In her speech to Parliament last week, President Patil declared that one of the top priorities for her government would be ?energy security and environment protection?. The intention is commendable. India and other developing countries face a triple challenge of increasing income growth, building energy infrastructure and confronting climate change. Reconciling these challenges would depend on financing, regulatory and institutional reforms, and international cooperation.
The energy needs of developing countries cannot be underestimated. About 1.6 billion people live without electricity and 2.5 billion lack access to modern energy sources. Even in fast-growing China and India, more than half the population relies on traditional biomass for cooking. This gap is a powerful driver of poverty, and a brake on economic growth and employment generation. With 1.4 billion people living in extreme poverty, for developing countries the priority is to use energy policy to stimulate growth.
In India, rapid economic growth is putting pressure on an energy infrastructure suffering from decades of under-investment. Compared to 2004-05, electricity consumption in India is expected to increase six-seven times to 3600-4500 TWh by 2030. Planning Commission estimates that by 2031-32 (end of the 15th plan), India will need total installed capacity of 800-1000 GW, up from around 160 GW today.
When magnified to the global level, the scale of investment envisioned has critical implications for greenhouse gas emissions and, as a result, climate change. Non-OECD countries will account for almost the entire increase in energy-related CO2 emissions from now until 2030 (see figure). According to the International Energy Agency?s reference scenario, three-quarters of the projected increase would come from China, India and the Middle East. Although rich countries bear the primary responsibility for climate change, reconciling the energy and growth imperatives in developing countries would undermine the response to climate change.
The problem is that renewable energy offers only medium- to long-term potential. Although global investment in renewables exceeded investments in fossil fuel-based technologies in 2008, renewables account for only 6.2% of global power capacity. At least until 2030 coal will remain the dominant source of electricity worldwide, accounting for 40% of the incremental energy demand in developing countries.
Thus, reconciling the climate change and energy imperatives by relying on renewable energy would not satisfy the growth and poverty reduction objective any time soon. The upshot: to maintain growth and reduce emissions, poor countries would have to improve the efficiency of coal-based infrastructure while investing in renewable energies until they become commercially viable and scalable.
What can be done then? First, public financing must be part of the overall financing mix. The financial crisis slowed growth in investments in renewable energy in 2008; Q1 of 2009 experienced a 53% decline. Recovery from the crisis does not promise adequate financing either. Without a high price on carbon, there is less incentive to invest in renewables. There are other market failures, including the reluctance of investors to put money into energy R&D when the benefits might be captured by competitors.
Some countries are converting the crisis into an opportunity. China has devoted $69 billion of its stimulus package towards sustainable energies (entirely in the form of grant financing). The US is providing $66 billion as grants, loan guarantees and tax credits. Brazil?s stimulus amounts to $2 billion. By contrast, India?s stimulus package does not offer any earmarked funding for renewable energy or energy efficiency. Of course, over-reliance on subsidies can skew incentives especially if the government starts ?cherry-picking? technologies.
Instead, a mix of public and private funding is needed for different stages of technology development, deployment, operation and maintenance.
The second policy imperative is regulatory and institutional reform. Independent regulatory bodies would be needed to monitor and verify the performance of projects as well as implementation of existing environmental regulations. This is easier said than done but initiatives are underway. Recognising its capacity limitation for supervision and enforcement (with about 300 staff), China?s new ministry of environmental protection now aims to develop an online monitoring system connected to the provinces to target more than 6,000 major sources of pollution. In India, where the Central Pollution Control Board has 150 people, the ministry of environment and forests plans on a new Environment Protection Authority to increase transparency and compliance.
Institutional coordination will be equally important. An integrated approach to the demands for energy security and environmental protection would draw together the multiplicity of ministries in India, including environment and forests, power, coal, new and renewable energy, and science and technology. Without replacing its ministries, China?s solution for fragmented and dispersed energy management has been to create a National Energy Bureau to draft and implement energy policies, regulations and develop clean energies.
International cooperation constitutes the third policy imperative. Compared to the hundreds of billions needed for climate change mitigation technologies, the response has fallen woefully short. Since 1991, the Global Environment Facility has allocated only $2.5 billion to climate projects and plans to devote only $50 million to scale-up technology transfer. The World Bank-managed Climate Investment Funds cite $6.3 billion of donor pledges but no contributions had been received until earlier this year. A new multilateral low carbon technology fund is needed to finance the incremental costs of more efficient or renewable technologies, underwrite project risks, cover intellectual property costs, and to give developing countries voice in determining alternative energy trajectories. Without predictable multilateral financing and joint development of new technologies by developed and developing countries, efforts to reconcile the growth, energy and climate imperatives will surely stumble.
?The author is Oxford-Princeton Global Leaders Fellow at the Global Economic Governance Programme, Oxford University