CO 2 Emissions Reduction Strategies and Economic Development of India

Transcription

1 WP CO 2 Emissions Reducion Sraegies and Economic Developmen of India N. Sayanarayana Murhy, Manoj Panda and Kiri Parikh Indira Gandhi Insiue of Developmen Research, Mumbai Augus 2006

2 CO 2 Emissions Reducion Sraegies and Economic Developmen of India N. Sayanarayana Murhy, Manoj Panda 2 and Kiri Parikh 3 Indira Gandhi Insiue of Developmen Research, General Vaidya Marg, Goregaon (E, Mumbai , India. sayamurhy@pacific.ne.sg; 2 manoj@igidr.ac.in; 3 kiri@igidr.ac.in Absrac his paper examines he consequences of alernaive CO 2 emission reducion sraegies on economic developmen and, in paricular, he implicaions for he poor by empirically implemening an economy-wide model for India over a 35-year ime horizon. A muli-secoral, iner-emporal model in he aciviy analysis framework is used for his purpose. he model wih specific echnological alernaives, endogenous income disribuion, ruly dynamic behaviour and covering he whole economy is an inegraed op-down boom-up model. he resuls show ha CO 2 emission reducion imposes coss in erms of lower GDP and higher povery. Cumulaive emission reducion arges are, however, preferable o annual reducion arges and ha a dynamically opimum sraegy can help reduce he burden of emission reducions. he scenarios involving compensaion for he loss in welfare are no very encouraging as hey require large capial inflows. Conrased wih hese, scenarios involving radable emission quoa give India an incenive o be carbon efficien. I becomes a ne seller for he firs 25 years and because of reducion in carbon inensiy i would demand less in laer years when i becomes a ne buyer. he resuls sugges ha for India, and oher developing counries, he window of opporuniy o sell carbon quoas is he nex wo decades or so. 2

3 CO 2 Emissions Reducion Sraegies and Economic Developmen of India N. Sayanarayana Murhy, Manoj Panda and Kiri Parikh. Inroducion he conribuion of he developing counries o he climae change problem has been hisorically small and heir per capia emission of CO 2 is significanly lower han hose in he developed world (Parikh e al., 99. Ye, some of hese developing counries are expeced o significanly increase heir emissions in he nex couple of decades (WRI, 996. China and India accoun for 2% and 6% of he curren world populaion respecively and will need special aenion in he fuure for he success of any global CO 2 emission reducion sraegy. he developed counries migh also find CO 2 abaemen in he developing counries o be less cosly compared o heir own domesic coss of miigaion. he developed counries may be seen by he developing counries as a source of financial and echnological resources o help hem conrol CO 2 emissions wihou deracing from heir developmenal objecives. his paper examines he impac of CO 2 emissions consrains on economic developmen and, in paricular, he implicaions for he poor by empirically implemening an economy wide model for India. Models ha assess economic impac of climae change in he lieraure can be classified as boom-up, op-down and inegraed. he boom-up models bring echnological knowledge and specificiy. However, ofen echno-economic evaluaions are incomplee and overly opimisic in ha policy and insiuional obsacles are no fully accouned for. op-down models bring macroconsisency. Among hem are economeric models which use reduced form equaions and he implied policies behind hem remain unclear. Anoher approach of op-down modeling is he compuable general equilibrium (CGE approach where a sequence of single period equilibria is worked ou. In economeric and CGE models ofen a high subsiuion elasiciy is assumed which makes i easy and relaively cosless o adjus o CO 2 consrains. he problem is hus assumed away. An aciviy his paper was compleed a couple of years ago, bu is being brough ou as a working paper in Augus We are graeful o Jerzy A. Filar and Jyoi Parikh for heir commens on an earlier draf. 3

4 analysis approach permis macro-consisency, dynamic behaviour, new and specific echnological opions and hus limied subsiuion. I can consiue a ruely inegraed op down-boom up approach. Energy secors have been he focus of aenion of several sudies concerned wih CO 2 emissions. Manne and Richels (992 is an example of his ype of models buil a a global level. Nordhaus (994 synhesizes a climae feedback sub-model and a world economic sub-model o deermine he opimal pah of economic growh and carbon dioxide emissions over a long period of ime. hese global models end o aggregae he economic aciviy in he world ino a single secor. McKibben and Wilcoxen (995 describe a global model in which money and financial consrains are incorporaed. Cline (992 and Fankhauser (995 review various models of ineracions beween carbon dioxide emissions and he economy. Among global models he second generaion model (SGM of Edmonds e al (992 is a general equilibrium muli-regional model used o calculae a sequence of equilibria. A he naional level, compuable general equilibrium models, which incorporae behaviour of individual agens in response o endogenous prices, have been used for developmen policy analysis (Adelman & Robinson, 978, Dervis e al., 982, Narayana e al., 99. hese are eiher saic models (Bergman, 990 or dynamic ones (Jorgenson and Wilcoxen, 990, useful for analyzing he effecs of adoping alernaive marke-based policy insrumens. he dynamic models ypically lack sufficien iner-emporal choices; hey obain a sequence of single-period soluions wih exogenously conrolled sae variables over ime (Glomsrod, 992. Shukla (995 provides a criical assessmen of greenhouse gas models and abaemen coss for developing naions. A few modeling sudies have explored India's opions. Blizer e al. (992a,b use a muli-secoral iner-emporal aciviy analysis framework and examine he impacs of resricions on emissions of CO 2 and oher greenhouse gases on economic growh of Egyp and India. hey also examine he coseffeciveness of differen measures for improving energy efficiency in reducing CO 2 emissions. heir analysis of he rade-off beween economic and environmenal performances focuses on aggregae welfare measures like he GDP or he oal consumpion of he sociey as a whole. Shukla (996 uses wo models, he boom-up MARKAL (Bergel e al, 987 which is an energy sysem model suiable 4

