Climate Change and India: Implications and Policy Options

1. Climate Change and India: Implications and Policy Options Arvind Panagariya Columbia University, New York India Policy Forum NCAER, New Delhi July 14-15 2009

2. Prologue “Action on Climate Change must enhance, not diminish the prospects for development. It must not sharpen the division of the world between an affluent North and an impoverished South, and justify this with a green label. What we require is a collaborative spirit which acknowledges the pervasive threat of Climate Change to humanity and seeks to find answers that enhance, not diminish the prospects of development, particularly of developing countries. All members of our common global family should have equal entitlement to the fruits of prosperity.” The Road to Copenhagen, Government of India, February 27, 2009 Arvind Panagariya Columbia University

3. Outline • Introduction • Climate Change in India During the Past Century • Predicted Changes, Vulnerabilities and Adaptation • Mitigation: Efficiency • Mitigation: The Distributional Issue • Policy Action: The Current State of the Play • India’s Options • Concluding Remarks Arvind Panagariya Columbia University

4. 1. Introduction • Global warming is real • But there is considerable uncertainty on the specifics • How much average temperature increase • In 2030, 2050, 2080 etc.? • In Kashmir? In Karnataka? • How will a given average temperature increase take place? • Rise in maximum, minimum or the entire distribution of temperature? • More hot days, less cold days? • More severe summer, less severe winter? • Same questions on rainfall, which may rise or fall • Impact uncertainties • More hot days will be bad in Rajasthan but not in Kashmir • More rain will be good in Rajasthan but bad in Meghalaya • For many crops, heat is bad but CO2 emissions are good Arvind Panagariya Columbia University

5. 2. Changes in the 20th Century: 2.1 Temperatures • Average temperature increase • World Bank (2009): none • Government of India (2004): 0.4oC • Inter-governmental Panel on Climate Change (IPCC 2007): 0.68oC • GOI (2004) further state • Warming mainly in the post-monsoon and winter seasons. • Warming predominantly due to increased maximum temperatures • A significant warming trend along the west coast, in central India, the interior peninsula and over north-east India, • A cooling trend in north-west India and a pocket in southern India. Arvind Panagariya Columbia University

6. Average temperatures in India: 1880-2000 Source: Lal (2003) Arvind Panagariya Columbia University

7. 2. Changes in the 20th Century: 2.2 Rains • GOI (2004): • The monsoon rainfall at the all-India level does not show any trend and seems mainly random in nature over a long period of time • Pockets of significant long-term changes in rainfall have been recorded: • Areas of increasing trend in the monsoon seasonal rainfall are found along the west coast, north Andhra Pradesh and north-west India (+10 to +12 per cent of normal/100 years) • Areas of decreasing trend are found over east Madhya Pradesh and adjoining areas, north-east India and parts of Gujarat and Kerala (-6 to -8 per cent of normal/100 years). Arvind Panagariya Columbia University

8. 2. Changes in the 20th Century 2.3 Glaciers • Glacier National Park in North America: Down to 37 glaciers from 140 of them 150 years ago • Gangotri Glacier • Receding since 1870 when data gathering began • 1,147 meters melted away during the 61 years between 1936 and 1996 (19 meters per year) • Receded 850 meters during the 25 years between 1975 and 1999 (34 meters per year) • Over one percent of water in the Ganges and Indus Basins is currently due to runoff from wasting of permanent ice from glaciers Arvind Panagariya Columbia University

9. Gangotri Glacier Source: NASA Arvind Panagariya Columbia University

10. 2. Changes in the 20th Century 2.4 Sea Level • rising at 1mm per year on the average • The rise is the highest along the Gulf of Kutchh in Gujarat and the coast of West Bengal • Along the Karnataka coast, there is a relative decrease in the sea level • Much of the rise in the sea levels has been due to warming of seawater that increases its volume Arvind Panagariya Columbia University

