Abstract
Perform, Achieve and Trade (PAT) has emerged as a significant policy tool to mandate decrease in specific energy consumption (SEC) of the energy-intensive industries in India. As there are similar cap and trade policies operating in different other parts of the world, learning and experience derived from those will be helpful to make PAT more effective and accurate without delay. The objective of this chapter is to highlight basic experiences of the initial phase of European Union Emission Trading Scheme (EU-ETS) and analyse its implications for PAT. This chapter gives an overview of the genesis of PAT and EU-ETS, briefly describes the mechanism design of PAT and identifies issues with PAT which need to be revisited on the basis of what has been learnt from the similar mechanism design of EU-ETS during its pilot phase. Targeting specific energy consumption under PAT as compared to grandfathering in allocation of emission permits in case of EU-ETS makes the former free of certain allocation inefficiencies, but the target has to be stringent enough to avoid reduced mitigation effort and resultant price volatility of the emission trading instruments.
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Notes
- 1.
The Energy Conservation Act (EC Act 2001) in India is an act towards the efficient use of energy and its conservation. It was approved by the Parliament in 2001 and came into force from March, 2002.
- 2.
Based on interactions with experts at BEE (7 April 2011).
- 3.
Based on interactions with experts at BEE (7 April 2011).
- 4.
In a cap and trade programme, the regulator establishes an overall limit on emissions—the ‘emissions cap’. Allowances equal total emissions permitted under the cap are then distributed through free allocation or by auction. Once the allowances are distributed, they may be traded freely. On the other hand, the participants in a baseline and credit (or ‘averaging’) programme have to ‘earn’ credits before they can begin trading. An emissions baseline is first defined for each participant by the regulator. Each participant then makes reductions and monitors or calculates its actual emissions using specified procedures. At the end of the compliance period, participants whose actual emissions are lower than their baseline receive ‘credits’ equal to the difference. Credits can then be traded freely. A participant whose actual emissions exceed its baseline must purchase credits equal to its excess emissions to achieve (Dyre et al. 2006).
- 5.
Windfall profit was another consequence. The burden of emission reduction by the power sector was largely transferred to the consumer which generated large windfall profit for the power sector and at the same time reduced consumer surplus hugely (14 billion € over the period 2005–2008)—this led to additional rent or supernormal profit. This happened because while fixing the price of power, the cost of carbon is already included. When excess allocations are sold then these power utilities generate some revenue out of that as well. In India, the possibility of such windfall profit is less because the market is not completely deregulated, and the carbon prices are not incorporated.
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Dasgupta, S., van der Salm, F., Roy, J. (2016). Designing PAT as a Climate Policy in India: Issues Learnt from EU-ETS. In: Ghosh, N., Mukhopadhyay, P., Shah, A., Panda, M. (eds) Nature, Economy and Society. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2404-4_16
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