5 for echno-economic analysis given exogenously specified secoral growh raes and he op-down SGM wih endogenous macro variables such as growh rae. he Indian componen of SGM has been used o explore CO 2 policy opions for India (Shukla, 996 and Fisher-Vander e al, 997. Gupa and Hall (996, 997 have ried o use a simple economeric macro-model as a op-down model o inegrae echnological opions idenified by echno-economic assessmen of various echnical opions for carbon abaemen. In his paper, we have used he radiional aciviy analysis framework o model he linkages beween he naional economy and environmen. Our programming model is muli-secoral and ineremporal and maximizes an objecive funcion, which is he discouned sum of uiliies from consumpion. he dynamic framework permis examinaion of opimal iner-emporal choices. here are some specific feaures we wish o highligh in our model of he Indian economy, which disinguish our approach from oher models of India. Compared o Blizer e al. (992b, our model has endogenous income disribuion. We also race welfare effecs for he low-income groups. his is done by examining he incidence of absolue povery in he populaion. Secondly, here are large differences in consumpion paerns among differen income classes in a developing counry, which are represened in our model. In his conex, we also specify several alernaive consumpion bundles for each income class from which he respecive represenaive consumers can choose. hus, we permi consumer purchases o be sensiive o he relaive shadow prices of commodiies in our programming model. Endogenous income disribuion is imporan because i will have considerable impac on he srucure of consumpion demand in he economy, as populaion in a lower income class oday will move o a higher income class in he fuure as income growh akes place. Finally, we impose erminal condiions on sock variables in our model. Wih he inclusion of naural resources among he sock variables, he erminal condiions can be inerpreed as susainabiliy consrains since i akes care of he asses lef for he fuure generaion. Compared o SGM's India model, which calculaes a sequence of equilibria over ime, ours is a dynamic model where iner-emporal subsiuion possibiliies are permied in he opimizaion process. Compared o Gupa and Hall's 5

6 economeric model also, ours is dynamically opimal and we confine ourselves o specific echnical opions, which have few unexplored barriers. he main quesion we address is: wha would be he consequence for growh and povery in India of differen carbon emission reducion sraegies? Specifically, we examine he likely loss in naional income growh and increase in he incidence of povery due o annual or cumulaive resricions on CO 2 emissions. Nex, we have aemped o esimae he incremenal coss of abaing CO 2 emissions and quanify he addiional inflows of foreign finances, which will compensae he welfare losses incurred for abaemen. Finally, we repor on our resuls from simulaing a sysem of global rade in CO 2 emissions quoas o look a he araciveness of such schemes for India. he organizaion of he paper is as follows. he framework of he muli-period aciviy analysis model is briefly described in secion 2. Several ses of model resuls are deal wih in Secion 3: he economy-wide impacs of imposing CO 2 emission consrains, he magniude of income ransfers from abroad as a measure of compensaion for he developing counries ha underake emissions reducion and some experimens wih inernaionally radable CO 2 emission quoas. We conclude in secion 4 and poin ou policy implicaions of our resuls. he equaions are given in he Appendix. he daabase used o implemen he model is also laid ou in he Appendix in ables A-A3. 2. Model Srucure he model is an aciviy analysis, muli-secoral iner-emporal dynamic opimizaion one. his permis exploraion of alernaive echnologies and CO 2 sraegies from a long erm dynamic perspecive. Wih alernaive aciviies represening differen echnologies, one can permi subsiuion of various kinds and incorporae non-lineariies in such models. he model maximizes a social welfare funcion given as he presen discouned value of uiliy sreams corresponding o he per capia consumpion of an average consumer, given he resources available o i and he various echnological possibiliies for using hem. In principle, he ime horizon of he model mus exend o infiniy. Empirical models, however, 6

7 work wih a finie ime horizon of lengh, say, ime periods only (aken o be 35 years in our case as i is compuaionally very difficul o work wih an infinie number of ime periods. Insead, hey accoun for he pos-horizon periods in oher ways such as by making simplifying assumpions for he pos erminal period, as we do below.. We represen he whole economy wih seven commodiies/goods, some of which can be produced in more han one way. In paricular, elecriciy can be produced by coal, oil, gas (combined cycle gas urbine, CCG and ohers (hydro and nuclear. We focus on specific opions on he power side as large par of India's CO 2 emissions occur in his secor and policy opions here need o be clearly undersood. Indusrial oupu can be produced by wo alernaive aciviies ha use coal-boiler and oil-boiler. echnical progress and energy efficiency gains over ime are prescribed exogenously. hese remain he same across all scenarios. Income disribuion is endogenous and depends on he oal consumpion, exogenously projeced oal populaion and specified Lorenz raio. hus populaion belonging o each consumpion expendiure class is deermined in he model. he composiion of aggregae consumpion changes nonlinearly as he economy grows and people move from one income class o anoher. Fifeen alernaive consumpion bundles are provided for each class o represen approximaely he indifference curve of he class. his permis subsiuion across commodiies as relaive prices change. he boom class corresponds o hose below he povery line so ha we also ge an indicaion of he number of poor in each period. Ideally income disribuion should be linked o producion srucure and echniques. Unforunaely, adequae daa on income generaed by aciviies and how hey are disribued o differen income classes are no available. However, empirically income disribuion as refleced in consumpion expendiure has remained very sable wih slow and miniscule changes in he Lorenz raio. Naional Sample Survey (NSS daa show ha i varied wih minor flucuaions beween

