emission-reducing measures on cumulative emissions. Electricity generation 23. The model estimates that coal-fired generation plants are likely to continue to dominate energy supply to the grid despite best efforts to increase the share of less carbon-intensive sources of power. The share of total power generated derived from coal increases from 73 percent in FY2007 to 78 percent in 2031 in scenario 1, and declines only slightly to 71 percent even in scenario 3 (Figure 1). This is a consequence of the lack of significant alternative natural resources in India, lack of availability of clean technologies such as solar at affordable prices, problems associated with the implementation of planned investment 64 The rate of return for any efficiency enhancement measures is affected, amongst others, by energy prices. This study assumes $0.99 per liter of gasoline, $0.72 per liter of diesel, $0.0791 per kilowatt-hour of grid electricity, $53 per tonne of imported coal (cost, insurance, and freight), $11 per tonne of domestic coal at the mine mouth (rising to about $20 at the power plant gate), $18 per tonne of lignite, and $11 per million British thermal units of natural gas, all expressed in 2007 U.S. dollars. 77 programs, and the abundance of (global and domestic) coal and its relative cost advantage. The greatest domination by coal in power generation is found in scenario 2, in which the introduction of renewable energy is slowed down at half the rate compared to scenario 1 and the share of grid-supplied power generated from coal increases to 84 percent in the terminal year. Only in the sensitivity analysis for scenario 3, in which even more carbon-neutral generation is introduced to replace generation from fossil fuels so that emissions from grid power supply are stabilized by 2025, is the share of coal power generation essentially halved, reaching 38 percent by the end of the study period. Figure 1: Share of Coal in Grid Power Generation Source: World Bank staff calculations. 24. Table 1 shows construction costs of new representative power plant units used in the study and their associated CO2 emissions per kilowatt-hour (kWh) of electricity generated. The emission levels in the table are for new plants and increase over time with plant usage. For each existing plant, the CO2 emissions per kWh were derived from the CEA‘s database for 2007–08 (CEA 2008). The total CO2 emissions for grid electricity are computed based on plant type, size, technology, and age; fuel type; operating conditions; and the dispatch order minimizing variable costs. Table 1: Costs and Emission Characteristics of New Power Plants Capacity Investment in plant & CO2 emissions Type Sub-type a Fuel (MW) equipment (US$/kW) (g/kWh) b Hydro Large storage 1,325 — 0 b Hydro Run of river 1,104 — 0 Nuclear Heavy water reactor 220 1,435 — 0 Coal Subcritical 500 883 Domestic 980 Coal Subcritical 250 930 Domestic 1,000 c Coal Low supercritical 660 945 Domestic 949 c Coal High supercritical 800 969 Domestic 919 78 Capacity Investment in plant & CO2 emissions Type Sub-type a Fuel (MW) equipment (US$/kW) (g/kWh) Coal Ultra supercritical 1000 1,041 Domestic 874 Coal Subcritical 500 844 Imported 957 Coal Subcritical 250 890 Imported 977 Coal Low supercritical 660 910 Imported 928 Coal High supercritical 800 942 Imported 898 Coal Ultra supercritical 1,000 984 Imported 854 Natural gas Open cycle 250 662 — 492 Wind — 100 993 — 0 Solar CSP with storage 15 6,071 — 0 Sources: Central Electricity Authority and other Indian sources. a. Costs provided in rupees in 2007 and converted to U.S. dollars at a rate of 45.3 rupees to the dollar. b. Costs independent of size. c. Low and high supercritical refer to low and high steam temperatures and pressures. — Not applicable. 25. In terms of total grid electricity generated, scenarios 2 and 3 are comparable; whereas scenario 1 is above the other two (Figure 2). However, the amount of CO2 emitted per kWh varies markedly from scenario to scenario. By the terminal year, CO2 emissions per kWh are almost 20 percent higher in scenario 2 and 8 percent higher in scenario 1 than in scenario 3. By far the most carbon-intensive is scenario 2, in which T&D technical losses remain high five years longer than in scenario 1 and 10 years compared to scenario 3, and in which the rates of construction of new super-critical power plants as well as renewable power generation are at half the rate in scenario 1. In scenario 1, CO2 emissions per kWh begin to rise in the last few years of the modeling period as a result of the rising share of coal-based power generation (see Figure 1). 79 Figure 2: CO2 Emissions from Grid Electricity Generation Source: World Bank staff calculations. kWh = kilowatt-hours, PWh = petawatt hours = 1012 kilowatt-hours. 