The Anti-Development Content of the Global Emissions Trading Scheme

One of the principal items on the agenda of the US Secretary of the State’s visit to India was facilitating a transition in India’s position on climate change to accepting a global emissions trading scheme (ETS).  It is becoming increasingly clear that significant carbon reduction on the part pf the developed world would be conditional on the carbon policies of other countries, particularly the high polluting fast developing countries such as China and India. The ETS is no longer going to be confined to one country or a group of countries but is likely to go global. The global ETS agenda is likely to be pushed forward considerably in Copenhagen and in subsequent policy actions. The global ETS is likely to involve the setting of firm limits to global carbon emissions whereas the spatial distribution of emissions will be affected by international trade in carbon permits. However, whereas economists and policymakers have debated the impact of the global ETS on the quantum of carbon emissions and what this means for the global environment, very little attention has been paid to the macroeconomic and developmental implications of the global ETS, particularly the effects on developing countries. This article is an attempt to articulate some of these effects and glean out their policy implications.

 

By definition, the global ETS would involve international trade in permits for carbon emissions.  Typically, economically developed, high carbon (at least in per capita terms) countries would buy carbon emission permits from the economically poorer, low carbon (again at least in per capita terms) countries.  This would involve a transfer of funds from the richer to the poorer countries and a concomitant commitment from the latter to restrict carbon emissions whereas the former would be able to emit more carbon than would have been possible in a world with firm quantitative restrictions on emissions but no global ETS.

 

The inflow of foreign exchange into the developing economies, while welcome, would not be an unmixed blessing as this would lead to an appreciation of their real exchange rates vis a vis the rich countries, thus lowering the export competitiveness of the poor countries. Concurrently, the relative export competitiveness of the richer countries will be enhanced.  The impact of the global ETS on the poorer countries will thus be like a Dutch disease. The carbon emission permits which they will be allotted, and a good fraction of which they will sell to the rich countries, will lower the pace of their industrialisation, hurt their growth prospects and hamper their efforts at reducing mass poverty.

 

Concurrently, the less developed countries by selling their carbon permits to the richer countries would have signed away their opportunity to emit carbon and impede the pace of their industrialisation.  Thus, the developing countries would be doubly disadvantaged.

Hence, the global ETS has an anti-development content.  Even the developing economies that are growing much faster than OECD countries (even before the crisis) are afflicted with mass poverty. Surely, global carbon management, important as it is, should not slow efforts to reduce mass poverty in these countries.  Given that higher economic growth is the most tried and trusted tool for poverty alleviation the global ETS needs to be finetuned to address these genuine concerns.  Whereas the quantitative impact of the global ETS on the developing countries can be tempered by staggering their carbon reduction requirements over a longer time horizon and giving them a more generous initial allocation of carbon permits, these efforts need to be supplemented by a qualitative change in efforts to address the carbon issue.  In particular, developing countries need to get accelerated access to new technology for carbon reduction as well as for generation of energy from non-traditional sources.  The global ETS needs to be supplemented with a well thought out technology transfer policy to which even the emerging economies can be expected to make contributions in cash and human resources.  Without such efforts, the global ETS is likely to have an adverse impact on developing economies.

 

The world has seen successful examples of such technology transfer in the past. For instance, the Green Revolution technologies led to sustained and significant reduction in mass hunger in many parts of the world .The time has come for similar action on the carbon front.

 

 

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