Climate Change Policy for Dummies: A primer on COP-15

Following is an article I authored for the Energy Bulletin of IIT Madras. It is a beginner's guide to understanding the hype and the ballyhoo of climate change and green energy.

My previous article titled 'At The Crossroads: India's Energy Demands' can be accessed here.
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More than 10,000 people from about 200 countries of the world will meet later this year at Copenhagen, Denmark in what has been touted to be the most important meeting ever to address the growing issue of global warming.

Convention of Parties (COP) – 15, as it is called, is a forum where leaders and policymakers from all over the globe will meet and decide the future course of action on the impending doom of climate change. Kyoto protocol, although a significant legislation, never could satisfy the environmentalists and they complained of political ill-will towards climate change mitigation. The United States which is the largest contributor of greenhouse gases in the world, was never party to the Kyoto protocol. This fact is often used by critics to undermine the effectiveness of Kyoto protocol. China, the second largest emitter was not bound by Kyoto protocol to reduce its emissions. The Kyoto protocol covered countries responsible for only 29 pc of global emissions, leaving out countries like US, China and India. The very scale at which the treaty operates made tracking and verifying governmental actions and claims impractical.

The 2 degree Celsius barrier:

The academia is unanimous in its opinion that a more than 2 C rise in global temperature from 1990 to 2050 will have adverse effects on human population. Some scientists warn that CO2 levels must be kept below 350 ppm (or about 1.5 C increase in temperature) to avoid serious impacts. Current levels are around 386 ppm, growing at an annual rate of 2.1 ppm. 450 ppm levels offer a 50 pc chance to keep the temperature change below 2 C and scientists argue that a 50 pc chance is not good enough when dealing with climate because the effects could be catastrophic.

The current scenario: developing v/s developed nations

Optimists are betting their money on COP 15 to evolve a new consensus among the nations of the world. They are hoping that the Obama administration, along with the other leaders of the world, takes strong and concrete steps. But there are already signs of discord. Developing countries like India and China demand that the rich countries decrease their emissions levels 40 pc below 1990 levels by 2020. The rich countries, which benefitted from an earlier industrial revolution, should take more drastic steps than developing countries which maintain that strong climate change sanctions could hamper their economic progress.

Japan, a leading emitter or GHG recently announced that it intends to reduce its emission levels by 15 % in 2020 as compared to 2005 levels. Critics argue that this is not enough and such shallow commitments by rich countries will not drive countries like India and China towards stronger action. Japanese government, on the other hand, defends their decision by arguing that Japan is already a very carbon-efficient economy and any further increase in efficiency will be unrealistic. Japan emits less relative to other major economies. Though it has the second largest economy, behind the US, it ranks fifth in global emissions, behind US, China, Russia and India.

The European Union has committed to 20 pc reduction by 2020 as compared to 1990 levels and by 30 pc if other rich countries follow suit. The congressional panel in US recently cleared a bill that aims at a 6 pc reduction in CO2 levels from 1990 to 2020. Overall, the developed nations have offered to reduce their emissions by about 8pc to 14 pc, whilst a reduction of 40 pc by them is required to carry any real hope of mitigating the change. Clearly, the developing world is at loggerheads with the developed nations.

FINANCIAL INSTRUMENTS:

Another important consensus that needs to evolve at COP 15 is the architecture of financial instruments needed to curb climate change. The Kyoto protocol adapted a cap-and-trade mechanism. Cap-and-trade mechanisms put a ceiling (cap) on consumption/production of a commodity and then the involved parties can trade the sanctions. Kyoto protocol imposed upper limits on carbon emissions for about 37 developed countries (called Annex-I countries). The Clean Development Mechanism (CDM) was the preferred cap-and-trade mechanism adopted at Kyoto which allowed Annex-I countries to trade Carbon Emission Reductions (CERs) with developing countries (called non-Annex I countries). A CER is a carbon credit which is equivalent to a reduction of 1 ton of carbon dioxide.

The Clean Development Mechanism and why it is not the solution:

The intentions of the CDM were noble – impose continually stricter sanctions on rich countries so that they shift towards a greener economy and in the process, the developing nations benefit from the green investments. In order to earn carbon credits, the rich countries would invest in developing countries, thereby enabling technology transfer. All the nations of the world therefore had economic incentives to reduce carbon emissions.

