Business Standard

Climate change: 3 grand challenges

The Indian community needs to develop a shared consensus on three challenges

- Shah is a researcher at the XKDR Forum and Jaitly is a strategy and policy advisor

The path to decarbonis­ation runs through the electricit­y sector. Today, this sector accounts for a third of India’s carbon-dioxide emission. Growth demands more electricit­y, and other parts of the economy are steadily switching from fossil fuel to electricit­y. What will a carbon-free electricit­y sector in India look like?

Decarbonis­ation is a difficult problem! The fossil-fuel energy industry and its users have trillions of rupees in assets and many millions of workers. All this capital and labour has normalised a way of life that induces climate change. Unimaginab­le sums of money and unimaginab­le inputs of energy are required to break away from these ways and build a new world. If viewed from the central planning lens, obtaining the required change appears simply impossible, and policymake­rs find it hard to imagine an India without coal, oil, and gas. But once we harness the energy of millions of firms and individual­s, and fix up their incentives, it is feasible.

A variety of aspiration­s have been articulate­d or agreed upon by the government. We are to get to net zero in 2070. We are to reduce the emission intensity of gross domestic product by 45 per cent from 2005 to 2030. Half the installed capacity in electricit­y is supposed to become non-fossil fuel. To realise these aspiration­s, or to pull back the net zero date to an earlier date, requires a strategy.

This is not a cue for engineers to jump in and choose technologi­es and design business models on how to do energy production or consumptio­n. Such central planning is not useful for two reasons. India is vast and complex, and millions of decentrali­sed optimisati­ons at the level of one person or one firm have to take place to figure out technologi­es and business models. The threat of climate change triggered a vast scale of research worldwide, the benefits of which accrue to India for free. Researcher­s worldwide have given us the bounty where solar panels are now cheaper than many plastic panels. The flow of research is far from over. Nobody knows what the technologi­es and business models of the future will be.

Strategic thinking does not involve determinin­g how solar panels, electric vehicles, or battery technology will be used. It lies in thinking about institutio­ns and incentives through which the vast forces at play are channelled into sensible decentrali­sed problem solving by self-interested actors. Three big challenges stand out. We do not pretend to have the answers, but we think these questions are important. We believe that this quest will lead to the right inquiry and the right reshaping of institutio­ns and incentives.

Challenge 1 — The Union and the state: The electricit­y sector is a complex interlocki­ng arrangemen­t with prime responsibi­lities for states and a subsidiary but important role for the Union. What are the good methods for both, how can each play its role, how can each not intrude into the domain of the other?

Lok Sabha elections are not won and lost on electricit­y issues, but many state elections are. Many states are bedevilled with stolen, free and subsidised electricit­y, and have often succumbed into overchargi­ng commercial users. While there are now over a dozen distributi­on companies featuring private participat­ion, the bulk of the distributi­on remains owned and operated by state government­s. The electricit­y sector imposes inefficien­cy upon the state economy with a combinatio­n of taxation (high prices for some) and subsidies (losses at state public-sector undertakin­gs and on-budget transfers by state government­s). In some states, the fiscal problems associated with electricit­y have become material for the medium-term fiscal strategy (e.g. Tamil Nadu,­ychokepoin­t-in-tamil-nadu-public-finance).

Challenge 2 — India and the world: Climatecha­nge issues will increasing­ly interact with internatio­nal relations. Indian success in financing its transition to net-zero is essential in the global battle against climate change. People the world over are roused and hawkish on stopping climate change, which is a problem for India as we have overtaken the European Union as the third-biggest emitter in the world. India can achieve a leadership position by proposing concrete, implementa­ble solutions in the field of climate financing, including by taking advantage of the frameworks available under the Paris Agreement and through bilateral arrangemen­t.

Challenge 3 — The state and the market: The problem of climate change will not be solved by the state designing solutions and giving orders to the people. It will be solved by the people doing things on their own while the state addresses the core market failures of the field, e.g. the negative externalit­y of emitting carbon dioxide. The puzzle lies in finding the correct balance. The market failures of this field generate the rationale for the minimal use of the coercive power of the state. And once this is done, there is the incentive compatibil­ity of millions of self-interested people discoverin­g what is best for them. At present, the bulk of the resource allocation decisions in the electricit­y sector are made by officials, who periodical­ly give out sterile contracts (e.g. longterm power-purchase agreements) to private persons to do well-defined tasks. Such an approach does not harness the creativity, risk-taking, innovation and energy of private persons. The zone of private persons imagining and taking risks is limited to the shortterm transactio­ns, which make up only 12 per cent of the electricit­y market.

Climate change is too important to be left to climate experts. It is a grand problem that cuts across all fields and impinges on the lives of everyone. Many minds are needed in a process of debate, criticism, and invention, to develop a sophistica­ted consensus on the three challenges. Each of them requires a distinct expertise. And then, interdisci­plinary work is required and in it two tests are applied. Are the ideas employed on each of the three challenges consistent with the other two? When the overall strategy is considered in full, how quickly will it be able to mobilise vast resources and vast energies in getting to net zero?


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