The recent submission of Intended Nationally Determined Contributions (INDCs) by more than 190 countries and the Paris Agreement have highlighted the actions that governments are willing to undertake to meet the challenge of mitigating greenhouse gas emissions. Among other efforts, the Indian INDC has set a target of reducing the emissions intensity of India's GDP by 33-35% by 2030, compared to 2005 levels, and of achieving 40% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030. The big question now is how to operationalize these targets and bring in the much needed private sector investments.
Within the suite of choices that India has for implementing its mitigation targets, the role of market mechanisms will be critical. As of April 2015, the Clean Development Mechanism (CDM), one of the innovative market mechanisms under the Kyoto Protocol, had facilitated investments of about ₹579,306 crore in the country through climate mitigation projects in different sectors. Although lack of demand for emissions reduction has plagued the CDM market, the Paris Agreement has given a fillip to market mechanisms in the post-2020 scenario.
Within the suite of choices that India has for implementing its mitigation targets, the role of market mechanisms will be critical.
India should take advantage of changing global dynamics by following a two-pronged strategy. First, it should start thinking about its own domestic emissions trading scheme (ETS) to achieve its mitigation targets at the lowest cost. Second, it should strategically align its inbound and outbound foreign direct investment (FDI) more closely with its climate goals to attract greater investments and increase its own ambition over the years.
A domestic ETS would provide Indian industries with the flexibility to choose between energy efficiency--which is currently the currency for the government's perform, achieve and trade (PAT) scheme--versus changes in fuel mix and other options like emissions reduction certificates or offsets from global markets. It is important to highlight though that a domestic ETS with absolute emissions cap should be introduced only when India is ready to accept absolute mitigation targets. In the meantime, India should think about allocating emissions rights in terms of emissions intensity of production or of value added, as against energy intensity of production. This will clearly align with the efforts of the industrial sector with India's overarching INDC mitigation target, as well as open up possibilities of future linkages with global carbon markets, such as the EU-ETS and the upcoming Chinese ETS.
In terms of aligning FDI with climate goals, the new framework of market mechanisms as envisaged in the Paris Agreement provides India with two potential routes to harness this opportunity.
India should start thinking about project opportunities that might otherwise be financially unviable, but which are of strategic importance, and can also attract foreign investment.
In case of outbound FDI, if India intends to invest in Myanmar or Africa for strategic reasons, along with other investment sectors, project developers should consider putting their money in, say, renewable energy projects and gain carbon credits or mitigation outcomes. Such an investment would align with India's strategic priorities in these countries with mitigation outcomes that can be counted towards India's NDC if the Indian government buys them. Else, it is still a gain for Indian project developers if a non-Indian entity buys these mitigation outcomes.
In case of inbound FDI, India should try to attract investment in sectors aligned with sustainable development. For example, India has huge ambitions of integrating renewable energy (RE) in the grid, which is also reflected in its INDC. However, such interventions as well as battery backups are costly. If India is able to attract FDI in projects that will otherwise not be financially viable, it can ramp up its RE infrastructure; the foreign investor will gain through mitigation outcomes, and the investing country can count the emissions reduction achieved towards its own NDC if it buys these mitigation outcomes.
This can also be aligned with the Make in India initiative that has seen an almost 40% increase in FDI inflow between October 2014 and June 2015. India should start thinking about project opportunities that might otherwise be financially unviable, but which are of strategic importance, and can also attract foreign investment. Renewable energy and low-carbon transport infrastructure are two such examples.
India should push for differential accounting of credits between developing and developed countries.
All this is possible but needs careful thinking and political will.
• First, it requires a thorough assessment of investment needs and mitigation opportunities in various sectors. This will help the government determine which mitigation outcomes to 'sell' and which ones to 'keep' for its own use.
• Second, India should push for differential accounting of credits between developing and developed countries. Developing countries should be allowed to count emission reduction investment in other countries towards achieving their NDC, while for developed countries this should be linked to 'higher ambition' in their NDCs. This could be one of the ways to operationalize the principle of common but differentiated responsibility in the Paris Agreement.
• Finally, India needs to give out a clear policy signal to its businesses and the investor community. Ultimately, both the private sector as well as the government can benefit strongly from a well-designed market mechanism due to the very important economic planning certainty that can arise from such an instrument.
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