Energy

The finance sector must sign the Paris pact

live mint, Dec 28, 2016

Original link is here

Without increased climate funding to the global South, the poor will end up underwriting a green future for a privileged few

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The infrastructure gap, global financial sustainability, and a green future are recognized to be common global problems. Photo: Bloomberg


The Paris Agreement on climate action has an Achilles heel: the lack of a buy-in from the financial community. This absent and crucial signatory will need to play a significant role if any ambitious response to climate change has to be achieved.

This is easier said than done. “Sustainability” in financial market jargon has a very different meaning to when it is used in development-speak. In the market, this term largely disregards issues pertaining to employment generation, poverty eradication, inclusive growth and environmental considerations. Instead, it is monomaniacal in enhancing the “basis points” of the returns it generates for the community it serves—with only perfunctory interest in the “ppm (parts per million)” of carbon (mitigated or released) associated with the deployment of finance, or the human development index (HDI) effects of investments.

The regulatory responsibilities and the fiduciary duties that drive the functioning of this community are focused mostly on protecting the interests of investors and consumers (of financial instruments and banking services) by de-risking the financial ecosystem. Together, these present two specific hurdles, both of which make it difficult for the world of money to serve the ambitions of the Paris Agreement. The first hurdle pertains to geography, more specifically political geography. And the second pertains to democracy, more specifically the politics of decision making within institutions that shape and drive global financial flows.

Together, they have deleterious consequences. For instance, the major chunk of climate finance labelled as such finds it tedious to flow across borders. Thus, it is mostly deployed in the locality of its origin. This tendency is even starker for financial flows from the developed world to the developing and emerging world. An Organisation for Economic Co-operation and Development—Climate Policy Initiative (OECD—CPI) study found that “public and private climate finance mobilized by developed countries for developing countries reached $62 billion in 2014”. A separate study by CPI estimated that global flow of climate finance crossed $391 billion in the same year—implying that only about 16% of all flows moved from developed to developing countries.

This represents the most significant “collective action problem” that confronts the global community on the issue of climate change. While there is a near universal recognition that a) climate change is a global commons problem, b) the least developed countries are likely to be most affected, and c) significant infrastructure will need to be developed in emerging and developing countries to improve their low standard of living, the flow of money is (not surprisingly) blind to each of these. It recognizes political boundaries, responds to ascribed (and frequently arbitrary) ecosystem risks within these boundaries and flows to destinations and projects that enhance returns—as it was meant to.

The travails of this constrained flow of capital do not end here. In a discussion paper published by the climate change finance unit within the department of economic affairs at the Union ministry of finance, it has been highlighted that even this modest cross-border flow, which also accounts for pledges and promises made, does not adhere to the “new and additional” criteria. Flows of conventional development finance and infrastructure finance are on occasion reclassified as climate finance. And on other occasions these conventional flows are cannibalized to generate climate finance. The size of the pie remains the same.

Unless we are able to increase the total amount of resources available to cater to both the development priorities and climate-friendly growth needs of emerging and developing economies, we may only be able to build a future that is both green and grim. Everywhere, low-income populations will underwrite a green future for a privileged few.

Additional finance for meaningful climate action may be generated by simultaneously working on three fronts as we move to 2020. Successful climate action will first and foremost be predicated on the domestic regulatory framework within each country. Currently, a slew of regulations, from the flow of international finance into the domestic economy to those related to debt and equity markets, disincentivize capital from investing in climate action. It is imperative for policymakers to get their own house in order and create financial market depth and instruments that allow savings to become investible capital even as they continue to demand a more climate-friendly international financial regime.

Second, there currently exists a vast pool of long-term savings—which can be labelled “lazy money”. According to a recent International Monetary Fund report, much of this lies with pension, insurance and other funds, which have accumulated savings of approximately $100 trillion. Due to lack of political will and appropriate mechanisms, this money is neither invested in the climate agreement objectives nor in the sustainable development goals agreed to at the UN last year. This helps nobody. As a result of its inability to flow across borders, developed-world savers earn sub-par returns. And due to this source of finance remaining outside the climate purview, the investment gap in infrastructure, particularly in developing countries, has continued to increase. It now stands between $1 trillion and $1.5 trillion each year. Making this “lazy money” count will be extremely important.

