Against this backdrop, it is instructive to recap the factual position concerning carbon emissions. In 2005, the total CO2 emissions for India, China, the US and the world were: 1.1, 5.1, 5.8 and 27.1 billion tonnes respectively, whereas their per capita emissions in the same order are 1, 3.8, 19.6 and 4.2 tonnes. It has been estimated that China’s emissions could reach 9 billion tonnes soon – although the figure of 6.5 billion tonnes has been mentioned.
It follows from this that it is wrong to club India and China in the same group of carbon emitters. China’s total emission is comparable to that of the US (and may indeed have surpassed this level), whereas India’s is only about a fifth of China’s. In terms of per capita emissions, China is close to the world average whereas India’s per capita emissions are less than a quarter of the world average.
In terms of outcomes for humans, the picture is even bleaker. For instance, India’s per capita annual electricity consumption is only 500 units compared to 8,000-10,000 units per capita consumed by western societies. Nearly 550 million Indians do not have formal access to any source of electricity. In this context, Prime Minister Manmohan Singh told former US President George W. Bush in 2008 that this was like the entire US population and half of the European Union living without any regular access to electricity.
Thus, it is quite reasonable to expect that India’s per capita electricity consumption will go up – from the present 500 units to at least 3,000 units in the next 10 years. But India will still consume less than half of the present per capita electricity consumed by the West.
India has argued that it will keep its per capita emissions below the world average, but western governments are disinclined to accept this. Their efforts, if successful, would cap emissions in such a manner that it will become difficult for India to meet the basic energy needs of the people using local resources. This is unjustifiable. Nevertheless, the global climate challenge has to be addressed. Hence compensatory mechanisms need to be put in place.
The Global Carbon Emissions Trading Scheme (ETS) being canvassed as a way out may or may not control carbon emissions, but it’s developmental and policy implications are eminently obvious, though less advertised.
By definition, the global ETS would involve international trade in permits for carbon emissions. Typically, economically developed, high carbon (at least in per capita terms) countries would buy carbon emission permits from the economically poorer, low carbon (again at least in per capita terms) countries. This would involve a transfer of funds from the richer to the poorer countries. Furthermore, a concomitant commitment from the latter to restrict carbon emissions, whereas the former would be able to emit more carbon than would have been possible in a world with firm quantitative restrictions on emissions but no global ETS.
The inflow of foreign exchange into economies such as India would not be an unmixed blessing, as this would lead to an appreciation of their real exchange rates vis a vis the rich countries, thus lowering their export competitiveness. Concurrently, the relative export competitiveness of the richer countries would be enhanced. The impact of the global ETS on countries such as India would thus be like ‘Dutch disease’. The carbon emission permits they would be allotted, and a good fraction of which they would sell to the rich countries, would lower the pace of their industrialisation, hurt their growth prospects, and hamper their efforts at reducing mass poverty.
Concurrently, the less developed countries, by selling their carbon permits to richer countries, would have signed away their opportunity to emit carbon. This would lower the pace of industrialisation and therefore, countries such as India would be doubly disadvantaged.
Hence, the global ETS has an anti-development content. Whereas the quantitative impact of the global ETS on countries such as India can be tempered by staggering their carbon reduction requirements over a longer time horizon and giving them a more generous initial allocation of carbon permits, these efforts need to be supplemented with a qualitative change in efforts to address the carbon issue. In particular, countries like India need to get accelerated access to new technology for carbon reduction and for generation of energy from non-traditional sources. The global ETS needs to be supplemented with a well thought out technology transfer policy to which even the emerging economies can be expected to make contributions in cash and human resources. Without such efforts, the global ETS is likely to have an adverse impact on developing economies.
This article originally appeared here on South Asia Masala.
If a global ETS is done on a voluntary basis and everyone has the same right to emit, I don’t see any disadvantage to developing countries. To the contrary, I think it will be a good thing for both the developed and the developing countries, as well as the climate.
I think if a global carbon tax and a global ETS are done on the basis of equal per capita allocation of emission rights, then it can only be a good thing to everyone.
Lincoln Fung’s comments and suggestions are useful. My article does not say that the global ETS is a bad idea. It points out to the difficulties developing countries would face if the global ETS is not accompanied by a technology transfer mechanism. An inflow of foreign exchange on account of selling of ETS would appreciate real exchange rates (if inflation targeting is followed exchange rates will have to be left alone). At the very least it will lead to serious problems of having to sterilize which will make the task of monetary management harder. This would be particulalry true if the present developed countries see the global ETS as a means of limiting the reduction in CO2 that they themselves have to make.
If the developed countries buy reduction in emissions or emissions growth from the developing countries, then the developing countries can use that income in foreign exchange forms to buy the technologies that would help reduce emissions or their growth. While sterilisation is an option, most countries do not necessarily have to use them.
However, as the article argues, the foreign exchenge inflow will not be an unmixed blessing, even if this technology is competitively priced. Developing countries will have to reduce carbon emissions (hence reduce the pace of their industrialisation and poverty reduction) as a consequence. If the exchange rate is left untouched, as it would under an inflation targeting regime, real exhange rates of developing countries will definitely appreciate. This will be a Dutch disease type effect and reduce developing country exports. If the exchange rate is managed, sterilization will have to be resorted to. Given recent experience it would be wrong to underestimate the pains associated with sterilization that many monetary authorties in developing countries have to go through in the face of financial inflows.