India and China: Climate Change’s Axis of Convenience

India and China, otherwise inclined to see themselves as geopolitical rivals, signed a formal five-year climate change agreement on October 21. “There is virtually no difference between Indian and Chinese negotiating positions on international climate treaties,” said Indian Environment Minister Jairam Ramesh afterwards.

At the heart of their common position are two basic principles.

One is that the developed countries have a “historical responsibility” for the lion’s share of man-made emissions produced since the Industrial Revolution. The other is that there is a strong correlation between rapid economic growth and fossil fuel consumption. Indian negotiators like to point to charts showing energy consumption and GDP growth following parallel paths.

The bottom line: both countries believe the established economies need to do more about carbon emissions and pay for whatever the rising economies do in this field. China and India have called on wealthy countries to lower emissions by 40% from 1990 levels by 2020. They have also asked that the anti-carbon efforts of emerging economies be rewarded with funding and access to green energy technology.

Needless to say, they both oppose any penalty system, including carbon tariffs on trade, which might apply to them.

On the face of it, the tight policy coordination that both Indian and Chinese officials claim exists makes perfect sense. Their own forecasts and those of the International Energy Agency all show that both countries will be dependent on coal, oil and natural gas to drive their booming economies for decades – even under the most optimistic projections regarding the spread of renewables and energy-efficient practices.
 
Where similarities end
However, if one digs deeper, it is clear there are limits to the climate change policy that overlap between the two Asian giants. These limits arise from three crucial differences between India and China.

The first is the gap in the sheer magnitude of their respective energy usage and carbon emissions. China is now the world’s largest carbon emitter. India is the fourth-largest. But China’s number one position is accomplished by an emission of 6283 million metric tons of carbon. This is almost four and a half times more than India’s 1400 million metric tons. (Source: 2007 figures, US Department of Energy).

The second difference is the economic sources of emissions in the two countries. Since its economic reforms began in 1991, India has seen its service sector, led by technology-heavy areas like software and telecommunications, come to represent over half its economy. The energy intensity of its economy has been in steady decline since then.

China’s economic path, especially since 2001, has been marked by an enormous expansion of heavy industry. From 1977 to 2002, the Chinese economy experienced a rapid southward energy intensity trend. This reversed in 2002, so much that the International Energy Agency that year revised its estimates of Chinese energy consumption for 2020 by a staggering 63%.

A study blamed the sudden shift in China’s energy profile on an enormous surge in investment in five energy-intensive industries including iron and steel, cement and glass. China began to produce half the world’s cement, a third of its steel and half the world’s flat glass. This cluster of industries accounted for 80% of the surge in Chinese energy consumption. (Source:www.iie.com/publications/papers/rosen0507.pdf)

India, on the other hand, had seen its manufacturing sector experience a mild five-year recession with the introduction of reforms. More importantly, in India, the specific energy-intensive sectors that in China distorted energy consumption have not grown at anything near the level that China experienced. India’s steel production this past year was roughly 50 million metric tons. China’s is well past the 500 million ton mark.

This effect of China’s heavy industry sector can been seen in energy intensity figures. It took China 13,780 British thermal units (Btu) to generate one purchasing power parity dollar’s worth of additional gross national product in 2006. The equivalent figure for India is 7477 Btu. China’s growth-to-energy figures resemble that of Eastern European economies. India’s is closer to that of Nordic states. (Source:http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=92&pid=47&aid=2&cid=&syid=2003&eyid=2007&unit=BTUPUSDM)

There are structural reasons why China will find it difficult to tame its energy consumption. One is that the consolidation of its fragmented heavy industry will be determined by political decisions rather than market forces – lowering the likelihood of energy inefficient plants being shut down.

Besides industry, there is already evidence that Chinese urbanization is moving on a track similar to the city systems of the United States, while India’s is tracking the evolution of Europe’s. This means cities with higher population densities, less car ownership and less energy consumption. The same may even be true in agriculture: nearly half of India’s population is vegetarian while almost none of China’s is. Meat production has an enormous carbon footprint compared to that of plants.

These and other reasons are why Indian officials privately say that their country is not really in the same family as China when it comes to carbon emissions – and is unlikely to ever be.

Which carrots?
The third difference between the two countries is that the payments that they hope to get from any international climate negotiations are not the same. Compensatory carrots come in two broad forms: funding and technology.

Chinese officials have told other emerging economies that they are not overly interested in getting money from the West. “It is our money being recycled back to us,” they half-joke. With some two trillion dollars in foreign exchange reserves and having run up government budgetary surpluses for several years, funds are the least of Beijing’s concerns.

India’s roughly $275 billion in foreign exchange reserves are comfortable but not generous. More to the point, India’s combined government debt stands at over 75% of gross domestic product. New Delhi could do with some foreign capital, for any reason. Both countries want to get technology, the real coin of power in the 21st century. However, India knows that because of its better intellectual property rights record and the fact the primary users of this technology are private Indian firms, the United States and many developed countries are more willing to consider technology agreements with India than they are with China. A technology agreement with India will effectively be a company-to-company agreement. An agreement with China will be with the Chinese state and driven by Beijing’s concerns rather than the law of contract. New Delhi, therefore, does not want any future technology understanding to be held hostage to China’s international piracy record. The nature of their two economies is also why India is less concerned than China about the imposition of carbon tariffs. A key reason why Beijing placed such a huge emphasis on its manufacturing sector was because it modeled its economy on the export-driven growth pattern followed earlier by Japan and Southeast Asia. India’s growth has been powered by domestic consumption. Which is one reason China’s share of world trade in goods is between six to seven times that of India.

In addition, the sort of energy-intensive raw materials like steel and aluminum which in theory could attract carbon tariffs, are almost nonexistent in India’s export basket. India barely exports 4 million tons of steel on a good year. Chinese figures are normally in the 50 to 60 million ton range. The mix of textiles, jewelry and high-end manufacturing components that dominate India’s exports are the type of thing that make carbon tariffs impossible to calculate.

India opposes carbon tariffs. It believes their introduction would be potentially fatal to the multilateral trading system because they are virtually impossible to calculate in any objective manner. It also worries that the loss of export markets for some of its heavy industry would, ironically, increase carbon emissions by decimating the most energy efficient plants of these sectors. But the overall costs to India’s exports if carbon tariffs were imposed would be negligible – at best one or two billion dollars in trade would be expected a year. The cost for China would be far greater.

Both India and China are negotiating separate climate change agreements with the United States. This is clearly a hedging strategy that assumes the present multilateral system, based around the Kyoto Protocol, which does not have a long life expectancy. The Kyoto agreement and its scions ensure that India and China speak on the same page because Kyoto has built in many clauses and principles that favor them. But if we assume Kyoto is already on its last legs given the US stance, the likelihood of India and China going their separate ways on climate change is a very likely possibility.