Monday, December 7, 2009

Market economy's contribution to environment

Rather than focussing on reducing emissions, India can make a difference by liberalising its economy, improve efficiency, and thereby contribute to a cleaner and safer environment. On the eve of the Copenhagen climate conference, I look at the relationship between economic reforms and energy efficiency in this article, "Earth Story", published in the Financial Chronicle, on 7 December 2009.

With the opening of the climate conference in Copenhagen, India has an opportunity to change the climate of negotiations.

Surprisingly, Jairam Ramesh, the minister for environment and forest, decided to play for a draw with his statement in Parliament last week proposing voluntary reduction in India’s carbon intensity. Despite his strong assertion that India will not accept any legally binding international commitment to reduce emission, he proposed to reduce the intensity of the economy by a modest 20 to 25 per cent.

Just when the world of climate science was getting shaken by allegations of massaging of data to support claims of global warming, the minister acknowledged that Indians are among the most vulnerable to global warming, and then promised to announce domestic emission norms by 2011. Yet, he failed to drive home the point.

Between 1992 and 2005, India’s energy intensity, that is energy needed to produce a unit of GDP, improved by about 52 per cent, from 1,281 kg of oil equivalent per $1,000 of GDP in 1992 to 618 kilogram of oil equivalent (kgoe) per $1,000 by 2005. During this period, carbon intensity declined by 45 per cent, from a high of 3.15 tonne of CO2 per $1,000 to 1.73.

These figures are impressive, and comparable to the major economies of the world, which varied in 2005 from 0.44 tonne per $1,000 for the US, 0.252 tonne for Europe area and 2.44 tonne for China.

India’s GDP in 2008 was estimated by the World Bank to be $1,217 billion (current dollar). At 2005 energy intensity level of 618.46 kgoe/$1,000, this required total energy of 752,969 million kg of oil equivalent (mkgoe).

But in 1971 energy intensity was a high 2,259 kgoe per $1,000. To achieve the GDP level of 2008 would have required 263 per cent more energy than it actually did. Likewise, at 1981 energy intensity of 1,154, would have required 87 per cent more energy. And at 1991 energy intensity of 1,409, would have required 127 per cent more energy to attain the GDP level of 2008.

The improvement in energy intensity is mirrored in carbon intensity. At 2005 carbon intensity level of 1.73 MT per $1,000, the GDP of 2008 emitted 2,094,083,144 MT of carbon. But at carbon intensity levels of 3.08 (1971), 1.96 (1981) and 2.72 (1991) the GDP of 2008, would have emitted 79 per cent, 14 per cent and 58 per cent more carbon, respectively, than it actually did.

This suggests that between 1992 and 2008, effective saving in total energy used was 127 per cent and effective decline in total carbon emission was 58 per cent, for the 2008 GDP level. The decrease in carbon intensity between 1992 and 2005 was a whopping 82 per cent from the 2005 base, and energy efficiency improved by 56 per cent, according to an analysis of the World Development Indicators.

The minister’s defensive strategy became apparent, when invoking national interest he offered to do domestically, emission reduction and emission standard, while vehemently rejecting similar measures under any international legal mandate.

The dramatic improvements in energy use since 1992 were not a coincidence. Equally, there was little conscious effort aimed at such environmental goals. The real secret of this amazing transformation is the economic liberalisation initiated during this period, which unleashed greater competition, ushered in a relatively free trade regime and facilitated investment and technology adaptation.

Globally, however, decarbonisation of the economy has been going on for the past 400 years as societies moved from fuel wood to coal, oil and electricity, driven by economic needs, leaving a safer environment in its wake.

Given this track record, rather than seeking to balance economics and environment, we need to push ahead with economic reforms with much greater vigour. We need to recognise that cleaner and safer environment is like value added products, which become accessible only with higher economic growth and prosperity.

We need to recognise that the poor are vulnerable to natural hazards, were so in the past, are in present and will be in the future, because of their poverty, quite irrespective of any change in the planet’s climate. If we are really concerned about the plight of the poor, then it is the intellectual climate that we need to change.

Even at a nominal economic growth rate of 8 per cent annually, India’s GDP will rise 150 per cent from 2008 level to over $3,000 billion by 2020. At our current carbon intensity level of 1.73 MT of CO2 per $1,000, the total carbon emission could increase by 2.5 times. But if our carbon intensity falls to European or Japanese levels, 0.252, prevalent today, the total carbon emission would fall by a sixth. This is possible at current levels of technological development.

And this could happen irrespective of whether man-made carbon is the cause of climate change or not. It would happen because of the economic need to improve energy efficiency. This is the real “business as usual” model.

The minister will emerge as a true ‘deal maker’ in Copenhagen if he succeeds in changing the intellectual climate at the negotiations. Economic freedom generates greater wealth and makes energy accessible, and that in turn, enables people to better insulate themselves from the vagaries of nature.