8 in and in 992 [see, Panda (999]. hus an assumpion of a consan Lorenz raio over a long period of ime is jusified for India. he consrains in he model include he following: (i Commodiy balance o ensure ha demand does no exceed availabiliy; (ii Producion requires fixed capial which once allocaed o an aciviy can no be shifed. Capaciy consrains ensure ha producion does no exceed capaciy creaed by invesmen in each aciviy; (iii Capial accumulaion consrains ha resric capial sock in each aciviy o increase by ne invesmen in each aciviy; (iv Domesic producion of oil is resriced o reflec he small oil reserves in India. On he rade side, we impose a balance of paymen consrain. here is also a wedge beween expor price and impor price o reflec inernaional rade and ranspor margins. Some resricions are imposed on expors and impor growh raes by secors o keep he model realisic. hus, impor of agriculure is resriced o reflec a self-sufficiency requiremen for a large counry, which is considered necessary for food securiy. We also resric impor of services as no all services can be impored. In he absence of non-linear expor demand funcions, expor bounds are inroduced o accoun for fall in expor price and profiabiliy consequen o large expors by India. he values of he bounds are given in he Appendix able A2. A savings consrain is imposed o resric marginal savings rae o 30 percen. Programming models ofen give high invesmens and implied savings rae. Such raes are no realisic as governmens in democraic developing poor counries are no able o force savings rae beyond a limi. Finally, hough he model is run for a period of 35 years, he pos-erminal fuure has o be aken care of. his is done by assuming ha a saionary sae would prevail in he fuure wih he composiion of oupu, consumpion, invesmen ec. fixed and growing a a prescribed rae. his ranslaes ino a larger weigh for he erminal year consumpion in he objecive funcion. he model is solved using GAMS programming ool developed by Brooke e al. (988. Income disribuion is endogenous in he model. I depends on he oal income generaed, which in urn 8

9 depends on he income disribuion. We assume an iniial income disribuion, compue he opimal soluion and he resuling income and disribuion and ierae ill hey converge. Emissions Invenory CO 2 is emied when fossil fuels such as coal and oil are burn in producion and household aciviies. For a given fuel, he amoun of emission is direcly proporional o is quaniy burn. he CO 2 emission coefficien of a fuel depends upon is carbon conen. We accoun for hese emissions in wo differen ways: flows and socks. he emissions from he producion secors are compued by considering he scalar produc of he aciviy vecor and he emission coefficien vecor ha indicaes he amoun of emissions per uni level of aciviy. he emission coefficien for an aciviy is derived by considering he fuel specific emission coefficien and he fuel inpu coefficien. Apar from he producion aciviies, emissions are also caused by he privae and public consumpion of fuels like kerosene, LPG and moor gasoline. We accoun for hese by considering emission coefficiens aached o each consumpion aciviy. he cumulaive emission of CO 2 a he end of any period is compued by adding he emission flows during he curren period o he cumulaive emissions carried over from he previous period. CO 2 emissions are known o accumulae and reside for long duraion in he amosphere leading o increase in CO 2 concenraions. Carbon Reducion Opions In he model CO 2 emissions can be reduced in a number of ways. Firs, i can be reduced by reducing he levels of differen aciviies. his has he direc effec of reducing income and consumpion and hence a loss in he social welfare. he second mehod is o change he composiion of producion in he economy in favour of less CO 2 -inensive aciviies. his can be done eiher by changing he srucure of rade so ha he more CO 2 -inensive producs are impored or he srucure of consumpion and oher final demand may be changed by reducing he budge share of CO 2 -inensive goods in oal final demand. his leads o an indirec loss of curren welfare as he invesor and consumer choices ge disored. 9

10 In addiion, echnological opions are also available for reducing he CO 2 inensiy of aciviy levels. hese have he virue of reducing emissions wihou any significan loss of oupu. here are essenially wo ypes of such opions: (a Reduce he amoun of CO 2 emiing energy inpus required by differen aciviies; addiional invesmen may be required o insall equipmen ha can operae hese processes a higher energy efficiency. (b Swich o less carbon inensive fuels. For example, insead of a coal based power plan, we may insall a CCG power plan, or insead of running indusrial boilers on coal, we may use oil. he CO 2 emission coefficien varies across he fuels, being highes for coal (26 C/GJ, followed by oil (2 C/GJ and he lowes for naural gas (4.7 C/GJ. hus, oil or naural gas can subsiue coal and lower CO 2 emissions. Alernaive fuels or producion echnologies can be inroduced by expanding he se of aciviies. None of he equaions (given in Appendix need change when new aciviies are inroduced. 3. Analysis of CO 2 Emissions Reducion in India We use he model described in he earlier secion o evaluae he impac on economic growh and oher relaed variables of several alernaive CO 2 reducion arges over a period of 35 years from 990 o he reference scenario is a business-as-usual (BAU scenario in which he paern of growh of various variables is deermined by he model in he absence of any emission consrains. We hen develop scenarios in which here are resricions on he amoun of CO 2 ha can be emied. hese resricions are applied in wo differen forms: (a reducion of 0%, 20% and 30% in cumulaive CO 2 emissions (CEM over 35 years (hese hree scenarios are labeled C0, C20 and C30 respecively; (b annual reducion of 0%, 20% and 30% in CO 2 emissions (EM in each year of he 35-year ime horizon (hese hree scenarios are labeled A0, A20 and A30 respecively. hus, we have six differen scenarios of emission resricions for comparison wih he BAU scenario. Nex, we carry ou a few compensaion runs where loss in welfare due o emission resricions is compensaed hrough foreign income ransfers. Lasly, we inroduce a carbon quoa regime wih radable permis and examine implicaions on India of such permis under alernaive permi prices on he world marke. 0

