Global warming is now contested by few; it is part of our personal experience. It has intensified over the past two decades, and will get worse before long. Remedial action against it is urgent. Such action has, however, been impeded by the fact that it is an external diseconomy: my actions to reduce global warming benefit the rest of the world more than me, and I do not see why I should act unless my fellow humans pay me. Hence international action is unlikely unless all - or most of the important - countries agree to cooperate.
Assuming that they did, the question would arise what action they could take. An obvious measure would be to tax carbon emissions. The World Bank created a Carbon Pricing Leadership Coalition for this purpose. It appointed a commission chaired by two economists: Joseph Stiglitz, professor at Columbia University, and Lord Stern, the I.G. Patel Professor in the London School of Economics. For convenience, I shall call the carbon pricing commission Stistern Commission.
The commission had before it two models that had been tried out. One is the United Nations Framework Convention on Climate Change. This convention was called together in 1992. Subsequently, its members have met every few years and exchanged voluntary promises to cut emission. Their last collective act was the Paris agreement of 2015; 185 countries met and agreed to meet every five years to look at what they had achieved and revise their promises. This is the agreement on which Donald Trump has reneged; the United States of America being the world's biggest emitter, its exit must leave the agreement pretty limp.
The other model is the European Union's cap-and-trade agreement. Under it, every significant emitter in the EU gets a ration of emissions for a specified period; the current period is 2013-2020. It has to keep its emissions within the ration. But if it emits less than its ration, it can sell the difference to an emitter who wants to exceed his ration. Initially, emitters found cheap and easy ways to keep within their rations, there was a surplus of permits, and there was no market for them. Emissions vary with the trade cycle, and so does the scarcity value of an emission permit. The EU system reduces emissions down to a planned limit, but the incentive to reduce emissions that this model gives is highly variable and unpredictable.
The Stistern Commission notes other options besides carbon tax and cap-and-trade: the state can subsidize capital or interest costs of low-carbon investments, or give guarantees that would reduce capital costs of funds raised in the market. It would be ideal to raise funds wherever they are cheapest in the world, and to invest them in emission reduction projects that give the highest return. Funds are cheaper in developed countries, and unexploited opportunities are more abundant in developing countries. So an efficient solution would require massive investments by developed in developing countries, and large flows of funds to service the investments from developing to developed countries.
That is politically impracticable. But at the national level, a carbon tax can bring in considerable revenue, and create an opportunity to reform the fiscal system. It would be difficult to evade because carbon fuels are produced by large firms, and would reduce the incentive to stay small and evade taxes. Revenue from carbon tax would eventually fall to zero when carbon burning ceases. But till then, it can bring good revenue: as carbon consumption falls, revenue can be sustained by increasing the tax rate. Stistern suggest using the revenue to introduce a minimum basic income or universal cash transfer - an idea which was very hot in India until the Bharatiya Janata Party came to power and buried it. They have many other ideas: preparing roads and railways for carbon-free vehicles, adaptation of the electricity industry to absorb renewable energy technologies like solar and wind which generate power only intermittently, feebates which combine taxes on emitters with rebates to green alternatives, and so on.
Emissions tax will also have its victims - especially those who will have to pay the tax, and those working in and earning income from coal, oil and gas. Farmers who use diesel pumps and fishermen with diesel-fired boats will also suffer. But the deserving from amongst them can be subsidized. A strong candidate for subsidy is research and development for emissions reduction.
Stistern suggest that rich countries should raise carbon prices to $40-$80 per ton of emissions by 2020 and $50-$100 by 2030; poor countries should have more time to reach these targets. They should also introduce carbon-cutting regulations; the more countries achieve by other measures, the less they would have to achieve by raising prices.
The global green movement is replete with fancy terminology, unrealistic ambitions and an absent sense of realism; in that context, the Stistern report represents a commonsense, realistic approach. It is primarily directed towards rich countries, and takes the generous line towards poor countries that is embodied in international negotiations. India should take a tougher line with itself, and plan for a more expeditious transition to a green world. For this we need an analysis that is far more detailed than Stistern. The national energy policy that the government published in June does not go far enough. It envisages that between 2012 and 2040, energy consumption would more than triple under the business-as-usual scenario and rise more than two-and-a-half times if we got "ambitious". This is crazy; it is intended to be used for bargaining in international negotiations, but cannot be the basis of policy. The thinking on renewable energy, and especially solar power, is undeveloped; the report is stuck in the problems created in the electricity sector by its division across states. The approach is too myopic and bureaucratic.
The energy issue is going to make or break India; the government needs to bring in better analysis. For historical reasons, the parochial ties between the Energy Research Institute and the government have deprived us of good analysis. The government should start anew.
The two most promising lines of approach are solar power and electric vehicles. Solar panels now produce power at competitive rates; what their spread requires is cheap, mass-produced converters to integrate the panels into the grid, or storage batteries, or both. Electric vehicles are competitive where power is cheap enough; what has held them up in India is government permission. For instance, Bajaj designed an electric autorickshaw four years ago; it is still to be approved for use on the road.
These are just a few illustrations to show that India can change over to renewable energy pretty rapidly if the government encourages the shift instead of slowing it down in the guise of regulation. We should learn from Germany: it does not get much sunshine, but it has made it so easy for people to generate solar power in their homes and feed it into the grid that one sees solar panels over thousands of homes. We should also invest in mass production of lithium batteries: so many of our village homes are unconnected to the grid, but could turn to electric lighting if they can store solar power on the spot.