This article discusses some of the specific policies needed to achieve the low carbon outcome.
Energy pricing must support energy conservation
Energy prices are critical for promoting energy conservation because even if energy-efficient options exist, they will be adopted only if they are cost-effective. For example, improved pumps and foot valves in irrigation can save energy, but these pumps are more expensive, and farmers have little incentive to use them because electricity for agriculture is either free, or very heavily subsidized. It follows that if we want to promote energy conservation, we should avoid energy subsidies and set prices at a level that covers full economic costs.
Withdrawal of subsidies may seem to hurt the poor, but this problem can be addressed by compensating those really in need through cash transfers. The Aadhaar platform, combined with financial inclusion, provides an effective mechanism for making the change. This approach could be applied to both kerosene and cooking gas, which are still subsidized by the central government. About half the kerosene ostensibly supplied for the poor actually leaks into the black market, and is used to adulterate diesel, damaging the engines into which it is fed and also increasing the pollution load.
State governments also subsidize energy by underpricing electricity to farmers. This policy encourages excessive withdrawal of ground water, and has dangerously lowered the water table in Punjab and Haryana. States should be persuaded to introduce a programme to increase electricity tariffs for agriculture in a phased manner over a number of years, earmarking the resources saved for promoting water-saving irrigation methods and much-needed water conservation in rural areas. The central government could offer to match the funds mobilized through higher agricultural tariffs to expand watershed management programmes.
Taxation to offset social costs of fossil fuels
The use of fossil fuels produces global warming and also local air pollution because of particulate matter released by thermal power stations and automobile exhausts. Since these costs are borne by society at large and not the energy user, there is a case for imposing taxes on the polluting activity.
With global warming, the social cost is borne by the world as a whole. This problem cannot be addressed by an individual country acting alone. What is needed is a global effort with all countries imposing a carbon tax at a globally calibrated rate. If all countries join, there will be no competitive disadvantage for any individual country. We should be willing to join a global pact on this issue.
The situation regarding air pollution caused by fossil fuels is very different. These costs are internal to a country and a tax on all fossil fuels (not just coal) is justified irrespective of whether other countries follow suit. The appropriate level of the tax depends upon the estimated social cost of air pollution. We currently have a clean energy tax on coal, but its level is quite low. Several international studies suggest that quite high tax rates could be justified on these grounds. The methodology underlying these studies should be carefully examined to come up with appropriate estimates for India and the implications for taxing different fossil fuels. This task could be assigned to NITI Aayog, which should also build in the quantification of the pollution impact in the energy calculator.
Any proposal to impose taxes will meet with opposition. We need to explain that the purpose of these taxes is to discourage the use of polluting fuels. The resources mobilized by such a tax could, in principle, be returned to the community by lowering other taxes, but since there is a need to raise tax revenues to fund many socially desirable expenditures, it makes sense to use the revenues from the pollution tax for these, rather than lowering other taxes.
Promoting energy efficiency in industry
Industry is the largest single user of energy and there is scope for increasing efficiency in energy use in industry. The Perform Achieve and Trade (PAT) initiative, started in 2012, has shown the way. In the first phase of this initiative, from 2012 to 2015, targets were set for almost 500 industrial units requiring reductions of between 3% and 5% in energy consumption per unit of output. Those failing to meet the targets could purchase credits from units exceeding the target. In the first phase, the energy reduction achieved exceeded the target. The second phase has commenced in 2016, with expanded coverage and more demanding targets. As the world focuses on increasing energy efficiency, the scope for efficiency gains will increase. PAT must be constantly strengthened to ensure that Indian industry stays ahead of the curve.
One reason for energy inefficiency in Indian industry is the unreliability of grid power, which forces many smaller units to invest in captive electricity generation, which is much less energy-efficient than grid-based supply. Improvement in the functioning of the electricity sector making captive generation unnecessary will improve overall energy efficiency. This lies entirely in the domain of state governments.
Energy conservation in transport
The transport of passengers and freight is another area which offers potential energy savings. Improved logistics would help by rationalizing the movement of freight and removing inter-state barriers and check posts with long waiting times. The introduction of a well-designed goods and services tax would be a major benefit in this context.
Reversing the historical decline of the share of the railways in carrying freight will help increase energy efficiency and reduce pollution. A long-standing problem in this context is the distortion in the fare structure of the railways, with passenger fares kept very low and freight being overcharged to cover losses on the passenger side. High freight charges have, in turn, driven goods traffic increasingly to the roads. This problem has been emphasized repeatedly in Plan documents and committee reports, but no railway minister wants to face the ire of parliamentarians who seem wedded to keeping passenger fares low! The result has been falling internal resource generation, which limits the capacity of the railways to make the investments needed to improve the national transporter’s carrying capacity. Investments also need to be supplemented by extensive reform of the institutional structure. The transformation brought about by China in the structure of its railways is a good example to follow.