11 3. Daa We have empirically implemened he model by using recen daa for India o esimae he various parameers and iniial values of differen variables included in he model srucure discussed in he previous secion. Inpu-oupu coefficiens and capial-oupu raios for various aciviies form he core of he model. hese daa are available from published sources for mos secors. In some cases, like he capial-oupu raios for he generaion of elecriciy using alernaive echnologies, we have based our esimaes on saisics published by he Cenre for Monioring Indian Economy (995 on he ongoing and proposed power projecs in India. Fuure projecions of governmen consumpion levels and of he upper and lower bounds for expors and impors (where relevan are specified in erms of growh raes. he daabase for operaing he model is lised in Appendix ables A-A Impac of Carbon Dioxide Emission Resricions able shows he values of some imporan macroeconomic variables and alernaive aciviy levels for seleced years for BAU scenario as well as various scenarios involving cumulaive and annual emission reducion. Some characerisics of he BAU scenario may be noed. Under i, he economy grows a an average annual rae of 6.3% over 35 years. he carbon emissions grow from 57 mc in 990 o 42 mc in Of hese emissions, 6 mc are from elecriciy generaion and 53 mc from indusrial producion in 990 and 659 mc and 397 mc respecively in he annual emissions are ploed in Figure. he cumulaive emissions over he 35-year period amoun o mc. Enforcing a 0% (or even a 20% cu on cumulaive CO 2 emissions has virually no impac in he shor run (3 rd or 5 h year or medium run (0 h year; see column C0 or C20 of able. he GDP and consumpion levels fall only marginally. In he long run (30 h year, however, he effecs of emission resricion are more visible. In he 30 h year under he C20 scenario, for example, GDP and consumpion per capia fall by.36% and.85% respecively compared o he BAU scenario. As a resul, number of people below he povery line increases by 5.94%. Deails are available in Parikh e al. (995

12 As he emission resricion level is ighened from 0% o 20% and furher o 30%, he effecs on long run GDP and welfare become increasingly adverse. hus, GDP falls by 0.53%,.36% and 4.06% and he number of poor increases by 2.%, 5.9% and 7.5%, in he 30 h year for 0%, 20% and 30% cumulaive carbon emission resricions respecively. he flexibiliy of he economic sysem ges reduced, as emission resricion becomes igher. Also, noe ha he loss in GDP and consumpion is nonlinear i.e., loss rises a an increasingly faser rae han emission resricion. For he case of a 30% resricion, even he shor run effecs (up o 5 years are noiceable: GDP and per capia consumpion loss is abou 0.2% and incidence of povery is higher by 0.3% compared o he BAU scenario. Furhermore, he losses are more severe owards he end of he arge period (30 h year han near he beginning of he resricion period. he model ries o pospone he economic losses due o wo reasons: i discouns he fuure consumpion flows and i also enjoys he faciliy of aaining emissions reducion arge over a 35-year period raher han in jus one or wo years. Nex, we consider he impacs of imposing annual reducion arges for CO 2 emissions. A 0% annual reducion arge over each of he 35-year period (scenario A0 achieves he same reducion over he period as he 0% cumulaive reducion scenario (C0. Bu he economic losses are larger under annual reducion scenario han cumulaive reducion of he same order. For example, in he 20% resricion case, annual consrains lead o a GDP fall of 3.66% in 30 h year as compared o.36% for cumulaive consrain and for 30% reducion, GDP is lower by a whopping 0.7%. Annual consrains are more resricive han cumulaive consrains because hey deprive he economic sysem of is freedom o choose an adjusmen pah over ime, hough he erminal period carbon sock level is he same under boh ypes of consrains. I can be seen in Figure ha under he C30 scenario, emission reducions are posponed owards he laer par of he ime horizon. he shor-run effecs are also large for he case of annual consrains. GDP losses in 3 rd year vary from 0.47% in he case of 0% annual emission resricion o.86% for 30% resricion. he increase in number of poor is a large percen increase even in he shor run, and in he 30 h year he number of poor increase by nearly 50 percen for a 30% annual reducion, which indicaes a significan shor run burden on he lower income segmen of he populaion. 2

13 he model resuls for alernaive aciviy levels for 5 h and 30 h years are also presened in able. hese resuls clearly illusrae ha, when a CO 2 emission consrain would be acive, India would shif away from coal based elecriciy o oil and gas based elecriciy and from coal-boiler based manufacuring o oil-boiler based manufacuring. here is, however, no change over o a new echnology in he shor run when cumulaive resricion of 20% or less is affeced. hese scenarios sugges he following : (a Cumulaive emission reducion arges are preferable o annual reducion arges and ha a dynamically opimum sraegy can help reduce he burden of emission reducions. Mehodologically i suggess ha an iner-emporal opimizing framework as we have used, is needed for exploring CO 2 reducion sraegies. One may noe ha sequenial general equilibrium models, which have many desirable feaures should be driven by dynamically opimal scenarios generaed by he ype of model presened here. (b Even cumulaive reducion arges increase povery by a larger percenage han i reduces GDP. he GDP loss is also no negligible in he long run. (c Annual emission reducions, which is implici in he pressures pu on developing counries by denying hem finance and credi for coal based power plans, for example, imposes unnecessary coss in erms of reduced GDP and higher povery, boh in he shor and he long run hrough disorions in choice of echniques in elecriciy generaion as well as in energy use in indusry. 3.3 Compensaion for Reducion of CO 2 Emissions A developing counry like India, which has so far conribued very lile o he climae change problem, canno afford a loss in GDP and an increase in povery due o carbon emission resricion. India could jusifiably seek financial assisance or oher forms of compensaion from he res of he global communiy for reducing is domesic CO 2 emissions for he sake of meeing global emissions reducion arges. 2 Wha would be he quanum of such compensaion? Our model provides a 2 echnological assisance could be anoher form of compensaion. 3

