Month: January 2022

January 30, 2022

Biofuels in India: Do the Benefits justify the Costs?    

Background

According to projections by the IEA (International Energy Agency), India is expected to overtake China to become the third largest producer of ethanol by 2023.  In 2016, India was seventh in the list of top ethanol producers and by 2021 it overtook Germany, Thailand, and Canada to become the fourth largest producer.  In 2022, India is likely to match ethanol production from China and by 2023 overtake China to claim the third spot after the USA and Brazil. The spurt in ethanol production in India is almost entirely policy driven. The most recent policy push on which the IEA’s optimistic projections for ethanol production from India are based come from the target set by the 2021 report on ethanol blending by Niti Aayog and the Ministry of Petroleum & Natural gas (MOPNG).  

Among key recommendations of the report are that the MOPNG mandate 10 percent ethanol blending (E10) in petrol throughout the country by April 2022 and roll out 20 percent ethanol blending (E20) in petrol in a phased manner by April 2023. This brings forward the target set by the national policy on biofuels 2018 which recommended an indicative target of E20 blending in petrol and 5 percent blending of biodiesel (B5) in diesel by 2030.  The 2021 Niti Aayog report is a step backwards from a technology perspective as it has renewed the focus on biofuels that rely on food-based feedstocks, while the 2018 policy emphasised biofuels that rely on non-food biomass.  The return to biofuels based on food-based feedstock has reignited the food versus fuel debate with many environmental organisations criticising the move. 

Biofuels

The two biofuel types that dominate production today are sugar-based bioethanol production and vegetable oil or fatty acid methyl ester (FAME) based biodiesel. Most of the first generation biofuels (1GB, primarily bioethanol and biodiesel) are sourced from food-based plants that have energy-containing molecules like sugars, oils and cellulose.  Since 2000, the share of biodiesel in total biofuel production has increased nearly ten-fold, from 3.3 percent in 2000 to nearly 32 percent in 2020, but bioethanol still accounts for two thirds of total production. Biofuel yield from 1GBs is limited and it has a negative impact on food security.  Second generation biofuels (2GB) use feedstock of lignocellulosic (non-starch based fibrous part of plant material) that include straw, bagasse, forest residues (all non-food) and purpose grown energy crops on marginal lands. There are very few commercial scale 2GB production operations today.  Third generation (3GB) biofuels are algae based and carry the potential to provide a non-food, high-yield, non-arable land use source of biodiesel, bioethanol, hydrogen etc.  3GBs are in the research and development stage.  Research on fourth generation biofuels (4GB) or photobiological solar fuels and electro fuels that directly convert solar energy into fuel using raw materials that are inexhaustible, cheap and widely available is in its early stages. 

The USA is the largest ethanol producer in the world accounting for 46 percent of global production and the second largest in biodiesel production accounting for 19 percent of production.  87 percent of bioethanol production in the USA is corn based.  Brazil is the second largest ethanol producer in the world accounting for 28 percent of global production and 14 percent of biodiesel production.  Brazil’s ethanol is derived from sugarcane and its biodiesel from soyabean. The European Union is the world’s largest biodiesel producer but most of it is produced from imported feedstock.  Globally, biofuels accounted for 0.2 percent of total primary energy consumption and 0.7 percent of transportation energy consumption in 2019.  In India the share of biofuel consumption in total primary energy consumption was roughly the same at 0.2 percent and its share in transportation was 0.7 percent. 

The Rationale for Biofuel use

Biofuels offer both advantages and disadvantages in terms of environmental, economic and social sustainability. Reduction in greenhouse gas (GHG) emissions, energy security through lower import of crude oil and rural development are the most important drivers for biofuels globally. These are the same benefits that the report by Niti Aayog offers: increase energy security as it could potentially reduce import of crude oil, increase participation of local entrepreneurs and sugarcane farmers in the energy economy and decrease vehicular emissions. While the benefit to farmers is unambiguous because increase in demand for any agricultural crop, not just biofuel crops will benefit farmers, the energy and environment benefits are somewhat ambiguous and highly context specific.     

