Climate justice and India's choice

Business Standard, 18 October 2021

Carbon dioxide is a pollutant, and the bulk of the CO2 in the air was put there by developed countries. For many in India who emphasise `climate justice', the corollary of this fact is that India need not worry about carbon emissions until we become a developed country. There is an increasing gap between India's self-interest and the simple insistence upon climate justice. The global financial system has changed in ways that interfere with carbon-heavy growth paths for India. First world electorates have shifted positions, and in democracies, this will reshape international relations.

We have too much CO2 in the air because humans have been burning fossil fuels since the dawn of the industrial revolution. Indian emissions through history make up 3.1% of the CO2 in the air. We did not make this problem: today's rich countries did.

The world is facing a difficult situation with cutting back on CO2 pollution. Global emissions of CO2 today are at about 55 Gt/yr. The Paris Accords are a set of soft assertions, which will likely be violated, and they only hold emissions flat. To avoid catastrophic events with a reasonable probability, emissions have to go to 0 by about 2055. Under business as usual, emissions are projected to grow to about 80 Gt/yr in 2055.

These three big numbers -- 55, 80, 0 Gt/yr -- require contemplation. The world is at 55 Gt/yr today which is held constant if the Paris Accords work. For 2055, we are projected to reach 80 Gt/yr, and we need to get to 0. An adjustment is required by 2055, compared with business as usual, of about 80 Gt/year compared with present trends. Zero CO2 means large changes for the present coal and oil based industries. These large changes are not easy to achieve in the short period of the coming 35 years.

On a flow basis, India's annual emissions rose from about 1 Gt/year in 2001 to 2.6 Gt/year today, with a compound growth rate of about 5% per year. We went up from about 4% of global emissions in 2000 to about 7% today. As the fourth largest source of emissions, India will be noticed if a strong climate transition does not commence. While there is ample sunlight in India, the carbon intensity of energy production has actually grown in recent decades (from 0.24 kg/Kwh in 1970 to 0.28 kg/Kwh today). Many countries have fared better in this period, e.g. China dropped from 0.33 kg/Kwh to 0.26 kg/Kwh, and the UK dropped from 0.26 kg/Kwh to 0.17 kg/Kwh.

If India aims for a carbon-heavy future, two things will come in the way. The first is the cost of capital. Real sector investment projects in India are now planned in an international asset pricing environment. Vast resources of asset managers worldwide have been reshaped into the ESG world. As a consequence, the cost of capital is high for a carbon-intensive electricity project and low for a renewable energy project. If Indian firms try to use fossil fuels, they face a high cost of capital in doing so. ESG investment also demands that big companies emit less carbon in their upstream suppliers. A firm like Google does not buy thermal electricity.

The new world of ESG-inflected investment pushes energy firms and energy customers in India to not emit CO2 (directly or indirectly). This holds, regardless of what we may think about climate justice.

The second problem is the views of the first world electorate. It is very difficult to communicate science to the public, but over the last 30 years, a lot of people have got the point that CO2 is an unpleasant pollutant with global effects, and that these problems will intensify unless we get back to 2000 levels of CO2 in the air. A Pew Research Centre survey in 17 advanced economies, published last month, found that 72% felt global climate change would personally harm the respondent, and 80% were willing to make changes in life and work in response. About 52% were not confident that the international community was doing enough to solve the problem.

These strong majorities have reshaped the views of first world politicians who face democratic accountability and have to follow the shifting views of the median voter. This will feed into the various elements of economic statecraft. It could lead to an intensification of the rules shaping ESG investment. There could be trade taxes upon the carbon embedded in first world imports. If a country is intransigent on climate questions, this can become a part of the overall give and take of foreign policy.

The Pew Research survey found that at present, 78% of the first world thinks China is a bad actor on climate change. While China emits a lot of CO2 today, they have moved considerably on climate transition. Per capita emissions in China peaked in 2013. There is intellectual capacity in China, and the requisite policy frameworks, through which Chinese politicians can show they are putting their shoulders behind the climate transition. This puts China in a better position in the give-and-take of diplomacy.

India did not create the CO2 problem, but we should pursue our self-interest. Under international asset pricing, carbon-heavy investment in India is hampered by an enhanced cost of capital. For 2016-2020, the focus in the global climate transition was in dealing with an intransigent Trump. As the world organises itself to remove emissions by 2055, the reshaped international relations environment implies there are gains for India from de-carbonising.

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