14 framework o compue he level of financial compensaion ha will offse he loss of social welfare associaed wih a given arge of reducing domesic CO 2 emissions. We model he financial compensaion in he form of addiional foreign capial inflows coming from a global fund 3. he exac procedure we follow is o le foreign ransfers in each year become an endogenous variable while i was exogenously fixed earlier. he objecive funcion is also modified: we minimize he discouned sum of foreign inflows subjec o mainaining he consumpion pah and welfare level as in he BAU scenario. his ensures ha he addiional inflows of foreign capial are no larger han he minimum required. hese scenarios assume ha whaever addiional foreign capial inflowsocccur, hey will be used appropriaely. In realiy, such compensaion is unlikely o be opimally used and welfare loss is bound o resul. Noneheless, he scenarios provide an idea of he broad magniude of he compensaion needed. he resuls of a numerical exercise o compue he compensaion levels for wo scenarios C30 and A30 are repored in able 2. he capial flows are no needed in each year of he 35-year ime horizon considered here. hey would be needed only in some years when addiional invesmens are underaken in carbon saving echnology. he required capial flows needed o compensae for welfare loss for he cumulaive reducion case (C30Comp amouns o Rs.453 billion ($ 87 billion a he exchange rae of Rs.6.65 o a US$ prevalen in during he whole period. However, he very firs year an inflow of US$ 4 billion is called for. Such large flows seem highly unlikely. Even if his were available, India s capaciy o absorb his fruifully is very doubful. If, however, he inflows in a given year were resriced so as o spread hem ou over ime, he oal inflows would have o be larger. his is obvious as he economy would be addiionally consrained. he scenario esimae of $ 87 billion has o be recognized as a lower bound. he magniude of such flows rises hree-fold o $ 278 billion for he case of annual emission reducion (A30Comp. he foreign capial flows are used o inves for shifing away from coal based producion o oil and gas based producion processes. In 3 he Global Environmenal Faciliy (GEF is a leading example of such a fund hough is finances are very limied a presen. 4

15 paricular, large scale oil-boiler is adoped for he manufacuring secor when capial flows accompany he emission resricion arges (compare aciviy levels in able 2 wih hose in able under he same column headings. Moreover, he capial flows required under annual reducion scenario is very large in he iniial year (abou 70% of GDP or $ 65 billion and poins o he infeasible naure of annual reducion sraegy in pracice. Lasly, i may be poined ou ha erminal consumpion level in hese scenarios remains he same as in BAU scenario and so no coss are shifed o he pos-erminal period even as CO 2 consrains are being me wihin he 35-year period. hese scenarios show he compensaion has o be large running ino US$ 87 o US$ 278 billion if India were o be induced o reduce is CO 2 emissions. Such compensaions seem unlikely a presen and hus, oher mechanisms should be explored o induce India (and oher developing counries o reduce heir CO 2 emissions. radable emission quoa is an obvious insrumen. We now examine i. 3.4 radable CO 2 Emission Quoas A variey of marke-based insrumens o implemen CO 2 abaemen objecive like a carbon ax or a radable emission quoa are discussed in he lieraure. he quaniaive implicaions of adoping such policies for he economic performance of he Indian economy is worh examining. In a global scheme of radable emission quoas, each counry is alloed a fixed annual emission quoa. A counry s righ of emission could, however, be augmened hrough purchase of quoa righ of anoher counry which has generaed a surplus by keeping is emission less han he quoa. No counry is permied o emi in excess of he oal quoa held by i ne of sales and purchases. his ensures ha he global emissions never exceed he oal quoas alloed o all he counries. In a sysem of radable emission quoas, he efficiency and equiy issues may be reaed independen of each oher. he opporuniy o rade in quoas leads o efficien use of means of abaemen, while he iniial allocaion rule could ake ino accoun equiy and need of various counries. Berram (992 and Parikh and Parikh (998 have argued among ohers he case for radable permis as a global policy opion for limiing greenhouse gas emissions. 5

16 We now describe a se of simulaions performed wih our model, which brings ou he impac of emission quoa rade on economic developmen in India. he revenue from he sale of surplus emission quoa affecs he economy in wo ways: (a i relaxes he foreign exchange consrain and permis larger volume of impors, and (b he increased foreign savings in he form of addiional foreign exchange availabiliy helps o expand domesic invesmen. We sipulae a few simple rules of rade in emission quoas. If emissions in a counry fall shor of quoa alloed for any paricular year, hen i has permission o sell he surplus quoa in he same year a ruling world marke prices. Similarly, is emissions may exceed he quoa alloed for any paricular year provided i bridges he defici by purchasing hem in he same year a going world marke prices. We have no considered he scope for banking he quoa unused in one year for use in anoher year. Nor do we permi lending and borrowings of foreign exchange from one year o he oher. Ye, his is a poenially beer siuaion han an annual resricion on CO 2 emissions (secion 3.2 as some ineremporal adjusmen is possible by rading in quoas. Permission o bank or borrow quoas or dollars from one year o anoher will be more beneficial jus like cumulaive resricion on emission compared o annual resricion. I is beyond he scope of his paper o specify how he world marke price (P CQ of carbon quoa is deermined. One mehod could have been o use he price emerging from a global modelling sysem, which links policy models of differen counries. Examples of such models are he Basic Linked Sysem (BLS of agriculural policy models by Fischer e. al (988 and he SGM model by Edmonds e. al (992. However, he prices generaed in a scenario of such a global model will depend on he policy reacions of many counries. Moreover, he equilibrium quaniy rajecory for India underlying he price rajecory in he global modelling sysem would no be consisen wih he quaniy rajecory generaed using our model. Hence, we ake a simple approach of specifying a consan real price of carbon quoa for all he 35-year ime period in a scenario, bu we simulae over a se of alernaive prices in differen scenarios o map ou he supply funcion of India s ne expors of carbon quoas. 6