26. Reducing T&D technical losses is one of the most cost-effective means of improving the power sector performance while simultaneously reducing CO2 emissions. Reducing technical losses is in fact equivalent to adding new capacity with no increase in CO2 emissions. Table 2 shows the impact of advancing or delaying by five years the implementation of the T&D loss reduction program assumed in scenario 1 on CO2 emissions and total investment over a 25-year period, assuming that the same amount of grid electricity as in scenario 1 will be supplied to end-users in all cases. In the case involving a delay of five years, additional plant capacity is needed to compensate for the larger technical losses, increasing the total investment requirement.65 Table 2: Impact of Pace of T&D Loss Reduction Program T&D loss reduction Change in CO2 emissions in Change in investment in 2007–31a implementation 2007–31 (million tonnes) (billion 2007 rupees) Accelerated by 5 years -796 -6 Delayed by 5 years 1,392 227 Source: World Bank staff calculations. Note: The years are financial years. a. The total investment covers all investments needed to supply the same amount of electricity to consumers as in scenario 1 and includes life extension, efficiency improvement, and new plant construction. 27. One of the greatest barriers to adopting efficiency-enhancement measures and renewable energy is the larger upfront cost of doing so. While the incremental investment costs may be recovered in later years by lower operating costs, resulting in net positive rates of return, the need to raise greater financing upfront remains a problem in many situations. Table 3 65 Scenario 2 is different from the five-year delay case in Table 2 because scenario 2 does not assume that the same amount of grid electricity is supplied. Instead, the shortfall is compensated by greater captive generation. 80 provides order-of-magnitude estimates of total investments in life extension, efficiency improvement, and new plants and equipment for grid electricity in the three scenarios between FY2007 and 2031. Investments are estimated each year in 2007 rupees. The table presents the cost figures in two ways:  Investments discounted at 10 percent to compute the net present value in 2007  Total investments without discounting 28. The table shows that delayed implementation, captured in scenario 2, lowers capital expenditures for grid electricity by about 15 percent. In this scenario, captive generation covers the unmet electricity demand caused by delayed implementation, giving a temporary relief to the public sector but incurring higher costs to the society as a whole: over the medium term, a portion of investment in the power sector is shifted from the grid system to privately-owned, smaller-scale power generators throughout the economy running mainly on diesel. In contrast, scenario 3 incurs higher upfront costs, as expected. However, with the exception of solar power, all investment projects for adding new generation capacity have a real rate of return of 10 percent or higher. Table 3: Investment Costs for Life Extension, Efficiency Improvement, and New Capacity in Grid-Supplied Electricity Scenario description Billions of 2007 rupees Difference from scenario 1 NPV (2007) Total NPV (2007) Total Scenario 1 Life extension & efficiency improvement 570 1,400 0 0 New capacity 8,000 24,000 0 0 Total 8,600 25,000 0 0 Scenario 2 Life extension & efficiency improvement 480 1,600 -90 180 New capacity 6,900 19,000 -1,100 -4,400 Total 7,400 21,000 -1,200 -4,200 % difference -14 -17 Scenario 3 Life extension & efficiency improvement 580 1,400 14 -40 New capacity 8,600 27,500 600 3,700 Total 9,200 29,000 620 3,700 % difference 7 15 Source: World Bank staff calculations. NPV = net present value; life extension & efficiency improvement includes T&D technical loss reduction measures. Notes: NPV computed using a discount rate of 10 percent. Rupees are in 2007 rupees. Total is the sum of annual investments without discounting. All numbers in the table are rounded off. Differences do not exactly match the differences between the numbers in the table as a result. Energy-Intensive Industries 29. CO2e emissions from electricity use (both grid-supplied and captive), from direct combustion of fossil fuel, and from processes unrelated to energy use are plotted in Figure 3. Among the six industries, iron and steel dominate, accounting for nearly half of total CO2e emissions in 81 2007. CO2e emissions from integrated and small plants are broadly proportional to their total production. This finding which may seem surprising at first—small plants cannot take advantage of economies of scale and tend to be less efficient—is due to the fact that many small plants use scrap, a process that is much less energy-intensive than others, whereas none of the large integrated plants do. For example, in 2007, a quarter of steel manufactured by small-scale plants was made from scrap. Figure 3: CO2e Emissions from Six Industries Source: World Bank staff calculations. Note: ―Iron and steel integrated‖ are large integrated steel plants, ―iron and steel small‖ are small steel plants. Household use of electricity 30. To estimate future consumption of electricity by households, patterns for ownership of 14 appliances were examined. Taking ownership data from the National Sample Surveys and censuses, the number of each appliance was estimated for each future year based on household income and the number of households in each income category. Assumptions were made about broad sub-categories within each category of appliance as a function of size and technology, the number of hours each appliance is used, and the amount of electricity consumed per hour. Electricity consumption calculated for 2005 using this methodology broadly matched electricity supplied to residential consumers. The results show that the amount of electricity used for space-cooling and water-heating makes up slightly more than one-third of total electricity consumed, but rises to nearly half by FY2031 in scenario 1. In scenario 3, where there are tighter mandatory energy efficiency standards, the share of electricity consumed for space-cooling and water-heating exceeds 60 percent by 2031, but the total amount of electricity consumed is lowered by almost a third. The largest reduction in electricity consumption is achieved for lighting: in FY2031, the total amount consumed is 70 percent lower in scenario 3 than in scenario 1. Data were not available to estimate the incremental costs of tightening emission standards. Figure 4 shows CO2 emissions calculated from power consumption. 