And finally, it is time to bring the big boys controlling banking standards into the tent. The Basel III Accords, designed to create a more resilient international banking system through a suite of capital adequacy, leverage, and liquidity requirements, contribute little to global climate resilience. Given the dependency of emerging economies like India on commercial finance for capital-intensive projects, the Basel Accords need urgent review.

The infrastructure gap, global financial sustainability, and a green future are recognized to be common global problems. But the world cannot continue to solve them on three different tracks. If so, each of them will fail. Only once they are seen as inter-connected can they be addressed effectively.

Samir Saran is vice-president at the Observer Research Foundation.

The false debate on India’s energy consumption

Economy & Society

Samir Saran & Vivan Sharan

Original link is here


Despite having among the largest coal reserves in the world, India lags far behind in consumption, at less than a fifth of China’s levels.[1]  The average Indian’s coal consumption is around 20 percent that of the average US citizen, and 34 percent that of the average OECD citizen. And yet, in international negotiations, India finds itself caught in a shrill and binary debate pitching growth against climate. This is a false debate, which stems from the inability of the current mercantilist system to grant all actors a fair share of the “carbon space” – the amount of carbon dioxide-equivalent emissions that can be released into the Earth’s atmosphere without triggering dangerous climate change.

In international negotiations, India finds itself caught in a shrill and binary debate pitching growth against climate

India’s position in climate negotiations is based on the importance of access to energy for human development. This is supported by data, including the positive correlation between energy access and the Human Development Index (HDI).[2]  Estimates vary on how much energy is needed to meet basic human needs (hereafter referred to as “lifeline energy”). The methodologies vary depending on whether these basic needs are considered through the prism of GDP growth targets, HDI levels, or calculations of the energy needed to meet a predetermined set of development goals.[3]

This essay will argue that, if the climate debates have allowed even a nominally equitable level of coal consumption towards meeting lifeline energy needs, India currently has immense room for manoeuvre. The analysis relies on a benchmark metric: that 2,000 watts (W) per capita is a basic level of lifeline energy, covering housing, transport, food, consumption (of manufactured goods), and infrastructure. This is based on a study by Novatlantis, which demonstrates that this level of consumption could power daily life in Western Europe.[4]  Therefore, lifeline energy is defined liberally in this study, as being high enough to cover the minimum lifestyle needs of citizens in developed countries.

Consumption after the financial crisis

While developed countries such as OECD and EU member states have reduced per capita coal consumption since the financial crisis, developing countries such as India have increased consumption over the same period. This reduction by developed countries does not necessarily reflect a greater degree of climate “responsibility”, and, conversely, the increase in consumption by India does not reflect “irresponsibility”, as this analysis will demonstrate. Table 1 shows the total per capita consumption of key regions and countries that are shaping the climate change discourse.

TABLE 1: TOTAL PER CAPITA COAL CONSUMPTION (W)

Countries/Regions 2005 2009 2014
US 2,580.8 2,147.5 1,887.6
China 1,324.4 1,674.4 1,909.6
Germany 1,308.9 1,162.7 1,269.7
Japan 1,260.2 1,127.9 1,321.5
India 217.2 279.3 377.3
World 640.9 675.7 717.3
of which:   OECD 1,316.0 1,143.0 1,100.6
                  Non-OECD 484.7 571.9 635.1
                  EU 846.8 705.6 704.8

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

Taking a closer look at coal consumption before and after the financial crisis, it is apparent that the trends are nuanced. Two key sub-trends are visible in Table 2, which tracks coal consumption against total primary energy consumption. The first is that, while developed countries have been cutting total energy consumption, developing countries have been increasing it, albeit at a gradually declining pace since the crisis. Second, while developed countries have cut coal consumption faster than total primary energy consumption, developing countries have increased coal consumption faster than total primary energy consumption. Clearly, then, coal consumption is very much part of the lifeline consumption matrix for developing countries since they require base load generation for industrial-driven economic growth (which is a prerequisite in countries such as India for improving the HDI and generating employment).