11. 2. Changes in the 20th Century 2.5 Extreme Weather Events • Heat waves, droughts, floods, cyclones and tidal waves • Heat waves: Declined in Uttar Pradesh, Madhya Pradesh, and Gujarat during 1978-99 relative to 1911-67 but rose in Rajasthan, West Bengal and Maharashtra between the two time periods • GOI (2004): “Instrumental records over the past 130 years do not indicate any marked long-term trend in the frequencies of large-scale droughts or floods in the summer monsoon season. The only slow change discernible is the alternating sequence of multi-decadal periods of more frequent droughts, followed by periods of less frequent droughts. This feature is part of the well-known epochal behavior of the summer monsoon.” • GOI (2004): The annual number of severe cyclonic storms with hurricane force winds averages to about 1.3 over the period 1891-1990. During the recent period 1965-1990, the number was 2.3. … Whether this is real, or a product of recently enhanced monitoring technology is, however, not clear.” Arvind Panagariya Columbia University

12. 3. Predictions, Vulnerabilities & Adaptation 3.1 Temperatures and Rainfall Baseline: 1961-90 Arvind Panagariya Columbia University

13. 3. Predictions, Vulnerabilities & Adaptation 3.2 Water Availability • The impact of climate change includes • Increased rains would add to the availability of surface water • More rapid melting of glaciers would do the same initially but the opposite eventually • Warming would lead to increased evaporation and transpiration • The Government of India (2004, Table 3.2) predicts the net effect to be positive for some rivers and negative for others • Policy Response (more intense pursuit of what India must do in any case) • Prudent utilization of surface and ground water through proper pricing as well as training • Harvesting of rainwater • Building of dams • Development of distribution networks • Re-forestation to help replenish ground water Arvind Panagariya Columbia University

14. 3. Predictions, Vulnerabilities & Adaptation 3.3 Agriculture • Increased droughts and floods can lead to partial destruction of crops with greater frequency • Compression of the monsoon season and increased intensity of rains may also impact agricultural productivity • Increased sea levels can reduce the availability of arable land • Rising maximum temperatures in drought prone areas lead to reduced productivity while those in cooler areas raise productivity. • Increased carbon dioxide levels in the air lead to increased productivity: C3 crops (rice, wheat, soybeans, fine grains, legumes, and most trees) benefit significantly and C4 crops (maize, millet, sorghum, and sugarcane) modestly. • Predictions of effects on productivity, which abound, are as good as astrological predictions! Arvind Panagariya Columbia University

15. 3. Predictions, Vulnerabilities & Adaptation 3.4 Health • If heat waves rise in frequency, length or intensity, incidence of stroke and related diseases would rise • Warmer climate makes air pollution more harmful and contributes to airborne diseases with greater potency • Increased dampness and water pollution accompanying floods are likely to increase the risk of spread of diseases such as Malaria • Water contamination that may accompany floods and draughts may also lead to increased incidence of intestinal diseases such as diarrhea • warming in colder regions, during winter season and in minimum temperatures may reduce health risks associated with cold waves. • Increased rains in currently dry regions may also reduce the risk of heat waves. Arvind Panagariya Columbia University

16. 3. Predictions, Vulnerabilities & Adaptation 3.5 Migration • Diverse rates of growth across states and between urban and rural areas would accelerate internal migration • Demographic changes would dot he same: four southern states (Andhra Pradesh, Kerala, Tamil Nadu and Karnataka) have reached the replacement levels of fertility rates, many of the poorer states in the north such as Bihar, Uttar Pradesh, Madhya Pradesh and Rajasthan have high population growth rates • Climate change can further add to complications in migration patterns. • Rising sea levels may displace a part of the population currently living in the coastal zones. • More frequent cyclones, droughts and floods may also lead to increased migration. • It is commonly suggested that climate related events would lead to massive migration from Bangladesh into India. • These sources of migration will interact with the ongoing process of urbanization and inter-state migration. Arvind Panagariya Columbia University

17. 3. Predictions, Vulnerabilities & Adaptation 3.6 Poverty • The incidence of poverty may rise though it is not inevitable • The poor are likely to suffer more from the vagaries of climate change • Policy response: Scarce resources lead to the issue of priorities. According priority to climate change versus • The provision of education and health • Helping sustain a high rate of growth • Attending to localized environmental concerns ranging from pollution of river waters to indoor air pollution associated with cooking with solid fuels such as dung, wood, crop waste or coal. Arvind Panagariya Columbia University