82 Figure 4: CO2 Emissions from Household Electricity Consumption Source: World Bank staff calculations. Notes: Entertainment covers television sets, computers, radios, CD players, DVDs, and VCRs. White appliances cover refrigerators, washing machines, ovens, microwave ovens, and toasters. Cooling covers fans, air coolers, and air conditioning units. Heating is for electric water heaters. Non-residential buildings 31. For non-residential buildings, consumption of electricity, diesel used for additional power generation, and use of liquefied petroleum gas (mainly for heating water and also for cooking in restaurants) was estimated. Six categories of buildings, two of which are separated further into public and private, are considered in this study. Meeting tighter energy efficiency standards for electric appliances lowers consumption by about 10 percent. In both scenarios, retail stores have the highest share of electricity consumption. The largest reductions in electricity use in scenario 3 are achieved in retail and private offices. All measures for tightening energy efficiency standards to achieve these reductions are estimated to have real rates of return of 10 percent or higher. 32. The evolution of CO2 emissions from electricity use and combustion of diesel for on-site power generation and of liquefied petroleum gas is shown in 33. 34. 35. Figure 5. The difference between scenario 1 and 3 is due solely to the higher energy efficiency of electric appliances in the latter. 83 Figure 5: CO2 Emissions from Non-residential Buildings Source: World Bank staff calculations. Road transport 36. Emissions from road transport are dominated by those from heavy-duty commercial vehicles (buses and trucks) in 2007, constituting as much as 60 percent of total. Their relative share declines over time and the share of passenger cars increases rapidly in scenario 1. However, the model forecasts private ownership in India of 86 cars per 1,000 people in 2031, a level that is significantly lower than 300 to 765 per 1,000 observed in most high-income countries today. In scenario 3, where tighter CO2 emissions standards for passengers and light-duty commercial vehicles are imposed and model shifts from private to public transport are promoted, the growth of emissions from passenger cars is substantially curtailed. By 2013, emissions from heavy-duty commercial vehicles in scenario 3 exceed those from scenario 1 because of much greater use of buses for public transport (Figure 6). 84 Figure 6: CO2e Emissions from Road Transport Source: World Bank staff calculations. Note: Sport utility vehicles are included in light commercial vehicles. 37. Shifting passengers from private to public transport reduces congestion and, where the shift is from cars to buses, CO2e emissions. Shifting passengers from motorcycles to buses, however, does little to reduce overall CO2e emissions. This is because emissions per kilometer traveled of motorcycles are an order of magnitude lower than those of buses. When converted to CO2e emissions per passenger kilometer, there is essentially no difference between the two. 38. Incremental cost calculations show that none of the technology options for meeting tighter CO2e emission standards give a real rate of return of 10 percent or higher, although the rates of return are all positive. Higher global oil prices in the future could increase the rate of return in each case. 85 Total CO2 emissions 39. For the three main scenarios, shown in Figure 7– 40. 41. 42. Figure 9, CO2e emissions from the five sectors under study increase by a factor of 4.1 for scenario 1 (Five-Year Plan scenario), 4.3 for scenario 2 (delayed implementation of supply measures), and 3.4 for scenario 3 (all-out stretch scenario). CO2e emissions for the sectors covered by the study will increase from the 2007 level of 1.1 billion tonnes to 4.5 billion in scenario 1, 4.7 billion tonnes in scenario 2, and 3.7 billion tonnes in scenario 3. Figure 7: Emission Profile for Scenario 1, Five-Year Plans Source: World Bank staff calculations. Notes: Electricity supply, grid and captive, covers electricity used across the entire economy, including those areas not covered by this study. Industry covers process-related emissions and direct use of fossil fuels in the six sub- sectors. Non-residential covers direct use of fossil fuels. Road transport covers gasoline, diesel, compressed natural gas, and bioethanol used by motor vehicles of all sizes. Non-residential buildings contribute so little from using diesel and LPG that their total contribution is not visible in the figures. Figure 8: Emission Profile for Scenario 2, Delayed Implementation of Supply Measures 86 Source: World Bank staff calculations. Notes: See notes for Figure 7. Figure 9: Emission Profile for Scenario 3, All-Out Stretch Scenario Source: World Bank staff calculations. Notes: See notes for Figure 7. 