17 he economy reacs o variaions in his price by buying or selling emission quoas in differen simulaion runs. How should emission quoas be allocaed? Parikh and Parikh (998 have argued for equal per capia allocaions, which are kep fixed o he populaion of he counry on he day a global agreemen is signed. his is o give an incenive o developed counries o sign he agreemen quickly and no o give developing counries a perverse incenive o increase heir populaion. hey have also suggesed ha his should be on a cumulaive basis covering emissions over some pas and some fuure years. Here, however, we make a simpler assumpion. he emission quoa is fixed a onne of carbon (c per capia 4 based on 990 populaion. his amouns o 82.9 million c per year and remains a ha level for he enire period 5. able 3 shows he resuls for a world marke price ranging beween Rs. 00 o Rs.000 a prices 6, i.e., US$ 6 o 60 per onne. I migh be noed ha in he compensaion scenarios, he implici cos per onne of carbon reducion was $ 5 in C30Comp and $ 42 in A30Comp. Also, in hese scenarios, India is assumed o be a small counry in he world quoa rade and so is sale or purchase does no affec he world marke price. Under he above quoa sysem, i is usually he case ha a developing counry like India would have surplus emission quoas in he iniial years because he size of is economy is small on a per capia basis during he iniial years. As able 3 shows he cumulaive sale by India of surplus quoa in he world marke would be beween abou 0400 o 400 mc over he 35-year period, i.e. an average of abou mc per year under differen price scenarios. Over ime, however, he economy grows and he surplus ges reduced. Indeed, India sars purchasing he quoa of oher counries someime beween he 24 h and 27 h year. he cumulaive purchase of quoa by India over he 24 h o 35 h year urns ou o be abou 3200 o 4500 mc, or an average of 9 o 29 mc per year. radable carbon quoa is an asse held by he economy and an increase in is sale revenue permis domesic consumpion and/or invesmen level o expand. Earnings from he sale of surplus quoa may hus be viewed as similar o he financial compensaion schemes discussed above. In he experimens 4 his is roughly equal o per capia world emission in I should be poined ou ha, saring from C/capia in 990, he emission quoa decreases a a rae equal o he rae of growh of populaion (.8% per year and drops o only 0.53 C/capia by he year 2025, he erminal year in he model. 6 he exchange rae of he Indian rupee was US$ Rs in

18 carried ou here, he economy grows over and above he base run (BAU since he quoa feches addiional revenue from res of he world in he iniial years. he ne presen value (NPV of per capia consumpion sream, a measure of aggregae welfare, increases wih quoa price. Wih addiional growh in he economy, cumulaive carbon emissions rises over he BAU run by 400 o 3300 mc (an increase of 2 o 6% depending on price of he quoa (able 3. Does India sell more as quoa price rises? India's offer curve for he price range considered here is drawn in Figure 2. I is no upward slopping a all ranges. he supply curve is backward bending in several ranges. he supply or surplus depends on he size of he domesic economy and he carbon inensiy of he producion processes. In order o undersand he urning poins in he curve, we documen he aciviy levels in able 4 in he elecriciy and he manufacuring secors which have alernaive producion echniques in he model. able 4 reveals ha India finds i opimal o inves in new carbon saving producion echniques wih rise in world price of carbon quoa. he producion echniques of he BAU run coninues ill quoa price reaches Rs. 50 (US$ 9 when i becomes economical o inves in combined cycle gas urbine (CCG o produce elecriciy. he processes adoped a price of Rs. 50 again coninues here afer ill world quoa prices reaches Rs. 400 when here is a shif o hydro and nuclear opions as indicaed by he expansion of he 'oher elecriciy' aciviy. he nex jump in echnology occurs a a price of Rs.700 wih adopion of oil-boilers for indusrial producion. I is ineresing o noe in Figure 2 ha he supply curve for carbon quoa urns upwards precisely as a shif occurs o a new echnology a prices Rs. 50, 400 and 700. Clearly, i is opimal for India o inves in new echnology and hereby generae surplus quoa o increase he sale of he quoa in he world marke a hese prices. However, when he producion echniques remain unchanged, he economy does no find i opimal o expand sale of quoa in he inernaional marke even a higher quoa prices in some ranges. he supply curve hus bends backwards in he price range Rs , and beyond Rs.700. I is opimal for India o reduce is offer of quoa o res of he world in hese ranges and use he quoa for expanding domesic producion insead. 8

19 We documen in able 5 some key variables for he 30 h year o examine long run effecs. he quoa runs show significan welfare gains for India. GDP in 30 h year increases by 6.7% over BAU for a quoa price of Rs 00 ($ 6 per c. I urns ou o be significanly larger for higher quoa prices and rises by abou 60% for a quoa price of Rs 000 ($60. he number of poor declines subsanially by 20% or more compared o he BAU scenario. he oal CO 2 emission in he 30 h year goes up by 0 o 20% over he BAU scenario because of he larger size of he economy. Bu, carbon inensiy of he producion process falls drasically by 6 o 25% for quoa price of Rs. 200 ($2 and above, reflecing adopion of new echnology. hus, while a carbon quoa sysem helps o raise GDP in a developing counry like India, i also helps in reducion of carbon inensiy in he producion process. In he Indian case, as we have discussed above, his occurs hrough subsiuion of coal by oil and gas. We have carried ou he numerical experimens of he model wih relaively few alernaive echniques. Wih increased revenue from sale of radable quoa, echnical change could be furher induced. One could hen expec a more comprehensive new menu of opions for CO 2 miigaion o develop. Such an emerging scenario is likely o reduce even oal emission from he BAU level even as GDP rises. 4. Conclusions Based on our analysis and he raionale we have presened, India should no have any obligaion o reduce is carbon emissions for quie some ime. Emission reducion imposes coss in erms of lower GDP and higher povery. If India is o reduce emissions, i should be compensaed for he loss. he compensaion scenarios are no very encouraging as hey require large capial inflows o ensure ha welfare levels are mainained. Can one inerpre he compensaion scenarios as scenarios of Kyoo proocol? In he compensaion scenarios, India needs US$ 87 billion o US$ 280 billion of capial inflows o reduce is carbon emissions by 30 percen cumulaively for 35 years or every year for 35 years respecively and i sill mainain is welfare level. Under he Kyoo proocol inflows may come from privae firms seing up carbon reducion projecs in India. Should India welcome his? Of course, he answer would depend upon wha price India ges for emission reducion. he 30 per cen reducion scenarios reduce 9