18. 3. Predictions, Vulnerabilities & Adaptation The Bottom Line • Joshi and Patel argue • “India is more vulnerable to climate change than the US, China, Russia and indeed most other parts of the world (apart from Africa). The losses would be particularly severe, possibly calamitous, if contingencies such as drying up of North Indian rivers and disruption of Monsoon rains came to pass. Consequently, India has a strong national interest in helping to secure a climate deal.” • I disagree assuming the efforts to “secure a deal” would imply immediate mitigation commitments by India • Large uncertainty associated with the predictions • Existing predictions of the impact of global warming on rains, evaporation and transpiration for India are not consistent with “calamitous” losses • Sustaining and accelerating the current rapid growth will better prepare the country including the poor to adapt Arvind Panagariya Columbia University

19. 4. Mitigation: Efficiency • Who should mitigate and who should pay for mitigation are two separate questions. The former is about efficiency and the latter about distribution • A simple model • Emission works as an input in production. Conversely, mitigation results in the loss of output • But emission also imposes a cost that is borne by all humanity Arvind Panagariya Columbia University

20. 4. Mitigation: Efficiency • A simple Two-country (A and B) Model • (1)X = F(K, L, Z), x = f(k, l, z) • (2)W = U(X, ), w = u(x, ) • (3) = 0 + Z + z • Upper-case letters denote country A variables and lower-case letter country B variables. X is output; K and L capital and labor; W welfare; Z emission; F(.) the production function; and U(.) the social welfare function. Country B variables are similarly defined. 0 is the inherited stock of emissions and  is the total global pollution • This can be neatly reduced to a simple diagram. Arvind Panagariya Columbia University

21. 4. Mitigation: Efficiency Arvind Panagariya Columbia University

22. 4. Mitigation: Efficiency • The optimal solution is Z*+z*. This solution can be implemented by either the imposition of a pollution tax at rate P* or through internationally traded permits. In the latter case, the implementing authority would issue permits for Z*+z* tons of emission and competitively auction them. • Whether the instrument is a tax or pollution permits, a revenue in the amount (Z*+z*).P* will be collected. Who should get this revenue? This is the distribution question. Arvind Panagariya Columbia University

23. 4. Mitigation: Efficiency • This is a highly simplified analysis. In particular, • The framework is entirely static. A dynamic model will yield a time dependent optimal tax with the discount rate playing an important role • No account is taken of the uncertainty associated with both costs and benefits of mitigation—allowing for it is likely to make permits a superior instrument • No allowance for political economy—allowing for it is likely to make the pollution tax a superior instrument Arvind Panagariya Columbia University

24. 5. Mitigation: Distributional Issue • Two aspects of the issue • Is there a case for developed countries having to pay for the damage their past emissions have done (“Stock” problem) • How should the costs of additional, future emissions be divided among countries (“Flow” problem) Arvind Panagariya Columbia University

25. 5. Mitigation: Distributional Issue 5.1 Stock Problem • The distribution of stock of emissions between 1850 and 2000 is • USA: 30 percent • EU-25: 27 percent (Germany 7 percent, U.K. 6 percent, France 3 percent, and each of Poland and Italy 2 percent) • Russia 8 percent • China 7 percent • Japan 4 percent • Ukraine, Canada and India: 2 percent each • Therefore, approximately 71 percent of the emissions from 1850 to 2000 were accounted for by the United States, EU, Russia, Japan and Canada. Arvind Panagariya Columbia University

26. 5. Mitigation: Distributional Issue 5.1 Stock Problem • Cooper (2008) argues against compensation • past polluters were ignorant that they were doing any harm and are long gone • Optimal decisions require forgetting the past (spilled milk) • focusing on the past wrongdoing will lead to inaction • Taking land use into account, rich countries are responsible for only 55 percent of the past damage since 1890 Arvind Panagariya Columbia University