Net Energy Balance

The overall energy ratio (OER) or the ratio of the energy delivered by the fuel (petroleum or biofuel) to the sum of all energy inputs going into its production is highest for petrol and lowest for cellulosic ethanol.  But as the energy input for biofuels is mostly renewable, the fossil energy ratio (FER) which is the ratio of the liquid energy output to the fossil energy input is lower.  For petrol, the FER is the same as that of its OER at about 0.8 and about 10 for Brazilian sugar cane-based ethanol. The FER is high for sugar cane-based ethanol because most of the energy input to produce ethanol comes from sugarcane fibre.  Estimates on the FER for Indian ethanol are not available, but it is likely to be lower than that of Brazilian ethanol because Brazilian ethanol is rated as the most energy efficient among biofuels in many studies.  

Greenhouse Gas Emissions

The report from Niti Aayog quotes potential reduction of GHG emission at the point of use, that is from the tailpipe of vehicles, to make its case for ethanol blending.  But life cycle assessment (LCA) studies have considered the carbon mitigation and other environmental impacts of biofuels over its full lifecycle, from plant to fuel. The findings are often conflicting, with a wide variation in the estimates. One reason for the wide variation is the difficulty in estimating net carbon emissions from land use change involved in biofuel cultivation.  All plants and trees are carbon sinks as they absorb carbon-di-oxide (CO2) from the atmosphere through photosynthesis.  Burning biofuels in vehicles releases CO2 back into the atmosphere but as regrowth of new biofuel plants balances the emission of CO2, biofuels are, in theory, carbon neutral. But if the land used to grow biofuel crops was a forest which had to be cleared to cultivate biofuel crops, then it removes a huge carbon sink which means the biofuel thus produced is not necessarily carbon neutral.  Forest clearing or land use change (LUC) as it is referred to in academic literature, substantially reduces the environmental benefits of biofuels.  For example, the constant increase in demand for sugarcane based ethanol from Brazil has meant extensive deforestation of rainforests resulting in GHG emissions from Brazilian ethanol use that was about 60 percent higher than that of petrol. 

For the Indian context the LCA study on corn-based ethanol production and soyabean based biodiesel production from China may be more relevant.  The study found that GHG emissions from Chinese ethanol and biodiesel was 40 percent and 20 percent higher than petrol and diesel respectively because of the relatively higher use of fertilisers, higher process energy consumption and the coal dominated energy mix.  If LUC related GHG emissions are not counted, then GHG emissions from most 1GBs is in the range 3 to 111 grams CO2 eq per MJ (carbon-di-oxide equivalent per million joules) which is lower than that of petroleum-based fuels.  However, if LUC is considered, many of the biofuels in use in climate conscious regions such as the EU (European Union) are found to be much higher than that of petrol and diesel.  

Issues

Commentary that followed the release of Niti Aayog’s report on biofuels have highlighted the potential food security and water challenges posed by the revised targets for ethanol blending. Sugarcane is a water intensive crop grown on land meant for food production and it is easy to see how the competing demands from the fuel sector could threaten both water and food security.  The response that only surplus sugarcane and rice are diverted to fuel production may not hold in the longer term. Higher than anticipated rainfall from the monsoons that underpin surplus food grain production cannot sustain an ambitious ethanol blending policy for the future. India is currently a net importer of ethanol as acknowledged in the report by Niti Aayog which means that it is yet to contribute to increase in energy security. If domestic production does not increase, targets for ethanol blending can be met only by increasing imports. Increase in domestic production will remain a challenge and may come only at the expense of food security as arable land is scarce for a significant increase in domestic production of biofuels. The gains in tailpipe emissions from ethanol blending are not only too small but also redundant given India’s goal for electrifying surface transport. Benefit to farmers and rural economies from biofuel production is the key political driver of biofuel production across the world.  For resource challenged India, this may bring only few benefits at very high cost.   