20 emission by 6. billion ones of carbon over 35 years. In he annual reducion scenario o mainain welfare a he same level, a compensaion of $278 billion is required. his means ha he welfare cos of reducing emissions by c is abou $45 for India. In he cumulaive reducion scenario, he implici welfare cos comes o $4 per c. For simpliciy, we have no discouned compensaion and emission reducions. hus, if any CDM projec ha gives India as is share less han $4 per C, hen India should no accep i. A $4 India jus breaks even. I ough o ge somehing more o make i worh is while. he fac ha CDM projecs bring invesmen may be looked a is own righ as any oher foreign direc invesmen projec. Accep i if i makes sense by iself. One may also noe ha a $4 per c, India does no gain anyhing from i. he emission credis would be claimed by foreign invesors, and if anyhing, India loses he low hanging fruis of carbon emission reducion, which may be more valuable when he ime comes for i o curail is emissions. Conrased wih hese, he radable quoa scenarios give India an incenive o be carbon efficien. I becomes a ne seller for he firs 25 years and because of reducion in carbon inensiy i would demand less in laer years when i becomes a ne buyer. In any case, a radable quoa regime would lead o much more induced echnical change han wha is provided in our scenarios. One can even expec a ne reducion in India s emissions in spie of higher growh. In he quoa scenarios, India remains a ne seller only for around 25 years. his suggess ha for India, and oher developing counries, he windows of opporuniy o sell carbon quoas is he nex wo decades or so. If hese are missed, i would be difficul o persuade hem o join in a global effor o reduce carbon emissions. A global agreemen wihou heir willing paricipaion would be ha much more difficul. 20

21 References Adelman, I. And S. Robinson, (978, Income Disribuion Policy in Developing Counries. Sanford Universiy Press. Berger, C. Haurie, A. and Loulou, R. (987, Modeling Long Range Energy/ echnology Choices: he MARKAL Approach, Repor. GERAD, Monreal. Bergman, L. (990, Energy and environmenal consrains on growh: a CGE modeling approach, Journal of Policy Modeling, Vol. 2, No. 4. Berram, G. (992, radable emission permis and he conrol of greenhouse gases, Journal of Developmen Sudies, Vol. 28, No. 3. Blizer, C.R., Eckaus, R., Lahiri, S., and Meerhaus, A. (992a, Growh and welfare losses from carbon emissions resricions: a general equilibrium analysis for Egyp, he Energy Journal, Vol 4, No. (992b, How Resricing Carbon Dioxide and Mehane Emissions Would Affec he Indian Economy?, Background Paper for World Developmen Repor 992, Policy Research Working Paper Series No 978, he World Bank. Brooke, A., Kendrick, D. and Meerhaus, A. (988, GAMS -- A User s Guide, he Scienific Press, Redwood Ciy. Cenral Saisical Organizaion (990, Inpu Oupu ransacion ables for 983-4, Governmen of India., Naional Accouns Saisics (various issues, Governmen of India. Cenre for Monioring Indian Economy, Curren Energy Scene in India, (various annual issues, Bombay. Cline, W.R. (992, he Economics of Global Warming, Insiue for Inernaional Economics, Washingon D.C. Eckaus, R.S. and Parikh, K.S. (968, Planning for Growh: Mulsecoral, Ineemporal Models Applied o India, MI Press, Cambridge, Mass. Edmonds, J.A., Picher, H.M., Baron, R. and Wise, M.A. 992, Modelling fuure greenhouse gas emissions: he second generaion model descripion. Proc. UN Univ. Con. Global Climae Change, okyo. 2

22 Fankhauser, S. (995, Valuing Climae Change: he Economics of he Greenhouse, Earhscan, London. Fischer G., K. Frohberg, M. A. Keyzer and K. S. Parikh (988, Linked Naional Models: A ool for Inernaional Food Policy Analysis, Kluwer Academic Publishers, Dordrech. Fisher-Vanden, K., P.R. Shukla, J.A. Edmonds, S.H. Kim, and H.M. Picher (997. Carbon axes and India, Energy Economics 9, Ginsburgh, V.A. and Waelbroeck, J.L. (98, Aciviy Analysis and General Equilibrium Modelling, Norh-Holland, Amserdam. Glomsrod, S., Vennemo, H. and Johnsen,. (992, Sabilizaion of emissions of CO2: a compuable general equilibrium assessmen, Scandinavian Journal of Economics, Vol. 94, No., pp Gupa, S., and S.G. Hall (996. Carbon abaemen coss: An inegraed approach for India, Environmen and Developmen Economics, (996, Jorgenson, D.W. and Wilcoxen, P.J. (990, Ineremporal general equilibrium modeling of U.S. environmenal regulaion, Journal of Policy Modeling, Vol. 2, No. 4, pp Manne, A.S. and Richels, R.G. (992, Buying Greenhouse Insurance: he Economic Coss of Carbon Dioxide Emission Limis, MI Press, Cambridge. McKibben, W. and P. Wilcoxen (995, he heoreical and Empirical Srucure of G-Cubed, Working paper, Ausralian Naional Universiy, Universiy of axes a Ausin, and he Brookings Insiuion. Narayana N.S.S., Parikh, K.S. and Srinivasan.N.(99, Agriculure, Growh and Re-disribuion of Income: Policy Analysis wih a General Equilibrium Model of India, Conribuion o Economic Analysis # 90, Norh Holland, Amserdam. Nordhaus, W.D. (994, Managing he Global Commons: he Economics of Climae Change, MI Press, Cambridge. Panda Manoj (999: Growh wih Equiy: Policy Lessons from he Experience of India in Growh wih Equiy: Policy Lessons from he Experiences of Seleced Asian Counries, Unied Naions, New York. 22

