Search the Internet          Tips  Sites: Finance, Investment

Recent Specials

Are pension fund      schemes bad ideas? Strong rupee adds      to IT firms' woes Chance to get state      finances back on track The small screen sees      a big battle Why you need personal      accident insurance 'RBI should deregulate      savings rate, cut CRR' Reforms: One step      forward, two      steps back The state governments'      precarious finances

Bargaining for a cleaner world

Jyoti Parikh

This week, thousands of delegates are descending on New Delhi to discuss issues relating to climate change, popularly known as global warming.

The threat of climate change arises from excessive emissions of green house gases, such as carbon dioxide, which are emitted from various economic activities, such as burning fossil fuels, cement production, deforestation and so on.

At the Earth Summit at Rio in 1992, the Framework Convention on Climate Change was agreed upon to deal with the threat of climate change and to promote sustainable development.

To give concrete shape to the action plan's specific treaties, the countries and organisations that signed the FCCC meet periodically to negotiate. The eighth meeting of the Conference of Parties, is taking place in Delhi. What are the issues facing COP8?

To understand these, we need to look at some facts. Some eight billion tonnes of GHG are emitted annually, whereas the earth's capacity to absorb it is only 4 billion tonnes. That is, only 50 per cent of these are absorbed or stored by forests, vegetation, oceans and rock crevices.

More than 70 per cent of GHG are emitted by 25 per cent of the world's population in the developed countries, whereas the other 75 per cent of population (nearly 4.5 billion people) living in the developing countries emits only 30 per cent.

Already, 220 billion tonnes of carbon equivalent is accumulated in the atmosphere. A US citizen emits 5.6 tonnes of carbon annually, whereas a person from India emits just 0.3 tonne of carbon.

The FCCC convention at Rio mandated the industrialised countries (IC) to take action earlier than others, simply because emit more GHG and therefore have a higher responsibility to reduce emissions. They were to arrest the growth of these emissions and to reach their 1990 levels of emissions by 2000. That never happened.

The ICs have kept on increasing their emissions. This was later renegotiated and the ICs asked for more time. In the Kyoto Protocol, proposed in 1997, they agreed to reduce by 2012 their emissions to a few percentage below their 1990 levels.

The climate change or global warming is a global problem and can have only a cooperative solution. In the case of local pollution, for example particulates emitted in air, it does not help Kolkata if you reduce pollution in Mumbai.

In case of global pollution, however, it is the sum total of all emissions in the world that counts and no matter where they are emitted. Thus, emissions by India and an European country would have the some impact as long as the sum total of their emissions remain the same, no matter how these are divided between the two countries.

This makes it possible for an European country to invest in India to reduce India's emissions and claim some of this reduction for itself.

The cost of emissions reduction varies from country to country. Suppose the cost of emissions reduction is $40 per tonne of carbon in country 'A' and $10 per tonne in country 'B'. Then, by inducing country 'B' to save carbon on its behalf, country 'A' saves $30 per tonne. In a normal trade, it is expected that this will be shared between country 'A' and 'B' in some proportion, so that both of them benefit from this trade.

Such possibility of trade was recognised and accepted as a legitimate means to reduce emissions in the Kyoto protocol. This arrangement is called clean development mechanism. It is a flexible mechanism offered to the ICs, who requested this so that they won't have to take expensive measures immediately.

For example, country 'A' can invest and modernise India's inefficient power system. This modernisation will save fuel (usually coal) and therefore help reduce the global carbon emissions benefiting the country 'A'. In addition, local pollution in India can also be reduced, which is harmful to the health of people of India.

The UNFCCC Secretariat has taken this idea further by providing guidelines about how to calculate carbon reduction over a baseline. These reductions, when certified by an authority, are certified Emission Reduction, which can then be credited against country A's share.

So far so good. But, how could this really work out? There are a number of problems in the way CDM is sought to be implemented. There is considerable asymmetry in information and bargaining power and the outcome can be highly iniquitous if CDM is not properly implemented.

Some of the problems with the current paradigm are as follows:

• The onus of proposing a CDM project is put on the host country, that is the developing country (DC). The entire burden starting from filling out forms to ensuring that the project meets all the criteria is also on the DC. The onus of getting them certified and monitored is also on the DC. What was meant to be a cost effective way to reduce the burden on the industrialised countries (ICs) is turning out to be a transfer of burden on DC, that is the seller of CERs. The DC will have to reveal all her costs to the potential buyer of CERs from an IC.

• On the other hand, not even minimal information is sought from the purchasing country. As a result there is complete asymmetry in the system where the ICs, that is buyers of the CERs, know everything to the last dollar about the DC's costs. The ICs reveal nothing about their own costs. The DCs do not have the vaguest idea about the buyers' needs and costs. Fair markets cannot function in such an asymmetric environment and sellers will be opened to exploitation. Moreover, the entire consumer's surplus is likely to be kept by the ICs, as there are no guidelines about sharing the benefits, $30 in the example given above.

• In the current procedure, there is no guidance about what needs to be paid to the DC. While all the information is sought from the seller about the costs, she does not know the value of it. For example, diamonds or crude oil are not sold at the cost of extractions. Their value is another matter altogether.

• Most of all, a big potential buyer, namely US, is currently outside the system. It is expected that the market price of about $5 per tonne of carbon could be $25 per tonne, if the US enters the market.

• When it comes to local environmental governance, for example air pollution and water pollution, the rules in these very same countries are fairly strict and enforced on all, which means that polluters must pay. However, when it comes to global pollution (GHG emissions), the rules are not voluntarily accepted nor is there a mechanism to discipline defaulters.

• Hundreds of CDM consultants, project advisors, traders and certifiers are waiting in the wings to get a piece of the CDM pie by providing services. They should be paid fees on the basis of percentage of the surplus accruing to the DC, and not the stated value of their time. Only then they will work to get a fair deal for their developing country clients.

Should one rush to CDM before the rules are fair and a system of global governance is established? One hopes that there is clarity about the system so that a fair and fast way to reduce emissions is established.

(The author is a Senior Professor at Indira Gandhi Institute of Development Research.)

Powered by

ALSO READ:
More Specials
More Money Headlines