43. The sector shares for emissions do not vary much across the scenarios. The largest share of CO2e emissions remains in the power sector, which is estimated at 54 percent (captive generation and grid supply) in FY2031 in scenario 1, 57 percent in scenario 2, and 58 percent 87 in the scenario 3. However, the largest increase in CO2e emissions occurs in the transport sector, which is expected to increase by a factor of 6.6 in scenario 1 and 5.4 in scenario 3. 44. The potential for reducing annual emissions by implementing all the demand-side and supply-side measures in scenario 3 is estimated at 815 million tonnes CO2 relative to scenario 1 by FY2031, as shown in Table 4. While the largest volume of emission reduction is from the power sector, the highest percentage of reduction is from industry. Table 4: Emission Reduction Potential in FY2031, Million Tonnes of CO2e Source Scenario 1 Scenario 3 Decrease % Decrease Grid supply electricity 2,287 1,937 350 15 Captive generation 169 170 0 0 Industry 1,281 950 330 26 Non-residential 1 1 0 0 Road transport 730 594 136 19 Total 4,468 3,653 815 18 Source: World Bank staff calculations. Notes: See notes for Figure 7. 45. The sensitivity analysis on scenario 1, taking lower GDP growth, reduces demand and hence annual CO2 emissions by an average of 10 percent between FY2007 and 2031 ( 46. 47. 48. Figure 10). Figure 10: Emission Profile for Lower GDP Growth Sensitivity Analysis Source: World Bank staff. 88 Notes: See notes for Figure 7. 49. The study also asked what additional capacity of carbon-neutral generation would need to be added to stabilize CO2 emissions in the power sector by 2025 with no further growth. Replacing 130 GW of coal-based and 2 GW of gas-based power generation with carbon- neutral generation capacity beyond scenario 3—for example, importing more hydropower from neighboring countries and adding more nuclear—was found to achieve this stabilization target (Figure 5). By FY2031, these measures nearly halve CO2 emissions relative to scenario 1 in the power sector and reduce the overall CO2e emissions to 2.8 billion tonnes, which is 2.6 times the 2007 level (Figure 11). It is important to point out that these calculations say nothing about the technical feasibility or cost of such massive additional introduction of carbon-neutral generation. Figure 11: Sensitivity Analysis for Scenario 3 – Emissions Stabilization in Power Sector Source: World Bank staff calculations. Notes: See notes for Figure 7. Role of Timing of Implementation 50. Because one important difference between the scenarios is the pace of implementation of emissions-reducing measures, their effects cannot be deduced from comparison of emissions in the terminal year alone. For example, while the completion of the T&D loss reduction steps is varied between 2020 and 2030, technical T&D losses are reduced to 15 percent in all scenarios by FY2031. What the differences do affect is the trajectory of CO2 injection into the atmosphere. One way of assessing the effects is to compare cumulative emissions over the study period. Figure 12 presents the results of such a comparison, based on the emissions in scenario set equal to 100 for each sector. For the non-power sectors, the figure includes all energy consumption, including CO2 emissions from power consumed in the sector and traced back to the generation sector. 51. The results show that CO2 emissions from captive power generation is nearly doubled in scenario 2, as a result of much higher capacity needed to compensate for lower power output from the grid system. Scenario 3 reduces both demand and power generation efficiency as well as carbon intensity. The sector with the largest difference between scenarios 1 and 3 is residential. 89 Figure 12: Comparison of Cumulative Emissions in FY2007–2031 Relative to Scenario 1 Source: World Bank staff calculations. Notes: See notes for Figure 7. For households, non-residential, and industry, CO2 emissions from power consumption are included and traced back to grid power generation. Conclusions and Implications 52. Although all major sectors of the energy system can contribute to a lower-carbon development, the pursuit of such a development path would require comprehensive and large-scale changes in sector investment, performance, and governance, particularly in the power sector. A crucial first step towards lower-carbon development over the longer term, as well as improved energy sector performance in the nearer term, would be for India to substantially improve upon its past performance in achieving its targets. Unless India improves the allocation of financial, technical, institutional, and skills-based resources, achievement rates may continue the roughly 50-percent success rate experienced for the addition of new generation capacity in the past three Five-Year Plans (19912006). In that case, one could anticipate even faster emissions growth over time compared to scenario 2 (delayed implementation) in which the total installed capacity in fiscal 2031 is ―only‖ 13 percent lower than in scenario in which all Five-Year Plan targets for generation are fully implemented. 