27. 5. Mitigation: Distributional Issue 5.1 Stock Problem • Each argument is problematic • Those participating in slavery did not know they were damaging the future generations of African Americans and are long gone but we do have the affirmative action program to right the past wrong • Achieving optimal solutions usually requires punishment for the past wrongdoing (creation of the Superfund to make the firms responsible for toxic waste dumps in the 1970s pay for the cleanup offers a near-exact parallel to the CO2 emissions) • Past offenders could speed up action by offering compensation; on the other hand, non-compensation will lead to greater delays • Why should we correct missions for land use and not population? Arvind Panagariya Columbia University

28. 5. Mitigation: Distributional Issue 5.1 Stock Problem • What form might compensation take? • Bhagwati (2006) suggests creating a substantial global warming superfund to which developed countries contribute for no less than 25 years. While there is no toxic waste to be cleaned up in this case, the funds can still be made available to the developing countries such as India and China to promote clean technologies including wind and solar energy. Given developed country companies are likely to develop a significant part of these technologies, the fund would also benefit the developed countries. Arvind Panagariya Columbia University

29. 5. Mitigation: Distributional Issue 5.2 Flow Problem • The pollution tax or the auction of pollution permits gives rise to revenues. The flow distribution problem concerns the distribution of these revenues among various countries • In the case of permits, free international tradability leads to a single world price for them. Therefore, the revenue distribution in any one year is equivalent to the distribution of permits. A country receiving 10 percent of the permits receives 10 percent of the revenues. • Emissions are not equal to the permits allocated. A country could buy additional permits on the market and emit more than its initial allocation of permits or it could sell some permits and emit less. The actual emission is independent of initial allocation. The former is determined by efficiency considerations and the latter by distributional considerations. Arvind Panagariya Columbia University

30. 5. Mitigation: Distributional Issue 5.2 Flow Problem • Many alternative criteria for the distribution of permits (or revenues) have been suggested • In proportion to the emissions in a base year • Equal to actual emissions • In proportion to the country’s population • In inverse proportion to per-capita income • Equal to actual emissions under business as usual to the developing countries until they reach a threshold per-capita income and in proportion to the actual use to developed countries. In proportion to the actual use to the developing countries as well after they reach the threshold per-capita income. Arvind Panagariya Columbia University

31. 5. Mitigation: Distributional Issue 5.3 Simulations by Jacoby et al. Arvind Panagariya Columbia University

32. 6. Policy Action: State of the Play • At the International Level • United Nations Framework Convention on Climate Change (UNFCCC) of which Kyoto Protocol is a part • Gleneagles Dialogue kicked off by the 2005 G8 plus five meeting • Asia pacific Partnership (AP6) consisting of Australia, China, India, Japan, South Korea and the United States • The United States Major Economies Meeting (MES) • At the national level • National carbon tax or “cap and trade” legislations—Waxman-Markey Bill in the U.S. Arvind Panagariya Columbia University

33. 6. Policy Action: State of the Play 6.1 International • UNFCC: came into force in 1994 • Objective: To stabilize GHG concentrations to avoid "dangerous anthropogenic interference" with the climate system • No enforceable limits on GHG emissions in the original treaty but provision for updates called “protocols” setting such limits as in the Kyoto Protocol • Annex I countries consisting of developed countries to reduce their GHG emissions to levels to be negotiated within the UNFCCC framework • Developing countries are not expected to limit their GHG emissions unless developed countries (excluding transition economies) supply enough funding and technology. Arvind Panagariya Columbia University

34. 6. Policy Action: State of the Play 6.1 International • Kyoto Protocol • Signatories countries to undertake emission reductions between 2008 and 2012. • Commitments: Relative to 1990 levels • 5.2 percent lower overall for Annex I countries • EU15 8 percent lower • United States: 7 percent lower • Japan: 6 percent lower • Russia 0 percent lower • Australia 8 percent higher • Iceland: 10 percent higher • Implementation mechanism • Emission trading • Clean development mechanism • Joint implementation Arvind Panagariya Columbia University

