Friday, June 17, 2011

What Should be India's Energy Policy?

What should India's energy policy look like? There has been endless debate and countless number of posturings people on every corner of this quadrilateral have adopted. However, we all fail to miss the woods for the trees. History is a great teacher, and we should certainly look back at world history to look at the curious case of Denmark to understand where it succeeded while others failed.

I remember sitting in class when Mr. Benjamin Sovacool was passionately discussing Denmark's conscious shift towards renewable energy that started way back in 1973 after the oil shock caught them with their pants down. I confess to not having thought too much of it then. Since then, however, a lot of water has flown under the bridge, and looking at things as they stand now, Mr. Sovacool stands vindicated. One should look at the Denmark model of energy self reliance and how they consciously moved their national grid from being dependent on fossil fuels towards being one dominated by renewable energy resources generating energy.

Way back in March 2008, Monica Prasad had written an article in the run up to the Copenhagen Summit (memorable for all the wrong reasons)in which she had written the following about Denmark (the whole article can be viewed here

"The one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita carbon dioxide emissions were nearly 15 percent lower in 2005 than in 1990. And Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power.

What did Denmark do right? There are many elements to its success, but taken together, the insight they provide is that if reducing emissions is the goal, then a carbon tax is a tax you want to impose but never collect.

This is a hard lesson to learn. The very thought of new tax revenue has a way of changing the priorities of the most hard-headed politicians... But if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.

How do you get them to change? First, you prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. ...

Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage. So this is lesson No. 1 from Denmark.

The second lesson is that the carbon tax worked ... because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. ...[T]he tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so... The key was providing easy substitutes. ...

[A] carbon tax has been promoted almost as a panacea — just pop in the economic incentives and watch them work their magic. But unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution.

An increase in gasoline taxes ... would likewise be the wrong policy for the United States. Higher gas taxes would raise revenue but do little to curb pollution.

Instead, if we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources, cleaner-burning fuel, carbon-capture technologies and other environmental innovations."

In the field of energy policy there are two paths, as Amory Lovins had put forward - The Hard Energy Path and the Soft Energy Path. The Hard Energy Path, consisting of the conventional fossil fuel based resources and nuclear energy is made for a scenario where energy demands increase exponentially, and this path will eventually lead to a collapse. On the other hand, the soft energy path is predominated by renewable energy and energy efficiency measures, and in the long run looks towards decreasing the load on our grid. Its a pity that even today we have per unit of production industrial energy demands three times that of USA and five times that of Japan. Nuclear energy is not the answer, because even if the whole world were to shift towards nuclear energy, we would consume our nuclear energy resources within 30 years, forget the waste management fiasco that shall follow.

This clearly underscores the need to a) invest even more in energy efficiency both in the form of laws and technical and financial support, something started with the Electricity Act 2003 and the Energy Conservation Act 2001; and b)Invest big time for local development of renewable energy technology as it is expensive to buy gear boxes for turbines, high grade silicon for solar cells and turbines from Chinese and American companies, when our own research institutions and industrial capability can easily do the same at much lower costs of production.

Moreover, incentives for industries to power themselves through renewable energy should be pushed beyond the tax breaks followed by mandating about 10% of their demand through renewables to reduce consumption of diesel and heavy fuel oil by industry. There is great business sense in doing so, as shown by Bajaj Auto and several textile mills in Tirupur and Coimbatore.

Lastly, we should be working actively in promoting amongst our own people the spirit of energy conservation by reviving the good traditional values of saving resources and not blindly follow the west and indulge in wasteful behaviour. In a world looking for answers, India can certainly be the solution provider and thus truly achieve the greatness it really deserves.


Manish said...

excellent write up Sir, I remember Prof. Ben's class quite vividly

Rachna said...

Very well written, to the point and easy to follow. Here is a question though - "even today we have per unit of production industrial energy demands three times that of USA and five times that of Japan" which industries are you referring to here?

Holds A Sharp Pen said...

The data is for the Indian manufacturing sector in general. We are still far away on an average from the Japanese standards, though sectors like cement are mixed - we have the best and the worst performing cement plants coexisting in the country (in terms of per tonne cement consumption). It is pretty much the case with industries like paper, chlor alkali and fertilizer as well.

Tushar Jindal said...

Rohit you have rightly portrayed the lacuna in the perception of these market mechanisms, initially conceptualized to move towards a lower carbon economy. The failure of cap and trade mechanism is a good example of this ineptness and I doubt whether the envisaged air emission cap and trade mechanism will make any difference....

I appreciate the thought of putting up a mandate to produce certain % of the total energy from renewable sources along with these mechanisms and I believe REC mechanism and PAT shall enlighten the path in the right direction.

Rachna said...

I am not sure I follow you there, Indian Industries have 3-5 times energy demand as compared to US which I guess would imply the same trend for GHG emissions, this seems hard to fathom, could you send me a reference for the industrial demand data point.

Holds A Sharp Pen said...

Multiple factors lead to this discrepancy - the size of India's industrial and manufacturing sector is much smaller compared to the developed countries. Our power demand overall is still very small, though with increasing industrialization we are seeing a surge in the same. Also, economic inequalities compounded by large population leads to massive inequity in consumption, thus leading to overall low emissions.

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