53. The achievement of the targets contained in the 11th and subsequent Five-Year Plans in the power sector requires the coordination of institutions across all levels of government— including the federal, state, and municipal governments—and an enhanced performance of the relevant institutions. If grid electricity continues to fall short of demand, then captive generation relying on diesel could expand, resulting in higher CO2 emissions per kWh and higher costs. Accelerated uptake of renewable energy, which would reduce reliance on thermal power generation and improve the diversification of the energy mix, requires a streamlined regulatory framework; in the case of large hydropower, it requires a concerted 90 effort to improve capacity to systemically implement existing policies on land acquisition and restoration and rehabilitation of project-affected peoples. The development of solar power, nuclear power, and other cleaner energy sources beyond existing ambitious plans would require significant structural changes, including access to new energy sources and technologies, improved delivery mechanisms, and widened access to a skilled workforce. Strengthened energy-efficiency standards for appliances and buildings also would be needed. As has been observed in many other reports, these are institutional as much as technological challenges. The likelihood of success also depends on putting in place a monitoring and evaluation system to detect any systemic slippages during program implementation and to ensure that early corrective measures are taken. 54. It is widely agreed that growth in GHG emissions is particularly difficult to mitigate in the transportation sector in those countries that currently have low private-vehicle ownership rates coupled with exploding urban populations and rapid economic growth. Over the timeframe of this study, India‘s urban population is expected to double, placing substantial stress on existing—often insufficient—transport infrastructure both for long-distance freight and the movement of people within the cities. Most transport infrastructure (including urban roads, rail, and highways) have long operational lives and the way that new infrastructure is implemented today to satisfy these growing needs will lock India into development pathways that may be difficult to change at a future date. Rising time-loss from on-road congestion, health impacts from local air pollution, and GHG emissions can be addressed only over the long term by difficult but fundamental changes that transform land use and transit policies. Over the near term, much would need to be done to provide extensive and better mass-transit in cities, to invest in the shift of freight transport from road to rail, and to improve facilities for non-motorized travel in order to cover this growth in demand and slow down the apparently inevitable growth in motorized transport. At the same time, for lowering long- term GHG emissions, it would be critical that new vehicles entering service have high fuel economy as well as meet tight local emissions standards. 55. Ultimately the scope of this study does not allow making conclusive statements about the costs of achieving different future carbon trajectories. The foregoing sections show that, on the supply side, particularly in grid electricity, there are capital cost increases on the order of 15 percent to achieve the ―stretch‖ results. These outlays however are only part of the total cost of achieving such ambitious GHG reductions. The speed of the hypothesized carbon- neutral capacity investments is estimated to increase costs considerably—more than 25 percent—and infrastructure and other investments for substantially reducing transport sector emissions would be very large. 56. Against these costs are possibilities for significant improvements in energy efficiency in many sectors, with low or potentially negligible costs. However, those opportunities depend on accomplishing various policy and institutional changes noted above, which constitutes a challenge. Other barriers include competition for limited funds from projects with higher risk-adjusted rates of return and constraints on financing availability for covering upfront costs. A well-known example of the former in industry is the much higher rate of return that can potentially be achieved by expanding production capacity rather than improving energy efficiency, even if both give positive rates of return and energy efficiency have added benefits of potentially lowering illnesses and premature death from reduced local air pollution. Amplifying the tendency to choose production capacity expansion over energy 91 efficiency improvement is the drive to expand a firm‘s market share. Financing limitations arise because banks tend to have a portfolio of risks and do not focus only on the mean return. Quite a few low-carbon technologies have high perceived-risks, and these perceptions can be reinforced by bad experience. For example, compact fluorescent lamps burning out in a few hundred hours instead of lasting the designed 10,000 hours, despite the much higher purchase price, would deter significant market penetration in lighting. To the extent that the much shorter actual life is a result of inferior manufacturing, this points to the critical importance of setting and enforcing performance standards, and taking poorly performing products off the market before consumers lose confidence. But closely associated with the performance of lower-energy-intensity electric appliances and equipment is the quality of electricity delivered—frequent and large voltage fluctuations could easily damage appliances designed for more stable power, returning the discussion back to that on the performance of grid electricity supply. 