Context

Climate change is bound to impact human lives and the global economy at an exceptionally high scale in the not-so-distant future. The solution to the problem calls for government intervention.

Carbon intensive nature of India’s energy ecosystem

• After China and the United States, India, which releases 2.44 billion tonnes of carbon dioxide annually, is the third-largest emitter of this GHG, making it a key player in emissions reduction.
•  The International Energy Agency’s (IEA) World Energy Outlook 2017 Report estimates that India will account for nearly one-fourth of the global energy demand by 2040.
• As per the IEA’s India Energy Outlook 2021 Report, India’s energy system is highly dependent on fossil fuels — coal, oil and bioenergy — that supply about 90 per cent of the country’s demand.
• Low electrification: About 38 per cent of primary energy is consumed for power generation, implying that the level of electrification is still low in the country.
• Power generation is highly dependent on coal — about 78 per cent of it comes from this fossil fuel — and, transportation is almost entirely dependent on oil.
• The Indian energy ecosystem is, thus, highly carbon-intensive.

Climate change as a feature of market failure

• Market failure due to climate change: Economic activities by consumers (driving or air-conditioning, for instance) and by producers (such as electricity generation and manufacturing) cause emissions, leading to pollution and global warming.
• Negative externalities: These negative externalities, causing outcomes that are not efficient, are not reflected in the costs incurred by consumers or producers.
• The true costs to the consumers, producers and society are not reflected in the market interactions.
• This leads to an uncontrolled rise in emissions and also breeds apathy towards mitigation efforts.

Way forward

• Government intervention: Achieving economic growth sustainably requires a strategy for reducing carbon emissions aggressively while also focusing on efficiency, equity, fairness and behavioural aspects.
• The solution to the problem of market failure calls for government intervention.
• Limits of emission: The most natural option of government intervention for reducing emissions is by fixing limits of emissions through regulation, taking into consideration the Nationally Determined Contribution targets set by the country under the Paris Agreement.
• Experts have shown that the wrongly set emission levels could lead to cost-inefficient outcomes.
• It makes it difficult for the regulator to obtain the information about each firm’s abatement-cost and damage-cost schedules in advance.
• Therefore, setting emission targets and regulating emissions through command and control might be good only during the initial phase of the mitigation strategy.
• Why Carbon tax is a better option? The carbon tax is a better option than regulating the pre-fixed levels of emissions.
• The marginal cost of abatement rises as the firms keep on reducing the emissions further, and the firm will stop reducing emissions and choose to pay tax at the point when the cost of abatement becomes higher than the rate of tax.
• This option will lead to near-efficient outcomes.
•  The trading scheme will bring in higher efficiency as the price of certificates will be determined by allowing firms facing low and high abatement costs to compete in the free market as per their own abatement and damage cost schedules.
•  The emissions trading scheme will determine the optimal and cost-efficient levels of emissions reduction by providing a choice to the firms to either mitigate or trade — the net effect of this will be a reduction in emissions.
• The low abatement-cost firms will keep reducing emissions as they would profit by trading the certificates.
• Equity in energy access: The issue of equity in energy access must be addressed by channelling the revenues generated from carbon pricing to households and firms impacted by the carbon trading and carbon tax — these could be through incentives or lump-sum transfers.

Conclusion

The socio-economic impact of decarbonising the economy and the way humans live would be crucial in setting our priorities. We have limited time and our resources are scarce.

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