35. 6. Policy Action: State of the Play 6.1 International • Current status of Kyoto Protocol • U.S.: Not ratified • Canada: Has stated it will miss • France, Germany will meet the targets • EU15: Will lower the emissions by 11 percent by 2010 if they implement all planned measures • Current status of UNFCCC • Bali Roadmap has paved the way for post negotiations for a post-Kyoto regime at Copenhagen Conference of Parties in December 2009 • Obama’s commitment to action on climate change has reinvigorated the advocates of action at Copenhagen • The U.S. Congress insists, however, that China and India must undertake mitigation commitments. These countries are opposed. So a confrontation at Copenhagen is inevitable Arvind Panagariya Columbia University

36. 6. Policy Action: State of the Play 6.2 National • EU 20:20:20 (GHG mitigation, increased renewable energy share and energy consumption curb) • China and India: national plans • USA: Waxman-Markey “Cap and trade” legislation • Proposes to cut CO2 emissions to 97% of 2005 levels by 2012, 80% by 2020, 58% by 2030, and 17% by 2050 • 85 percent of the permits to be given to firms free of charge and auction 15 percent of them competitively with the former share declining gradually and reaching 0 by 2030 • Import tariffs on countries lacking similar mitigation programs beginning in 2020 Arvind Panagariya Columbia University

37. 6. Policy Action: State of the Play 6.2 National • Are import-tariffs under Waxman-Markey WTO legal? Two possible avenues to justification under GATT • GATT Article III (as border tax adjustment, BTA) • Will require justification based on process and production method (PPM) and likely thrown out by the DSB • If upheld, China and India will be legally able to retaliate since the U.S. has relatively low energy taxes • With the EU emission reduction programs going farther, they too could take action against the U.S. • GATT Article XX: The U.S. will need to show that without import tariffs significant leakage would occur AND that the discriminatory tax would plug it. • Even EPA has estimated the leakages to be tiny • The tax would not plug the leakage due to reshuffling: India would export to EU and EU to USA • China and India can retaliate under Article XX. Arvind Panagariya Columbia University

38. 7. India’s Options • Three questions • What is in India’s best interest? • Is there justification for the position in climate change negotiations that these interests dictate? • Does India have the leverage necessary to defend this position? Arvind Panagariya Columbia University

39. 7. India’s OptionsWhat will Serve Its Best Interests? • Worth taking voluntary mitigating actions that are costless or reduce costs • Binding commitments in a post-Kyoto agreement are not in India’s interest • With 300 million people living in abject poverty, growth cannot be compromised • With 40 percent of the households without ANY electricity, India needs to tap all possible sources of energy • The cost in terms of adaptation forgone will be large • Given the existing stock of emissions and large emissions by the rich countries, India’s own mitigation will have virtually no impact on global warming—India could eliminate all GHG emissions and still will do nothing to global warming Arvind Panagariya Columbia University

40. 7. India’s Options Is ‘No Mitigation’ Justified? • India ranks 137th among emitters on per-capita basis. Freezing its emissions at current levels or less would deprive India of any chance of eradicating poverty. Almost any social justice criterion would come out against developing countries being denied room to grow sufficiently that they can eradicate abject poverty in order to allow developed countries to more or less maintain their ultra-high living standards. • The exemption to the developing countries from mitigation commitments is enshrined in the UNFCC which explicitly recognizes that ‘the largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low and that the share of global emissions originating in developing countries will grow to meet their social and development needs.’ • while virtually all analysts club China and India together in climate change discussions, their emission profiles and magnitudes are vastly different. India is simply not a “big league emitter.” Arvind Panagariya Columbia University

41. Total CO2 Emissions from the Consumption and Flaring of Fossil Fuels, 1980-2006 Arvind Panagariya Columbia University

42. Per-capita Emissions of CO2, 1980-2006 Arvind Panagariya Columbia University

43. 7. India’s Options Is “No Mitigation” Feasible • WTO rules and the possibility of retaliation allow India to combat pressures from Waxman-Markey type of unilateral actions • UNFCCC cover can be effectively used to delay commitments • India must undertake research studies that can persuasively make the case that by 2040 it can eradicate poverty and build up adaptation capabilities that will allow it to undertake mitigation subsequently • India must also produce research studies to argue the position that mitigation by developed countries alone is possible without the fear of leakage. Arvind Panagariya Columbia University