However, recent research suggests that CDM has been very ineffective in reducing carbon emissions. The market architecture of CDM stresses on carbon credits as a tool for mitigation. The private players in the carbon credit market have suitably taken up “low-hanging” projects to generate carbon credits – projects that are easy and cheap to execute but which do not significantly aid sustainable development. It has been reported that of the CER production, 51 % are from HFC destruction and N2O capture that do not deliver any sustainability benefits. Also, when developing countries themselves would have sanctions in the future, all the cheap abatement options would already have been exploited by the rich countries, leaving them at a disadvantage.

Interestingly, the carbon market is predicted to be the largest commodity market in the near future, slated to rise to $400 billion by 2012 -2015 from about $ 11 billion in 2005. Critics describe this as a “market for hot air” and accuse legislators of creating an artificial scarcity when none existed. With such a huge financial value attached to the market, industry lobbyists are working hard to retain the CDM. The CDM is particularly prone to manipulation by politicians and polluters. Also, given the advanced stage to which countries have committed themselves towards the CDM, it is highly unlikely that the COP 15 will see any major changes in the architecture of CDM.

A Carbon Tax regime: advantages and bottlenecks

The cap-and-trade is a quantity-based approach. A large fraction of economists and environmentalists advocate the use of price-based mechanisms. Experts suggest the use of a “carbon tax”, as a pigovian pollution tax for a global public good. There will no country emissions quota, no trading and no reference period. It will be a tax on services and goods that will increase every year at a rate commensurate with desired abatement of emissions. Although the intricacies of this system are complex and need substantial discussion to be agreeable across the countries, it offers many benefits. Al Gore says “tax what you burn and not what you earn” – he advocates the implementation of carbon tax, while reducing other taxes so that the consumer has a disincentive when buying a gas-guzzling car or coal-produced electricity as against a hybrid vehicle or hydel/wind power.

There are two major roadblocks for the carbon tax. Most of the arguments against it have come from a “it’s a tax and therefore it is bad” crowd. Taxes have never been welcomed by politicians for a fear of backlash from the public. Secondly, it is the unwillingness of a consumer to pay a higher price for a product although it translates to an overall saving over years. Consider the incandescent light bulb v/s CFLs debate. Although the CFL offers a longer lifespan and consumes significantly less energy than a light bulb, people tend to choose the incandescent light bulb because of its cost, which is a fraction of that of CFL. It has been estimated that the average US household might need to pay about $ 1500 per annum in 2020 if the government imposes such legislations. The average consumer responds only to economic incentives. Governments, therefore, have a strong role to ensure that there are adequate economic incentives for the consumer to switch to cleaner and greener products.

India, for one, has fared very poorly in this respect. Reva, the revolutionary electric car from a Bangalore-based company emits about 60 pc less carbon per kilometer as compared to other cars in the market. It costs about Rs. 4 Lakh against a Maruti which costs about 2.5- 3 Lakh and the new Nano which’ll be around 1.2 Lakh. In spite of the lower cost per km and lower emissions per km, Reva has managed to sell only about 1000 cars in India. Interestingly, Reva has sold about 2000 cars abroad in countries, many of which offer incentives for such environment-friendly products.

Cheap GHG emission reduction possibilities:

McKinsey & Co. in a recent report has identified developing Asian countries to possess about 60 pc of the world’s cheap GHG abatement potentials. These measures do not require any substantial investment and can be met with existing technologies. Measures like improving vehicle efficiency, better building design and greener power account for about 70 pc of low-cost abatement options. These measures require involve very little technology (like those in forestry or agriculture) or mature existing technologies like nuclear power and energy-efficient lighting.

Continuing on the same lines, a substantial public investment by governments (as opposed to private investments through CDM) will intensify the action to implement clean energy technologies. Past examples in the US - the JFK Apollo program in the 60’s, Carter Energy program in the late 70’s and lately the investment in security after 9/11 have accelerated the developments in those sectors. Governments across the world have to invest massively in clean energy technologies because no effort to achieve emission reductions will be possible without adopting cleaner energy over fossil-fuel based energy and currently low-carbon energy is significantly costlier.

Conclusion:

The COP-15 should develop a robust institutional framework for mitigation and adaptation, with enthusiastic participation from countries willing to take bold steps and embrace ambitious commitments. The stretch from here to Copenhagen is difficult and uncertain. It is imperative that the leaders and policymakers evolve consensus on mitigation practices and policies. Countries like the US need to own-up for their previous actions and lead the world in climate change efforts, while countries like India and China has a major role to play in deciding the future course of action. Copenhagen, in all probability, offers the last chance for the world to design a greener tomorrow and in these designs lay the fates of millions of poor people who are the most vulnerable to adverse climate change effects.

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The ticker on the side panel called 'Countdown to Copenhagen' is about COP 15. Should you need references, I'd be happy to share.