57. It will be necessary for decision makers in India to carefully consider the costs and benefits they will obtain from different cleaner-energy options. For example, greatly expanded renewable capacity will require predictable and stable feed-in tariffs to attract investments until such time as the technologies become fully cost-competitive. Such price subsidies run counter to the general prescription for economically efficient energy pricing and compete with other priorities for scarce resources, including expanding the availability of modern energy services for the poor. The technology cost gaps would be lessened should India decide to impose a relatively comprehensive system of energy price adjustments to reflect carbon content and local environmental impacts, as well as policy instruments to encourage reduced traffic congestions that also would increase energy efficiency in transport in most cases. But such an ambitious policy has not yet been achieved by any country, developed or developing. In the meantime, India will benefit from looking at particular institutional and pricing reforms that provide maximum development and environmental benefits while also contributing to slowing GHG emissions. 58. Aside from the possibilities discussed to this point, what are the options for truly dramatic reductions in GHG growth even as energy use expands? One possibility is to enhance regional trade in cleaner energy sources. Given the limited availability of clean domestic energy resources in India compared to its needs, international cooperation to facilitate access by India to natural gas and hydropower imports would change the energy options available to the country. Increased energy trade would require both a long-term commitment to purchase the energy to be generated and sustained efforts to develop the resources at the regional level. It would also require strong counterparty assurances of supply reliability to mitigate concerns in India over energy security. 59. The other option is adoption of emerging new carbon-neutral energy sources—beyond wind and hydro, which are already assumed to be maximally exploited in our scenario analysis— that are acceptably safe and relatively affordable. Much attention has been given internationally to the possibility of carbon capture and storage (CCS) for use with fossil fuels. Unfortunately, aside from the fact that large-scale CCS is still pre-commercial, India‘s geology does not seem particularly hospitable. Current estimates indicate that India‘s oil and gas fields plus coal fields have less than 5 billion tonnes of CO2 storage capacity. This could store national emissions from large point sources for only five years (Holloway et al. 2008). At this stage of technological know-how, then, the choices would come down to a significant 92 further advance in cost-effective solar (e.g., concentrated solar power over large areas of India‘s deserts with the right radiation conditions), or a hugely ambitious further expansion in nuclear power—either of which would have to be roughly cost-competitive with coal in order to be no-regrets investments. In the case of concentrated solar power, there would be inevitable tradeoffs with competing demand for water resources, which are increasingly stressed in India, as well as a lack of land availability. Cooling water availability will also present a challenge for nuclear capacity addition. One alternative would be co-financing of additional costs for these (and other higher-cost carbon-neutral resources) through sales of CO2 reduction credits or other carbon finance mechanisms, although there remains uncertainty as to whether nuclear energy would be eligible for such financing. But given the large amounts of carbon-neutral investment needed in the stretch scenario and even more so for emissions stabilization, unless the carbon-neutral technologies were fairly cost- competitive the carbon finance costs would be staggering. 60. Ultimately, India needs to decide what steps it will take to meet the continuing energy and economic development needs of its people, taking into account the costs of risks and various options. India also shares with the rest of the world an interest in limiting disruptive and costly climate change. The findings in this study underscore the challenge of meeting energy access, energy cost, and global environmental objectives within the menu of technological options currently available. Where there are synergies between cost-effective efficiency improvement and demand management on the one hand and reduction of carbon intensity on the other, they should be pursued as a top priority. 93 References CEA (Central Electricity Authority). 2008. 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