India must use markets to decarbonise 

News: Recently, in the Conference of Parties (CoP-26) of the UNFCCC held at Glasgow in November 2021 several partner countries were seen committed to concrete action plans to contain global warming under the threshold of 1.5 degrees Celsius.  

Why should India decarbonize? 

Climate change is bound to impact human lives and the global economy. This is going to be at an exceptionally high scale in the coming future.  

After China and the United States, India is the third-largest emitter of the Carbon dioxide. Thus is a key player in emissions reduction. 

As per the IEA’s India Energy Outlook 2021 Report, India’s energy system is highly dependent on fossil fuels i.e., coal, oil and bioenergy. Thus, Indian energy ecosystem is highly carbon-intensive. 

India is a growing economy which would demand more energy consumption with time. As per the IEA’s World Energy Outlook Report 2017, India will account for nearly one-fourth of the global energy demand by 2040. Therefore, India’s economic growth should be sustainable. It requires carbon emissions reductions. 

What are the reasons behind high Greenhouse Gases (GHG) emissions and the climate change? 

It is a feature of market failure. The consumer’s economic activities like driving or air-conditioning and the producer’s economic activities such as electricity generation and manufacturing are inefficient in nature.

They cause emissions, leading to pollution and global warming. These negative externalities are not reflected in the costs of production and consumption. This leads to an uncontrolled rise in emissions and also breeds apathy towards mitigation efforts.  

Way Forward 

There is a need to address the problem of market failure. Government intervention is required in a number of ways.  

(A) The government can adopt the command-and-control strategy. This involves regulations for reducing emissions like setting emission levels and fixing limits of emissions. However, it would be good only during the initial phase of the mitigation strategy. 

Further, the Nationally Determined Contribution targets or emission levels set by the country under the Paris Agreement should not be wrongly set. It could lead to cost-inefficient outcomes.  

(B) The carbon tax is a better option. I would work well for regulating the pre-fixed levels of emissions. This option will lead to near-efficient outcomes. Initially, the firms reduces the emissions, the marginal cost of abatement rises. However, the firm will stop reducing emissions and choose to pay tax at the point when the cost of abatement becomes higher than the rate of tax.  

The government can introduce an auction-based carbon trading scheme. It will spur higher efficiency. The price of certificates will be determined in the free market between the firms facing low and high abatement costs. It will determine the optimal and cost-efficient levels of emissions reduction. The firms will have choice to either mitigate or trade. The firms having low abatement-cost will keep reducing emissions as they would profit by trading the certificates. They will adopt green-tech, renewable energy, electrification and energy efficiency measures. 

India should adopt an effective policy framework for emissions reduction. It should take into account the reasons for market failure.  

The market-based instruments are the most efficient tools for the transition to a green energy economy.  

The government should ensure equity in energy access. It should channel the revenues generated from carbon pricing to households and firms impacted by the carbon trading and carbon tax. 

Source: The post is based on an article “India must use markets to decarbonise” published in the Indian Express on 02nd May 2022.