Energy, economy and emissions in India: analysis using equilibrium models

Abstract

Rapid development, increased use of fossil fuels, depletion of natural resources of energy, and increased level of carbon dioxide emissions are some of the major concerns facing the world today. The concerns, specially the first three, are more serious for India because international protocols have started focusing on emissions restrictions even for the developing countries. Since emission, energy use and economic growth are dependent on each other, in future policy makers will have to strike a balance between emission and economic growth. In this context the study of energy-environment interactions with the economy assumes significance. The objective of this research is to examine the long-term energy-economy-emission trajectories and understand the implications of various mitigation policies on these trajectories and understand the implications of various mitigation policies on these trajectories. Specifically, to understand the implications of carbon taxes and advanced technology options on a) the economic growth, and b) inter-fuel substitution and pattern of energy use in future.

For India, a few models of bottom-up type have set earlier. The most vital limitation of the bottom-up energy models is that the end-use demands, which are the most important drivers of bottom-up energy models, are exogenously given and inelastic to changes in macroeconomics parameters such as energy prices or changes in GDP resulting from tax or subsidy policies. The present research makes an attempt to overcome this limitation by using two equilibrium models for analysis.

First model used is Edmonds-Reilly-Barns (ERB) model. ERB is a well-documented behavioural, long-term global energy and greenhouse gas emissions model with four competencies: supply, demand, energy balance, and greenhouse gas emissions. The world is divided into nine regions in the model. We have set up the ERB model for the Indian region, while keeping the balances for the other regions as specified in the original ERB model. For policy analysis, a range of carbon tax scenarios for mitigation is created. The long-term results, till 2050, like the global energy prices, energy mix and emissions from ERB model could be useful as inputs and benchmark for other models.

The second model is a CGE model called Second Generation Model (SGM). It is calibrated for the year 1990. Here, production relations, for eight producing sectors (including six energy sectors), are represented by constant elasticity of substitution (CES) functions Six energy sectors are coal, oil production, oil refining, gas production, gas distribution and electricity. Electricity sector is generated from six sub-sectors – coal-based, oil-based, gas-based, hydro, nuclear and solar. While we consider only commercial energy sources both renewable and natural resources are explicitly treated. Traditional biomass fuels are ignored since national accounts and official input-output data do not include their value. SGM endogenously generates the macroeconomic information such as energy prices and loss of GNP and consumption. As with the global model, we study the impact of imposing carbon tax through this model also. We generate another set of scenarios, with a focus on introduction of advanced technology in solar electricity.

Data requirements for these models include Input-Output tables, macroeconomics variables like consumption and investment, demographics, energy flows, and emission coefficients. Input-Output tables, published by Central Statistical Organization (CSO) for a disaggregated level of 60 sectors, are aggregated and used in conjunctions with energy flows to suit the purpose. The data on macroeconomic variables is from the National Accounts Statistics (NAS), published by the Government of India, publications of United Nations (UN), and the Centre for Monitoring Indian Economy (CMIE). Energy flows are taken from the CMIE publications and TERI energy Data and Directory Yearbooks. Emissions coefficients data for the various fuel types is from World Resources Institute. Apart from these data, the parameters like income and price elasticities are taken from literature.

The main results are as follows. Coal remains the dominant fuel in Indian energy scene, even at moderate level of carbon tax. Gas turns out to be second-most favored fuel after coal. Oil consumption increase leads to high level of import requirements due to fast depleting sources. Energy intensity of India declines to around one-third of current level by end of next half century. Per capita emissions from India’s energy sector remain below world average. A high level of carbon tax achieves high mitigation. The carbon tax achieves high mitigation. The carbon tax achieves high mitigation primarily by fuel switching, where by coal is initially substituted by oil and gas and later by carbon free renewable and nuclear energy. Even a high carbon tax fails to induce sufficient penetration of solar electricity. Advanced technology for solar, if available at two third the present cost, combined with a moderate tax could achieve significant penetration of solar electricity and significant mitigation.

The research could be useful for policy makers to assess the possibilities of switching to gas as the main source of energy in case Indian has to abide by international protocols on emission mitigation. The implication for industry is that transitions in energy sector over the next half-century, towards increased use of gas as the main energy source, are going to affect the existing players in energy business, mainly in power production, crude oil production and refining.