TABLE 2: CHANGE IN COAL CONSUMPTION VS. TOTAL PRIMARY ENERGY CONSUMPTION

Regions Category 2006 2009 2010 2011 2012 2013 2014
OECD TOTAL 0% -5% 3% -2% -1% 0% -2%
COAL 0% -11% 6% -2% -5% 0% -2%
Non-OECD TOTAL 4% 0% 4% 4% 2% 1% 1%
COAL 6% 2% 2% 6% 1% 1% 0%
EU TOTAL 0% -6% 4% -4% 0% -1% -4%
COAL 3% -12% 5% 2% 3% -3% -7%

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

Finally, Table 3 shows that the average citizen of the US and of China both consume nearly the entire 2,000W lifeline energy benchmark in the form of coal. Conversely, in India’s case, only about 19 percent of the 2,000W benchmark is consumed in the form of coal. In fact, citizens of OECD countries get a much larger proportion of their energy needs from coal than citizens of non-OECD countries. This is also a function of the disparity in per capita energy consumption as a whole between developed and developing countries – while coal consumption as a percentage of lifeline energy in developed countries is decreasing, the gap between the per capita coal consumption of developing and developed countries remains vast.

TABLE 3: PERCENTAGE OF LIFELINE ENERGY DELIVERED BY COAL, WITH A PER CAPITA NEED OF 2,000W

Countries/Regions 2005 2009 2014
US 129% 107% 94%
China 67% 84% 95%
Germany 65% 58% 63%
Japan 63% 56% 66%
India 11% 14% 19%
World 32% 34% 36%
of which:   OECD 66% 57% 55%
                  Non-OECD 24% 29% 32%
                  EU 42% 35% 35%

Source: BP Statistical Review of World Energy, 2015; The World Bank; author’s calculations

India’s twin imperatives

The World Bank’s Special Envoy on Climate Change recently stated that “clean energy is the solution to poverty, not coal”.[5]  This is a view that resonates within a number of development-financing institutions based in OECD countries. For instance, the US Export-Import Bank stopped funding greenfield coal power generation projects worldwide in 2013. The World Bank also seems to be moving in this direction, even though coal consumption has been increasing in developing countries and coal-based energy remains the most practical option at a large scale.[6]  This narrative isolates economic growth from lifeline energy and skirts over the role of growth in development.

The preceding analysis attempts to address some myths related to coal consumption. First, in per capita terms, developed countries in fact consume much more coal than developing countries: The average OECD citizen consumes about double the coal of the average non-OECD citizen. China is a notable exception. And if Chinese per capita coal consumption is a benchmark, the debate on India’s consumption is clearly redundant.

The average Indian already spends much more on renewable energy (as a proportion of income) than counterparts in China and the US

The per capita trends show that India will supply a larger proportion of its 2,000W benchmark through clean(er) fuels than developed countries. There is enough room for India to increase its coal consumption while continuing to accelerate its renewable-energy thrust. India has set a target renewable-energy capacity of 175 gigawatts by 2022. This means that it will be among a handful of countries to source a large proportion of its lifeline energy needs from non-conventional sources. The average Indian already spends much more on renewable energy (as a proportion of income) than counterparts in China and the US.[7]  To spend even more, purchasing power will need to grow, and so, in turn, will lifeline consumption.

This has clear implications for India, and for other similarly placed developing countries. Unlike developed countries, which have already seen peaks in their energy consumption, India must respond to two imperatives. First, to increase its lifeline energy as well as clean energy. This means that the country will have to ensure financial flows towards lifeline energy, make coal consumption more efficient, and engage with the international financial system to ensure that regulations do not make clean energy investments more costly than they already are. Second, and at the same time, lifestyle emissions need to start adhering to or approximating the Swiss model, which shows that “daily life in Western Europe could be powered by less than one-third of the energy consumed today&rd[8]  The estimated 20 million people at the top of India’s socio-economic pyramid, and large companies that consume as much energy as counterparts in developed countries, must be included within the paradigm of “climate responsibility”.