Source: International Energy Agency, Renewables 2021
January 30, 2022

Natural Gas and Nuclear Power in the EU: If you can’t Beat them, Green them

Background

The European Union (EU) has proposed a new green taxonomy under which some natural gas and nuclear energy projects may be labelled as “green” investments if they meet specific criteria. A nuclear power plant is labelled green if the project has a plan, has secured funds, found a site to safely dispose of radioactive waste and is in a position to receive construction permits before 2045. For natural gas, the criteria are that the plant has emission levels below 270 grams of carbon-di-oxide equivalent per kilowatt hour (gCO2eq/kWh), it replaces a more polluting fossil fuel plant, receives construction permit before 2030 and has a plan to switch to low-carbon gases by the end of 2035. This is part of the broader green taxonomy that the EU is developing.  The first part of its taxonomy rulebook that included environmental criteria for investments in renewable energy (RE), shipping and car manufacturing is applicable from January 2022.

In the last two decades (1999-2019), primary energy consumption in the EU has fallen by over 4 percent from about 63 EJ to 60 EJ (exajoules).  In the same period, the share of fossil fuels in the EU energy mix has fallen by about 13 percent from 51.46 EJ to 44.57 EJ. Most of the decrease in fossil fuel energy consumption was led by coal which fell by over 37 percent in the same period.  Natural gas consumption increased by over 11 percent and RE consumption increased by over 1200 percent, although from a very small base.

In 2019, fossil fuels supplied roughly 73 percent of EU’s primary energy with oil accounting for about 38 percent, natural gas 23 percent and coal about 12 percent.   Nuclear power accounted for over 11 percent of primary energy consumption, RE about 10 percent and hydro about 4 percent. Energy production in the EU in 2019 was dominated by RE that accounted for 37 percent of total production followed by nuclear energy that accounted for 32 percent, solid fossil fuels 19 percent, gas 8 percent and petroleum 4 percent. Imports accounted for roughly 60 percent of EU energy consumption and Russia was the largest source of oil, natural gas and coal imports.  In 2000 fossil fuels accounted for 84 percent of energy consumption Germany.  Since 2000, Germany developed 90 gigawatts (GW) of RE power generation capacity equal to its total power generation capacity. Yet in 2017 fossil fuels continued to supply 80 percent of energy consumption illustrating the energy transition challenge.

Energy Density

One of the key energy transition challenges is energy density of fuels which is its ability to deliver substantial quantities of energy relative to its weight or physical dimensions. The energy density of natural gas at 40 million joules per cubic meter (J/m3) is only one thousandth of the energy density of oil but more than 10 trillion times that of solar energy. Higher the energy density of an energy source, lower is the transportation and storage costs.  The energy density of nuclear power is more than 10 billion times that of oil which implies that the energy densities of solar and other RE sources is minuscule compared to that of nuclear energy.  High energy and power densities of natural gas and nuclear power means that these sources of energy have lower surface or land requirement.  With the shift towards RE, EU along with the rest of the world is climbing down the energy density ladder, from highly concentrated fossil fuels to more dispersed renewable sources which will require 100 or even 1000 times more land area for energy production than today. For example, in 2010, modern RE sources (excluding hydropower) required almost 270,000 square kilometres (km2) to deliver 130 GW, while the fossil fuel-nuclear-hydro system delivered 14.3 terawatt hours of power (more than 110 times that from RE) required about 230,000 Km2. 

Carbon Emissions

A natural gas combined cycle plant can emit 403-513 gCO2eq/kWh from a lifecycle perspective and anywhere between 49-220 gCO2eq/kWh with carbon capture and storage (CCS) including methane emission from the extraction and transportation phases. In comparison solar technologies emit anywhere between 27-122gCO2/kWh for concentrated solar power (CSP) and 8-83 gCO2eq/kWh for photovoltaics (PV) with thin film PV technologies emitting less than silicon-based PV technologies.   Carbon emissions from nuclear power are an order of magnitude lower than that of solar energy at 5.1-6.4 gCO2eq/kWh with the fuel chain contributing most of the emissions.  Expanding RE addresses one global goal, that of reducing carbon emissions but not all global goals. In the EU unintended macroeconomic consequences of rapidly scaling RE such as energy price inflation and the consequent impact on inequality are becoming significant.