Impressive plans have been announced for expanding investment in the railways using borrowed funds and public-private partnerships. This is overdue, but its viability depends on being able to service the loans and, in the case of PPPs, to provide a return to investors. This will involve lowering freight charges to attract traffic away from road transport, and raising passenger fares to reduce losses in this segment. A Rail Tariff Regulatory Authority has been anno-unced, but has not yet been constituted.
Energy use in cities: buildings and urban transport
With growing urbanization, cities will account for a large part of total energy demand in the form of electricity used in buildings for lighting and other appliances, and petrol and diesel used for inner-city transport. There is huge scope for increased energy efficiency in both these areas.
Building design standards, which are set by state governments and local bodies, must be revised to make the buildings more energy efficient and also enforced in practice. The central government on its part could announce that all new central government buildings will meet the highest green standards. A good step that would capture the public imagination would be to announce a programme for tearing down all the 60-year-old ‘Bhavans’ housing government offices on Rajpath, and replacing them with state-of-the-art green buildings, with rooftop solar electricity. This could be a multi-year project capturing the public imagination as an effort to establish this part of the nation’s capital as a model of urban design and energy conservation.
There is a need to upgrade the statutory minimum energy efficiency requirements for all major appliances in line with the latest technological developments. These standards should be revised periodically to reflect new developments in these areas in the world. Simultaneously, there should be aggressive use of labelling to push consumers to greater energy efficiency.
A great deal can be done to increase energy efficiency in urban transport through better land use planning to reduce the demand for transport and by encouraging a shift from private transport to public transport. These areas are entirely in the domain of state and local governments. Land use planning is obviously easier in new cities than in existing cities, but some improvements are possible even in existing cities through rezoning, and especially where substantial expansion is being planned.
A shift to public transport is absolutely critical for achieving greater energy efficiency and reducing congestion and local pollution in our cities. Creating a good quality public transport system is a precondition for success and the initiative in this area lies entirely with state governments. Where a metro system exists or is planned, it should be integrated with the bus transport system to allow combined use by commuters. Electronically readable fare cards, which can be used in the metro system or in the bus system, will help achieve this objective.
Positive measures to promote public transport will have to be accompanied by disincentives for the use of private vehicles. A pollution tax on petrol and diesel will help. An annual registration fee which is effectively an annual tax on car ownership would also help, as would the introduction of much higher parking charges. The resources realized from these taxes should be earmarked to support public transport.
There is a strong case in the major metros for declaring that from a fixed date in future, all new taxis, including three-wheelers, will have to be electric. Indian automobile manufacturers have the capacity to respond provided they are given a clear signal in advance that the change is inevitable. There should also be a provision for importing such vehicles at a reasonable duty to encourage domestic manufacturers to meet the demand. Electrification of vehicles is a key element in a climate change strategy not only because they are more energy-efficient and reduce local pollution, but also because the electricity will increasingly come from renewables, reducing total pollution.
We also need to upgrade the quality of automotive fuels to reduce the pollution effect in cities. This would require upgrading of the refineries and the additional cost of doing so may need to be recouped by an increase in fuel prices.
Pricing issues for renewable energy
The costs of solar energy have been falling and the latest bids for solar projects have produced solar tariffs that seem comparable to the price of conventional electricity supplied to the grid. However, the supply of solar and wind energy is intermittent, and induction of large-generation capacity from intermittent sources into the system is only possible if the distribution companies contract balancing capacity for the lean period or there is scope for storing the electricity produced during the peak period and using it in the lean period to deliver a pattern of supply which matches the demand profile. In both cases, additional costs have to be incurred. These will have to be passed on as higher electricity tariffs.
To summarize, a number of policy interventions are needed in different areas to combat climate change. Some are in the domain of the central government, while others are in the domain of state governments. Within each government, action often lies with different departments, each of which typically works in a silo, and achieving coordination across these different actors is often difficult. Fortunately, all that has to be done doesn’t have to be done immediately. However, five years from now, when the Intended Nationally Determined Contributions are reviewed in the climate change negotiations, we should be in a position to show substantial progress in all these areas. For that, we need to start immediately to build public understanding about the need for these policies as part of the strategy to combat climate change.
Montek Singh Ahluwalia is former deputy chairman of the Planning Commission.