[1]   In 2014, China accounted for more than half the world’s coal energy consumption, at around 3.9 billion tonnes of oil equivalent, while Organisation for Economic Cooperation and Development (OECD) countries consumed just over half this figure. China’s target of capping coal consumption at 4.2 billion tonnes by 2020 was welcomed by OECD countries. See data from the BP Statistical Review of World Energy, June 2015, available athttp://www.bp.com/content/dam/bp-country/de_de/PDFs/brochures/bp-statistical-review-of-world-energy-2015-full-report.pdf; “China seeks to cap coal use at 4.2 billion tonnes by 2020”, Agence France-Presse, 19 November 2014, available athttp://economictimes.indiatimes.com/news/international/business/china-seeks-to-cap-coal-use-at-4-2-billion-tonnes-by-2020/articleshow/45205271.cms.

[2]   UNDP, 2013; The World Bank, n.d.

[3]   Shripad Dharmadhikary and Rutuja Bhalerao, “How Much Energy Do We Need?”, Prayas Energy Group, May 2015, available athttp://www.prayaspune.org/peg/publications/item/298-how-much-energy-do-we-need-towards-end-use-based-estimation-for-decent-living.html(hereafter, Dharmadhikary and Bhalerao, “How Much Energy Do We Need?”)

[4]   Novatlantis, “The 2,000-Watt Society”, 2007.

[5]   Rachel Kyte, “World Bank: clean energy is the solution to poverty, not coal”, theGuardian, 10 August 2015, available at http://www.theguardian.com/sustainable-business/2015/aug/07/world-bank-clean-energy-is-the-solution-to-poverty-not-coal.

[6]   Sunjoy Joshi and Vivan Sharan (eds), “The Future of Energy”, Observer Research Foundation, 2015, available at https://www.economic-policy-forum.org/wp-content/uploads/2015/02/ORF-EPF-Final-Report-The-Future-of-Energy.pdf.

[7]   Samir Saran and Vivan Sharan, “Indian leadership on climate change: Punching above its weight”, Planet Policy blog, The Brookings Institution, 6 May 2015, available athttp://www.brookings.edu/blogs/planetpolicy/posts/2015/05/05-indian-leadership-climate-change-saran-sharan.

[8]   Dharmadhikary, Shripad and Bhalerao, Rutuja, “How Much Energy Do We Need?”, Prayas (Energy Group), May 2015.

Unbundling the coal-climate equation

October 7, 2015 03:47 IST | Samir Saran and Vivan Sharan, The Hindu

Original link is here

TH07_Global_Coal_e_2574097d

There is still enough room for India to grow its coal consumption while continuing to accelerate its thrust on the expansion of renewable energy.

Ahead of the Paris climate summit, India announced on October 2 its Intended Nationally Determined Contributions (INDCs) for climate change mitigation and adaptation. India intends to reduce its carbon emissions intensity by 33-35 per cent by 2030, from its 2005 levels. While this commitment has drawn fulsome praise from many, the green ayatollahs have predictably ignored its herculean clean energy ambitions and focussed on Indian dependence on coal. It is time to lay bare the ‘coal hypocrisy’ of these privileged ‘western greens’.

India’s total energy consumption is a fraction of that of China, the U.S., the European Union and the OECD. Its position at the climate change negotiations has continued to reflect the centrality of access to energy for human development. And India’s normative position is supported by data, such as the positive correlation between energy access and the Human Development Index (HDI).

