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‘India’s CO2 market can achieve emission cut without hitting growth’

ByJayashree Nandi, New Delhi
Dec 16, 2022 02:19 PM IST

“It would be a remarkable step for India. It will help achieve, if run efficiently, very big reductions in emissions. And this will be achieved without unduly compromising economic growth which is very critical for India.”

India’s domestic carbon market can help achieve large CO2 emission reductions without compromising economic growth, and three recent market-driven policies in India, US and EU show use trade interventions will be increasingly used by countries to drive mitigation of CO2 emissions in different parts of the world, Michael Greenstone, Milton Friedman Professor in Economics at the University of Chicago, told HT in an interview. Edited excerpts:

Michael Greenstone, Milton Friedman Professor in Economics at the University of Chicago.

India’s Parliament has passed the Energy Conservation (Amendment) Bill 2022 which has a provision of creating a carbon market to help achieve India’s climate commitments under the Paris Agreement. Do you think such a market will be effective in reducing emissions?

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It would be a remarkable step for India. It will help achieve, if run efficiently, very big reductions in emissions. And this will be achieved without unduly compromising economic growth which is very critical for India. It’s truly remarkable, and in striking contrast to the US, my own State which seems more comfortable with more expensive approaches. I think this would establish India as a real leader.

How does such a domestic carbon market work?

The way it works is the Indian government would say that there is a maximum amount of CO2 emissions that are covered in the Indian economy. And then rather than just say which industry should emit how much, it lets them sort it out. So, the industries that find it very difficult and expensive to reduce emissions pay industries that find it inexpensive and they both benefit from that trade. But the key thing is that from the climate perspective, the total emissions are assured and equal to whatever the gap has been set out. It’s for the firms to achieve the goal collectively and in a less expensive manner.

The US has passed the Inflation Reduction Act which provides clean energy subsidies to American companies, and the EU on Tuesday made a deal to impose a carbon dioxide emissions border tariff on goods from countries that are not mitigating emission’s by EU standards. India is going to set up a domestic carbon market soon. Do you think trade now will be the key tool to deal with the climate crisis?

A tonne of emissions in Mumbai does the same damage as a tonne of emissions in Memphis. If the world is going to make progress on reducing emissions the raw truth is that reductions have to occur everywhere in the world. There are very few mechanisms to hold countries to their promises. You can name and shame them that hasn’t worked very well, you could have war and invade a country who you feel did not reduce their emissions enough. That would be very hard to justify (laughs). What’s left are mechanisms like the border trade adjustments that influence behaviour through trade. What you are seeing is people no longer being satisfied with making voluntary agreements at COPs (UN Climate negotiations) and trying to put some teeth behind these agreements. That’s what the European policy is about. I expect other countries will introduce similar policies over time.

How about historical responsibility? Is it fair to put such discriminatory policies by big polluters which would impact developing countries that have contributed the least to climate crisis?

The planet doesn’t care about the past. It has already received the pain from past emissions and now cares about the CO2 emissions that are coming. That has to be the starting point. Who should pay for reductions going forward? When you look at India’s historical contribution and current per capita contribution, it gets difficult to say that India should bear the burden of this transition. I think there is a very strong case to reduce the cost for India. That’s where we get into very, very thorny politics. I don’t think anyone is going to be successful running for President or senator in the US by saying that we have to send India 250 billion dollars a year to help them buy green electricity. What might be possible is supporting development of new technologies, making it less expensive for India. Other funds that can be directed to India and other countries. It’s still a very thorny issue. What makes it more complicated? India is perfectly positioned to have the worst climate impacts on the planet. It’s hot already, it’s poor by global standards. So what shouldn’t be lost is the benefits of reductions of emissions are going to be very large for India.

How do you see climate politics shaping up in the next 5 to 10 years? What are your expectations personally?

I think it’s important that countries remain engaged. As a citizen in US, I benefit every time India reduces its emissions and India benefits from US reducing emissions. It’s really important that we do not lose sight of that dynamic. The core challenge is that low carbon sources in general remain more expensive than fossils. So anything we can do to shrink that delta is going to be significant. That’s the core economic problem. It is also the case that coal in particular has a terrible PM (particulate matter) problem associated with it. Even if you are very narrowly focused on India’s pollution problem, coal doesn’t look like a very good deal.

In India resources at pollution control boards and environment departments are very limited. How can they implement and monitor market mechanisms?

We have a homegrown example of Gujarat. The Gujarat Pollution Control Board staff ran a pilot of a pollution market with their existing staff. The market is for particulate matter that is harder to monitor than CO2 and yet did it very effectively. It managed to reduce pollution effectively. India’s emissions markets are not some ideas from the US or EU. We now know they work in India. Its much easier to monitor CO2 than it is to measure PM 2.5 reductions. The Gujarat market gives me confidence that if they are willing, they can implement a carbon market effectively.

What results are you seeing in Gujarat from the pollution market?

The Gujarat pollution market covers the entire state. It started with 150 industries who have reduced their emissions by 20% to 30%. The pilot shows it wouldn’t cost much to get very large reductions in particulate matter emissions. The Gujarat market has been a success and the Gujarat government based on the results is planning to start a new market in Ahmedabad which is scheduled to begin in the New Year. We have been aiding them in setting it up. We are also doing some trial training with the industries. We have done an exercise in Gujarat about what would happen if they brought all 900 industries of a sufficient size in the market under this. Benefits of improved health would outweigh the costs by about a 100 to one.

Do you think India can have a national pollution market too? Will that help reduce air pollution in cities?

We know pollution markets work in India. The government has goals under the National Clean Air Programme (NCAP) to reduce PM 10 and PM 2.5 pollution by 20 to 30% by 2024. There are different ways to get there. One way is an endless series of small policies, dust at construction sites, EV chargers etc. What is sitting there on the shelf, is a national Sulphur Dioxide (SO2) market. SO2 undergoes chemical transformation in the atmosphere to become Particulate Matter and such a market could reduce PM across the country. All NCAP cities can meet their goals in an inexpensive way.

The US passed the Inflation Reduction Act 2022 and at COP27 US announced a new carbon offset plan that will allow companies to fund clean energy projects in developing countries. How effective are these policies?

IRA is a very powerful piece of legislation that the Biden Administration passed. It will reduce CO2 emissions in the US and it will do so in a relatively cost-effective way. Some of its limitations are that it doesn’t cover the whole economy. It’s mainly focused on the electricity sector but when the history gets written it will be clear that the IRA was the moment when the US became serious about confronting climate change. So, it’s a big step forward. It’s going to be important to get emissions reductions wherever possible and to ruthlessly and relentlessly searching for least cost methods. So, based on the mechanism announced at COP27, offset mechanisms in principle often provide least cost means of reducing emissions but the key is to do it in a way that the reductions are real. So, it’s not greenwashing.

How can you ensure carbon offsets are not greenwashing?

Carbon markets are an effective antidote to greenwashing. The challenges come with some of the offsets which are not rigorously monitored. In organised carbon markets like the EU ETS, the California market, the energy market on the Atlantic coast there are real CO2 emission reductions. They are some of the most credible and effective ways to confront climate change. It has to be clearly established how you are going to measure CO2 emissions. At the end of the year, they count up my emissions and hold them up against my credits. If my credits do not hold, I have to pay a very large financial penalty. The penalties are so high that people do not want to pay it. Introducing market forces to reduce greenwashing are effective.

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