India’s own emissions trading scheme
Economic liberalisation has ushered in sustained industrial growth over the last two decades. This growth has been one of the major drivers of rise in demand for energy in the country, in particular led by energy-intensive industries such as power, iron and steel, cement, fertiliser. These energy-intensive industries account for over 45 per cent of commercial energy use in India, to deliver 25 per cent of national GDP, as per the estimate of BEE.
For these energy-intensive industries, as the name suggests, energy constitutes a high proportion of input cost ranging from about 25 per cent in the case of iron and steel, 40 per cent in case of cement and fertiliser to almost 90 per cent in case of thermal power plants. The energy demand of these industries is primarily met by fossil fuels such as coal and oil, and therefore is highly vulnerable to availability and price volatility of energy resources.
According to an assessment by the World Bank, Indian industry has seen greater energy efficiency improvement since the late 1980s than any other sector of the economy. Some of the reasons for this are the rise in competition following liberalisation, high energy prices and the enactment of the Energy Conservation Act, 2001. This trend needs to be sustained. There is strong evidence to show that investment in energy efficiency pays back in a short period of time, while delivering a lasting impact on input costs.
The National Energy Conservation Awards given to industries every year on the National Energy Conservation Day by the Ministry of Power indicate that the payback on investments is 1.3-3 years for energy-efficient technologies.
Stressing the importance of energy efficiency, the Prime Minister, in his address on National Energy Conservation Day, reiterated the need for measures to stimulate energy efficiency, and thereby enhance cost-effectiveness of commercial and industrial activities.
Given the potential in the industrial sector, the Ministry of Power and BEE are giving final touches to an innovative market-based scheme to promote energy efficiency. The ‘Perform Achieve and Trade’ (PAT) mechanism, which is the flagship programme of the National Mission for Enhanced Energy Efficiency (NMEEE), is intended to stimulate energy efficiency investments that would enable industries to save at the minimum 5 per cent of their energy cost, estimated at 9.8 million tonnes of oil equivalent.
This would translate into an annual cost reduction of over Rs 30,000 crore at current oil prices, thereby enhancing their global competitiveness, in addition to achieving savings to the national exchequer as well as reducing India’s overall GHG emissions.
The PAT scheme and NMEEE are an integral part of the National Action Plan on Climate Change (NAPCC) which was released by the Prime Minister in June 2008. NAPCC outlined eight national missions for multi-pronged, long-term, and integrated strategies for achieving the key goals of sustainable development while balancing the concerns of climate change.
PAT scheme, which will be the first-of-its-kind initiative in the developing world, is a market-based mechanism to make improvements in energy efficiency in energy-intensive large industries attractive. PAT mechanism intends to enhance cost-effectiveness of energy efficiency in energy-intensive industries by certification of energy savings and enabling their trading.
The scheme builds on the provision of the Energy Conservation Act that empowers Central Government to notify energy-intensive industries and mandate them to report their energy usage, appoint Energy Managers and adhere to targets for energy efficiency. The Ministry of Power notified units consuming energy more than the benchmark in nine industrial sectors — namely Thermal Power Plants, Fertiliser, Cement, Pulp and Paper, Textiles, Chlor Alkali, Steel, Aluminium and Railways — in March 2007.
The PAT energy efficiency targets, measured in terms of reduction in their Specific Energy Consumption (SEC), will provide the industry an Energy Saving Certificate (ESCerts) which it can sell to another industry having mandatory target but unable to meet it. ESCerts so purchased would be deemed to be in fulfilment of compliance requirement for the underachiever and avoid the penalty for non-compliance under the Act. The sale and purchase of ESCerts has been given legal sanctity by amending the Energy Conservation Act.
PAT takes into consideration the fact that in almost every industrial sector, state-of-the-art energy-efficient plants coexist with less energy-efficient plants. The diversity of energy use is large with the least efficient plants in several sectors using two to six times more energy to manufacture a unit of the product than that used by the most efficient plant (see charts for cement and paper sectors, respectively). Mindful of this diversity and the fact that mandating one target in a sector will inevitably result in closure of inefficient plants, the PAT scheme will mandate differential targets by clubbing together units in bands within each sector.
The flexibility of the PAT scheme to allow an obligated entity to purchase ESCerts for compliance will enable an economically efficient path for achieving the overall target set for the scheme. The first commitment period for PAT is likely to commence in 2012 and will run for three years. However, in order that there is price discovery and liquidity in the market, ex-ante auction by BEE of ESCerts, intermediate target setting and issuance of ESCerts and their banking over two or more commitment periods are being worked out. ESCerts’ fungibility with the Renewable Energy Certificates (RECs) that are being traded in the power exchanges is also being deliberated.
The PAT mechanism could help save the industry about 10 million tonnes of oil equivalents in fuel savings, equivalent to over 5,600 MW of avoided capacity addition. It would become an integral element of India’s positive response to the Durban Platform for Enhanced Action.