Lifeline energy

While a number of estimates exist on how much energy is needed to meet development objectives (we call it ‘lifeline energy’), an interesting benchmark is that of the 2000-Watt (W) society, based on a Swiss research group’s findings. The research states that 2000-W per capita is a basic level of energy which accounts for housing, mobility, food, consumption (manufactured goods) and infrastructure. In a forthcoming paper for the European Council on Foreign Relations, we argue that if the ‘space’ allocated to India for coal consumption towards fulfilling lifeline energy needs is even nominally equitable, India does not have to compromise on its development and growth aspirations.

On an average, U.S. citizens consume nearly the full extent of this lifeline energy benchmark using coal, the ‘dirty fuel’. India consumes only 19 per cent of the benchmark through coal. In fact, citizens of OECD countries get a much larger proportion of their energy needs relative to the 2000-W benchmark from coal than non-OECD countries.

It is important to note that in 2014, the average Indian accounted for around 20 per cent of the average American’s coal consumption and around 34 per cent of those from the OECD. What has caused concern in the developed world is that while they have reduced per capita coal consumption relative to pre-financial crisis levels, India has increased consumption over the same period. In our analysis, we point out that just as reduced coal consumption of developed countries following the crisis does not necessarily reflect a greater degree of ‘responsibility’ towards the climate, the increase in consumption by India does not reflect ‘irresponsibility’.

This is better explained by two key trends, visible after the crisis. One, while developed countries have been cutting down energy consumption as a whole, developing countries have been increasing consumption, albeit at a gradually declining pace. Two, while developed countries have been cutting coal consumption faster than primary energy consumption, developing countries have increased coal consumption faster than primary energy consumption. Clearly then, industrial consumption (manufacturing and jobs) is very much part of the lifeline consumption matrix for developing countries.

Growth-development link

Many financial institutions such as the U.S. Exim Bank have stopped funding coal-based power generation projects. The World Bank also seems to be following in this direction even though coal consumption has been increasing in developing countries and coal-based energy remains the most practical option of scale. This tendency isolates economic growth from lifeline energy and skirts the central goal of development within growth.

India is neither in the same basket of per capita coal consumption as developed countries nor comparable to China. In fact, we have shown that India will meet a larger proportion of the 2000-W benchmark through ‘clean’ fuels than developed countries. Therefore, there is enough room for India to grow its coal consumption while continuing to accelerate its renewable energy thrust. And this is precisely what the Indian INDCs reflect.

India has set a target of renewable energy capacity of 175 gigawatts by 2022; and has promised to achieve 63 GW of nuclear energy if “supply of fuels is ensured”. It will be among a handful of countries to source a large proportion of its lifeline energy needs from non-conventional sources, across the developing and developed worlds.

It is worth emphasising that unlike developed countries that have already peaked their energy consumption, India must first strive to provide the 2000-W per capita lifeline energy to all, even as it seeks to clean this energy mix. India will continue to consume coal to grow its industrial base, improve HDI and develop its economy. This in turn will allow it the financial capacity to invest heavily in non-conventional sources. The Indian INDCs reflect this enduring paradox; India will need to grow its coal capacity if it is to successfully go green.

Developed countries such as those within the EU want to reduce their emissions to two tonnes per capita by 2050; which will in turn reflect the total carbon ‘space’ available per capita if the world is to limit global warming to manageable levels. While the road to Paris is paved with such good intentions, it is essential that each person on this planet begins to move towards an equitable carbon profile. This has two clear implications.

First, large developing countries such as India must invest in renewable energy benchmarks that match developed countries. Second, developed countries must pare down per capita coal consumptions to levels which would match India’s lifeline consumption through coal in the future.

Simply put, every time a new coal plant comes up in India, one should be shut down in the OECD. If coal use can be substituted by clean sources, then millions of tonnes of coal capacity in EU and the U.S. are low hanging fruits. India uses coal to satisfy less than a fifth of its potential lifeline energy needs, while OECD countries use this ‘nasty’ fuel to satisfy two-thirds of theirs. It is time to meet in the middle. No, we are not suggesting historic responsibility; only the one we jointly shoulder for tomorrow.

(Samir Saran is vice-president and Vivan Sharan is visiting fellow at the Observer Research Foundation, India)