Energy Price Inflation

Energy price in the EU increased to unprecedented levels in 2020.  The European central bank (ECB) has acknowledged that part of the reason is the ongoing energy transition.  According to the ECB, the combination of insufficient production capacity of RE in the short run, subdued investments in fossil fuels and rising carbon prices risk putting the EU through a protracted transition period during which the energy prices will continue to increase.  The ECB expects the green energy transition to reinforce the supply demand imbalances arising from adverse weather conditions in 2021 that constrained the production of RE pushing gas prices to record high levels.  In November 2021, wholesale electricity prices in the euro area reached €196/MWh, (Megawatt hour) nearly four times as much as the average in the two years before the pandemic. The ECB has stated that energy price inflation was the prime factor behind inflation that has touched the highest level since the euro was introduced in 1999. Though the tighter carbon pricing regime has led to reduction in emissions and increase in green innovation, these have come at the cost of higher energy expenditure for poorer households.  On an annual basis, a doubling of wholesale electricity prices from about €50/MWh to €100/MWh would mean an additional €150 billion to be recovered from consumers. This will affect poor households much harder than wealthy ones.  The share of people who have said that they could not afford to keep their home adequately warm is as high as 30 percent in some of the less wealthy EU countries.  This is despite the fact that Eastern EU states with a lower contribution of RE has lower electricity prices than Western European states, with higher percentage of RE in total energy, had higher electricity prices.  In addition studies on the EU economy have concluded that a 10 percent increase of the electricity price can lead to a 2 percent reduction of firm-level employment.

Implications

The new EU green taxonomy has angered many environmental groups as it appears to be a complete departure from the EU’s role as the leader of the ideological charge against both fossil fuels and nuclear energy. They are disappointed that the new taxonomy will compromise their cherished goal of 100 percent RE.  They fear that investing in gas and nuclear will lock-in these technologies and slow down adoption of RE.  This may be true but not if the EUs goal is decarbonisation through hydrogen in the longer term.  Both natural gas and nuclear power can be used to generate hydrogen and the infrastructure built for natural gas can eventually be used to transport hydrogen. For India which has simultaneously embraced RE and hydrogen as the means to decarbonisation, EU’s experience will hold valuable lessons.  More importantly EU’s new green taxonomy may become the global regulatory standard for green investments which India could potentially adopt.  Under the new taxonomy, investments in natural gas and nuclear projects in India may become more attractive as the cost of capital for these projects is likely to decline with decrease in perceived risk.  There is also a lesson in EU’s embrace of natural gas and nuclear power.  Its realist and technology agnostic approach to decarbonisation was probably unavoidable as the unintended economic, social and political consequences of increasing the share of RE became harder to ignore. India must take note as it is less wealthy and more unequal than the EU.

Source: BP statistical review of world energy 2021
January 30, 2022

Energy Trends in 2022: ‘Known’ Knowns and the ‘Known’ Unknowns

‘Known’ Knowns

Global   

Optimistic forecasts for renewable energy (RE) capacity additions, particularly for photovoltaic (PV) power generation capacity and less optimistic forecasts for fossil fuel investment are two key threads that run through most reports on energy sector expectations for 2022. Unwavering policy and public support along with financial and non-financial subsidies for RE (for capacity additions and for research & development) in most of the developed world and in large markets like India make optimistic forecasts for RE capacity additions a ‘known’ known. 

RE is expected to account for 90 percent of global capacity additions and PV capacity is expected to touch 162 GW (gigawatts) in 2022. Growth of wind energy capacity additions is expected to slow down in 2022 but grow faster than the average growth of the sector in 2017-19 with 80 GW of capacity addition.  RE capacity addition of 49 GW in 2022 is expected in Europe on account of continued policy support and corporate power purchase agreements (PPAs) with RE producers. Prospects for decentralised RE are projected to be bright in the USA although most reports express some uncertainty over setting of carbon mitigation targets. RE capacity addition in China is projected to decelerate in 2022 primarily because of impending subsidy phase-outs but even then RE capacity addition is expected to increase by 58 percent. Given that China accounts for over 50 percent of wind turbine manufacturing capacity and almost 70 percent of solar panel output, tight global supply chains are expected to challenge global RE capacity additions in 2022. 