23 Parikh, J., Panda, M. and Murhy, N.S. (994, Consumpion Paern Differences and heir Environmenal Implicaions: A Case Sudy of India, Discussion Paper No. 6, Indira Gandhi Insiue of Developmen Research, Bombay. Parikh J. and Parikh K. (998, Free ride hrough delay: risk and accounabiliy for climae change, Environmen and Developmen Economics, vol. 3, Par 3, forhcoming July 999. Parikh, J., Parikh, K., Painuly, J.P., Shukla, V., Saha, B. and Gokarn, S. (99, Consumpion Paerns: he Driving Force of Global Environmenal Sress, Repor submied o he Unied Naions Conference on Environmen and Developmen by he Indira Gandhi Insiue of Developmen Research, Bombay. Parikh, K., Panda, M. and Murhy, N.S. (995, Modelling Framework for Susainable Developmen: Inegraing Environmenal Consideraions in Developmen Sraegies, Discussion Paper No. 27, Indira Gandhi Insiue of Developmen Research, Bombay. Planning Commission (98, A echnical Noe on he Sixh Five-Year Plan of India (980-85, Governmen of India. Planning Commission (995, A echnical Noe o he Eighh Five-Year Plan of India (992-97, Governmen of India. Shukla, P.R. (995, Greenhouse gas models and abaemen coss for developing counries: A criical assessmen, Energy Policy, 7, -. Shukla, P.R. (996, he modeling of policy opions of greenhouse gas miigaion India, Ambio, 25(4, World Resources Insiue (996, World Resources , Oxford Universiy Press, New York. 23

24 able : Scenarios for Carbon Emission Reducion by India BAU C0 C20 C30 A0 A20 A30 Percenage Change from BAU Gross Domesic Produc (Rs. Billion Year Year Year ear Year Per Capia Consumpion (Rs. Year Year Year ear Year Number of Poor (Million Year Year Year ear Year Cumulaive Emissions (mc Absolue Levels in Rs. Billion Seleced Aciviy Levels in Year 5 Elecriciy-coal Eleccriciy-ohers Elecriciy-oil Elecriciy-CCG Indusry-coal Indusry-oil Seleced Aciviy Levels in Year 30 Elecriciy-coal Eleccriciy-ohers Elecriciy-oil Elecriciy-CCG Indusry-coal Indusry-oil BAU: Business as usual A0,A20,A30: Annual reducion of CO2 emission by 0%, 20%, 30% over BAU C0,C20,C30: Cumulaive reducion of CO2 emission by 0%, 20%, 30% over BAU 24

25 able 2: Compensaion hrough Addiional Foreign Capial Flows C30Comp A30Comp Addiional Foreign Capial Flows (Rs. Billion* Year 685 ($ ($65 Year ($ 9 Year ($ 7 Year ear Year Year ($46 0 Cumulaive over 35 years 453 ($ ($278 Addiional Foreign Capial Flows as % of GDP Year Year Year Year ear Year Year Cumulaive over 35-years Seleced Aciviy Levels in Year 5 (Rs. Billion Elecriciy-coal Eleccriciy-ohers Elecriciy-oil 0 0 Elecriciy-CCG 55 5 Indusry-coal boiler Indusry-oil boiler Seleced Aciviy Levels in Year 30 (Rs. Billion Elecriciy-coal Eleccriciy-ohers Elecriciy-oil 0 4 Elecriciy-CCG Indusry-coal boiler Indusry-oil boiler Noe: Compensaion is hrough minimum addiional foreign capial inflows ha would mainain he consumpion pah of BAU scenario. * Figures in parenheses are in Billions of US$. 25

26 able 3: radable Carbon Quoa for India: Emission Cumulaive Cumulaive Cumulaive Year Cumulaive Increase Quoa sale of purchase of ne sale of by which emission in NPV Price carbon carbon carbon here is rise over of per quoa over quoa over quoa over purchase Base Run capia Rs/C 35 years 35 years 35 years of quoa (mc cons (mc (mc (mc sream (% Noes: (icarbon quoa of 822 mc per year ( c/capia in 990. (ii Rs. 00 was equivalen o US$ 6 in , he base price for he model. (iii NPV is ne presen value a a discoun rae of 0%. 26

27 able 4: Aciviy Levels for Differen Carbon Quoa Prices in Year 30 (Rs. Billion Quoa Price Elecriciy Indusry (Rs./c coal ohers oil CCG coal boiler oil boiler BAU

28 able 5: Seleced Variables for Year 30 Under Differen Scenarios Scenario GDP Number of Carbon Carbon PercenageChange over BAU Poor Emission Emission GDP Number Carbon / GDP of Poor /GDP (Rs Billion (Million (Mc (c/rs million raio BAU QP QP QP QP QP QP QP QP QP QP Noe: QP00 indicaes carbon quoa run wih price Rs.00 and so on. 28