What Makes Market Mechanisms for Emissions Abatement Work in India?

Rama Mohana R. Turaga and Anish Sugathan

 

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Environmental policy traditionally relied on command-and-control approaches in which government plays a central role in policy design and implementation. The developed economies, since the late 1980s, however, saw the emergence of “new environmental policy instruments”, such as market-based instruments, information-based policies, and voluntary agreements. In the context of climate change policy, developing countries such as India have been experimenting with market-based instruments such as “Perform Achieve and Trade (PAT)”, which seeks to improve energy efficiency in industries in India.

What is PAT?

India launched the National Action Plan on Climate Change in 2008, even before it voluntarily committed to emission reductions at the 2015 Paris Climate summit. Under this plan, India established the National Mission on Enhanced Energy Efficiency (NMEEE), which is aimed to improve energy efficiency in the economy through market-based instruments such as tradable permits, energy labeling, and financial incentives. PAT is the flagship program of this mission and seeks to improve energy efficiency in eight energy-intensive industrial sectors that contributed to 36% of India’s total energy consumption in 2009-10.

The first phase of PAT started in 2012 after extensive consultations with several stakeholder groups, undertaken by the Bureau of Energy Efficiency (BEE), the public agency responsible for design and implementation. The program set mandatory targets for reduction of specific energy consumption (consumption per unit product) for each of the 478 firms regulated under the program. The “market” component of the program involves issuance of energy saving certificates for those firms, which reduce energy consumption below their targets. These certificates can be traded in specified energy exchanges with other regulated industries that failed to meet their targets.

In PAT implementation, BEE, as the central actor, conducted extensive stakeholder consultations, set up technical committees, and coordinated with many other stakeholders for monitoring and verification. To ensure ease of transactions, the government created new infrastructure, including a technology platform for reporting by all the stakeholders and a new trading platform in the existing energy exchanges. The program also had a role for Central Electricity Regulatory Commission, the regulator of electricity markets in India’s federal government, to set the rules for trading.

The initial assessment of the first phase of PAT indicates that the regulated firms collectively exceeded the reduction target by 30%, leading to 31 million tons of CO2 reduction or approximately 2% of India’s total CO2 emissions. Only the thermal power plant sector failed to reach their target. However, certain issues of program efficacy remain unclear: (i) would rising energy prices have led to emission reductions even in the absence of PAT, (ii) given the lack of certainty regarding future caps, does PAT incentivize only short-term investments by industries in energy efficiency and (iii) will the promised cost effectiveness be realized in light of the likelihood of low volumes of trading for certificates? Despite these issues, more industrial sectors and units are planned to be covered under the program in the next few years.

Governments Continue to Matter

As the India’s experience with trading in energy saving certificates suggests, governments continue to play an important role in the design and implementation of even the non-traditional environmental policies. Energy consumption certificate trading, in particular, shows the key role of the government in designing the program, in enforcing targets, in creating demand for certificates, and creating a platform where these certificates can be exchanged. The next step is to compare the design and effectiveness of various types of market-based mechanisms for climate change mitigation across countries to figure out what works, where, and why. Arguably, implementing complex governance mechanisms might be less feasible in developing countries that lack institutional capacity.  After all, one needs significant technical expertise in the design and implementation of such schemes. If so, the diffusion of new governance mechanisms might be impeded by differences in state capacities across countries.


Rama Mohana R. Turaga is an Associate Professor in the Public Systems Group at the Indian Institute of Management Ahmedabad, India.

Anish Sugathan is an Assistant Professor in Business Policy at the Indian Institute of Management Ahmedabad, India.