Carbon prices in compliance markets, including the EU’s Emissions Trading System (EUETS) and China’s National Emission Trading Scheme are expected to increase in 2022 on the back of policy support.  In industrialised countries, governments are expected to increase carbon tax rates and introduce new taxes to meet their decarbonisation pledges. On voluntary carbon markets corporate entities with ambitious net zero targets are expected to drive up demand for high quality carbon offsets. 

In 2022, electric vehicles (EV) are expected to take a double-digit share of the global market for the first time and EV sales are expected to touch 5.8 million. Some projections are more optimistic with sales of over 7.8 million units.  While Europe is expected roll-out its super-credit for EVs subsidy reductions are forecast for China.  Though production costs of EVs are expected to increase as cost of lithium, aluminium and copper are anticipated to increase, these price increases are not likely to be passed on to consumers as the EV price must remain below price caps set by government EV incentive schemes. 

India

India’s RE capacity additions are expected to set new records in 2022 as delayed projects from various competitive auctions are completed. Despite this, growth of RE capacity additions are expected to be far lower than the annual capacity addition of 40 GW required for India to reach the target of 500 GW pledged at the COP26. The target of the government is to achieve 227 GW of RE capacity (including 114 GW of solar capacity and 67 GW of wind power capacity) by 2022, more than its 175 GW target as per the Paris Agreement. India’s renewable energy sector is expected to attract investment worth US$ 15 billion in 2022.

‘Known’ Unknowns

Global

Investments in fossil fuels that used to be determined largely by market fundamentals are increasingly influenced by climate change related disincentives, pressure from activist investors, and government policies to mitigate carbon emissions.  In 2014, investors with just US $52 billion assets under management had pledged to shift investments away from fossil fuels.  In 2021, as many as 1,485 institutional investors, representing a massive US$39.2 trillion of assets under management, committed to at least some form of divestment from fossil fuels.  Banks now view lending to fossil fuel companies as carrying political risk.  All this has decreased investment in supply of fossil fuels but this has not translated into decrease in demand. 

Towards the end of 2021, global economic recovery from the pandemic increased demand for fossil fuels leading to unanticipated surge in the price of fossil fuels. What this suggests is that while the pressure to shift away from fossil fuels by constraining supply is known, how the global energy market that still depends on fossil fuels to meet 83 percent of demand remains unknown. The IEA’s (international energy agency) simultaneous call to stop investment in fossil fuels in its net zero report and to the OPEC (organisation of petroleum exporting countries) for opening its taps to keep oil markets well supplied best illustrates this contradiction. 

In North America and Europe, gas demand has increased as replacement of coal-fired power generation. However, the decline in coal-fired generation has removed an important buffer for gas demand and prices. The result is less elastic gas demand, soaring natural gas prices, increase in price volatility and ironically a return to coal in some markets.  After falling in 2019 and 2020, global power generation from coal is expected to jump by 9 percent in 2021 to an all-time high of 10,350 TWh (terawatt-hours).  Depending on weather patterns and economic growth, overall coal demand is projected to reach new all-time highs in 2022 with global production touching an all-time high of over 8 billion tonnes (BT) in 2022 and remain at that level for the following two years, underscoring the importance of energy security.  Diversifying energy supply with RE may insulate the energy sector from the impulses of market forces to some extent but increase dependence on more volatile natural forces such as the weather.  

In 2022, fossil fuel companies’ investment in technologies like carbon capture, utilisation & storage (CCUS) and low carbon hydrogen may coalesce into the beginning of an RE versus RE race with the solar plus batteries camp pitched against the CCUS and hydrogen camp.  Incentives in advanced markets such as the production credit of US$3 per kilogram of low carbon hydrogen and 45Q tax credit for blue (hydrogen derived from fossil fuels with CCUS) hydrogen could level the RE playing field for the two camps adding momentum to the competition. 

