Climate Change Policy for India

While the global environment waits for the world to reach some form of agreement on
climate policy, developing countries such as India are entering a phase of higher economic
growth. The decisions on investment in energy systems that will be made in India in coming
years will have an important impact on global climate change over the coming century. This
paper explores how action could be undertaken in India today, in a way that commits India to
longer run goals for greenhouse emissions but does not raise the short run cost to the
development process in India. The approach proposed is a modification of the McKibbin-
Wilcoxen Blueprint for climate policy which relies on establishing property rights and
markets in both short term and long term emission permits. The goal is to encourage long
term investment decisions to move towards less carbon intensive activities. This approach
could be unilaterally implemented in India. If successful it would not only reduce Indian
carbon emissions but it would be an example for the entire developing world to follow and it
might remove a key obstacle preventing the United States from implementing policies based
on the argument that developing countries are not committed to taking action to reduce
greenhouse emission.
This paper outlines the recent history and prospects for carbon emissions in India. It also
explores the various alternative economic instruments that might be used. The paper presents
illustrative results for the consequences of a rise in the price for carbon in India based on a
new version of the G-Cubed multi-country model that includes India. This simulation
illustrates that an immediate increase in the price of carbon either through taxes or from
entering a Kyoto style permit trading market could be very costly for India. Thus a credible
commitment such as would be possible under the Blueprint is the best way to change
investment incentives in India while at the same time give India time to develop before
contributing to the cost of global greenhouse abatement.