India

For India the perennial ‘known’ unknown of efforts to reform the bankrupt discoms will continue in 2022. The fate of the draft electricity amendment bill (2020) will add to the ‘unknown’ component.  With GDP (gross domestic product) projected to grow at over 9-10 percent, electricity demand and demand for coal are projected to increase substantially in 2022.  The largest increase in coal production of 163 million tonnes is expected from India in 2022 with overall production crossing the 1 BT mark.  But hitting this target depends on the big unknown of how the pandemic plays out and how the economy responds.  2022 may pose another challenge for India’s RE capacity addition which is underpinned by its cost competitiveness over coal.  While inputs for coal are declining, the spike in global demand for critical minerals required for solar, wind and storage technologies have increased their capital costs.  This may have a negative impact on capacity additions for RE.  In addition, the substantial increase in RE capacity expected in 2022 may drive down tariff compromising the economic viability of RE projects.

Overall, 2022 is likely to hail the beginning of interesting times highlighting the tension between ‘known’ known energy outcomes that are the result of state led policy decisions to increase RE investments and ‘known’ unknowns that are market response to the state led interventions primarily from the fossil fuel sector. 

Source: International Energy Agency, https://www.iea.org/reports/renewables-2021/executive-summary
January 30, 2022

Carbon Inequality in India: The Need to Look Within

Economic Inequality

According to the world inequality report 2022 (WIR 2022), India and Brazil are countries with ‘extreme’ inequality among low and middle-income group countries. China is slightly better as it is characterised by only ‘high levels’ of inequality.  India is also among countries that experienced ‘spectacular’ increase in inequality along with USA and Russia.  Among countries in South and Southeast Asia, the ratio of the income of the top 10 percent to the bottom 50 percent is 22 for India which is much higher than 17 for Thailand, a military dictatorship.  Globally the entire drop in growth in the share of income going to the bottom 50 percent of the population due to COVID 19 in 2020 was because of South & Southeast Asia, particularly India. When India was removed from the data set, the share of income going to the bottom 50 percent was found to increase slightly in 2020. 

Carbon Inequality

The inequality in income and wealth naturally translates into carbon inequality that arises from differences in consumption.  Within India the national average per person emission was about 2.2 tonnes of carbon-di-oxide (tCO2).  The middle 40 percent emitted about 2 tCO2 per person, the bottom 50 percent about 1 tCO2 and the top 10 percent about 8.8 tCO2 per person in 2019. This pattern is not unique to India. 

Globally on average each individual emitted just over 6.5 tCO2 in 2021.  In 2019, the bottom 50 percent of the world population emitted only 1.6 tCO2 per person accounting for 12 percent of emissions while the middle 40 percent emitted 6.6 tCO2 per person accounting for about 40 percent of total emissions. The top 10 percent emitting 31 tCO2 per person accounted for 47.6 of total emissions and the top 1 percent or about 77.1 million people emitting 110 tCO2 accounted for 16.8 percent of emissions.  The top 0.1 percent or just 7.7 million people emitted 467 tCO2 per person and the top 0.01 percent or just 770,000 people emitted a staggering 2531 tCO2 per person in 2019.   

Carbon Inequality: Within and between Countries

In multilateral climate negotiating platforms, India has consistently upheld the principle of equity between countries. Just before COP 26, the Government of India welcomed the launch of climate equity monitor (CEM), an online dashboard for assessing, at the international level, equity in climate action, inequalities in emissions, energy and resource consumption across the world.  According to the CEM, its objective is to counter messages from western sources that rely on or promote methodologies that pay no more than scarce attention to equity, differentiation, and historical responsibility, all guiding principles of the UNFCCC (United Nations framework convention on climate change). The CEM observes that even where the discourse claims to focus on equity, it privileges views from the global North that seek to establish themselves as acting on behalf of the rest of the world.  The CEM aims to address this disparity and promote a new narrative where the South looks out on the North and the rest of the world. As nations rather than individuals are the units of negotiation in multilateral climate negotiations, contesting ‘between country’ inequality is a perfectly legitimate position for India.  However, this does not mean ‘within country’ inequalities can be ignored.

According to WIR 2022, in 1990, 63 percent of the global carbon inequality was due to ‘between country’ inequality but in 2019, 63 percent of global carbon inequality was due to ‘within country’ inequality. Looking within to address carbon inequalities will strengthen India’s case for addressing between country carbon inequality in multilateral platforms. 

Most of the emission reduction in India to meet the targets of the Paris Agreement must come from the top 10 percent of India’s population whose emissions are higher than world average emissions.  Compared 2019 levels, Indian emissions can increase by 70 percent or by 1.5 tCO2 per person until 2030.  Emissions of the bottom 50 percent can increase by 281 percent to 2.7 tCO2 per person by 2030 while emissions of the middle 40 percent can increase by 83 percent to 1.7 tCO2 per person.  However, emissions of the top 10 percent must fall by 58 percent to 5.1 tCO2 per person to meet the targets of the Paris Agreement. 

Climate policies recommended by WIR 2022 that target the bottom 50 and the middle 40 percent of the population include public investment in renewable energy supply, protection for those affected by the transition to cleaner energy sources, construction of zero carbon social housing, cash transfer for increase in fossil fuel energy prices.  Policies that target the top 10 percent include wealth or corporate taxes with pollution top-up.  

The suggestion of a global carbon incentive (GCI) to address carbon inequality from Raghuram Rajan, former Governor of the Reserve Bank of India to address global carbon inequality is also a credible option. Under GCI, every country that emits more than the global average of around 5 tCO2 per person would pay annually an amount calculated by multiplying the excess emissions per person by the population and the GCI into a global GCI fund. Countries below the global per person average would receive a commensurate pay-out. With a per person emission way below the cut-off of 5 tCO2, India would not pay anything but instead receive a pay-out from richer countries.  If the initial GCI is set at US$ 10/tCO2 emissions above the global average, substantial sums can be raised to address carbon inequality. 

If the idea of a GCI is applied to address ‘within country’ carbon inequality in India, the top 10 percent or 138 million people will have to pay-out a total of over US$5.2 billion annually.  This is about a third what the government spends on climate change each year. Compared to the current carbon price of close to €80/tCO2 at the EU ETS (European union emission trading system) in December 2021, the GCI of US$10/tCO2 is very low but it is a good starting point.  The key bureaucratic challenge would be to identify the top 10 percent of carbon emitters, but it is not impossible.   

Is Inequality Fair?

India’s current climate policies overwhelmingly promote production of cleaner sources of energy or technologies through large financial and other incentives to the private sector that includes protection from external competition (through import duties and tax breaks for example) at one end and a guaranteed market (through various mandates to increase the share of clean energy) at the other.  The beneficiaries, primarily the promoters and shareholders of private entities constitute a large part of the top 10 percent of emitters. Empirical studies show that near-term climate action such as policies that incentivise production of clean energy comes at some cost to the poor. Using the nested inequalities climate economy (NICE) model, the study shows that an equal per person refund of carbon tax (or equivalent such as the GCI) revenues can pay large and immediate dividends for improving well-being, reducing inequality and alleviating poverty.

It is unlikely that policies that favour the bottom of the carbon pyramid will find favour in India   where power is characterised by the bond between capital and state. As noted by Nobel laureates Esther Duflo and Abhijit Banerjee in the foreword of the WIR 2022 inequality is not seen as a problem under private sector led growth that celebrates the unabashed accumulation of individual wealth. The fact that the top marginal income tax rate in India has declined from a peak in the 1970s to a level that is lower than the top marginal income tax rate in much richer countries including Japan, United Kingdom, Germany, France and even the USA illustrates state preference for capital.   

The conclusions of an academic study on this subject that found that humans, even as young children and babies, actually prefer living in a world in which inequality exists is relevant in this context. It sounds counter-intuitive, but the study showed that when people find themselves in a situation where everyone is equal, many become bitter as those who work hard are not rewarded, and slackers are over-rewarded. This makes inequality ‘fair’ when those in the top 10 percent are framed as hard workers and those below as slackers. But climate change, like the pandemic, is a problem that does not respect borders or man-made barriers and labels. Policies that favour the top 10 percent may be ineffective in saving them when the bottom 90 percent crumbles under the weight of climate change.

Source: World Inequality Report 2022