A company's adherence to good environmental practices can force its counterparts to switch to clean behaviour.

Should society collectively reward forbearance from bad behaviour or incentivise a change from bad behaviour to good conduct? This is at the heart of a controversy over the grant of carbon credits to Reliance Power, which is putting up a 4,000 MW (Ultra Mega Power Project or UMPP) at Krishnapatnam, in Andhra Pradesh.

The company said in a statement on Tuesday that it has secured a registration from the competent authority under the United Nations Framework for Climate Control (UNFCC) that the electricity generated by it will qualify for emission reduction certificates which can then be sold in the market and earn additional revenues for the company.

The company's claim for carbon credit rests on the principle that it had the option to go in for a cheaper, but more emission-intensive, process. It has, however, opted for a cleaner process that burns less coal per unit of electricity produced. The less the coal it burns, the fewer the particles of carbon dioxide emitted into the atmosphere.

By forswearing the use of a dirtier process of power generation the company is doing the global environment good and, hence, such avoidance must be financially rewarded by society.

After all, it does not matter whether the company is driven by considerations of social responsibility or dictated purely by self-interest.

What matters is that the planet as a whole will have to contend with fewer tonnes of carbon dioxide emissions from the Krishnapatnam power project than would have been the case had it opted for an alternative process.

Clean coal tech

But this is precisely what a Washington-based ‘green' group that monitors the grant of UN certificates for projects under the Clean Development Mechanism disagrees with.

The group, CDM Watch, contends that the terms of the Government of India tender required that the bidders agree to produce power using available clean coal technologies.

This means the company did not really have the option of burning more coal and emitting the resultant carbon dioxide into the atmosphere. The question of rewarding the company for its forbearance does not, therefore, arise. The company has also secured all the financial approvals and sanctions for financial assistance from lenders and investors. That means the project is inherently viable and, hence, needs no additional incentive by way of sale of carbon credits. “To say that this project requires Clean Development Mechanism (CDM) revenues to go forward is patently absurd,” is the reaction of the group's spokesperson.

Wrong argument

The ‘green' group is clearly in the wrong. The issue is not about whether Reliance Power was obliged to use clean technologies for producing power or if it merely chose to do so even as it was quite well within its right to have opted for something dirtier.

At the core of the international approach towards environmentally sustainable growth is a very simple idea. How to prevent people from punching newer holes in the ozone layer?

That does not mean people who have hitherto been doing so will continue to enjoy the privilege of doing so while new entrants would be put through the wringer.

More specifically, can the world get everyone to stop punching holes in the ozone without legally mandating it which, in any case, is so difficult to enforce?

A market approach to this problem is to financially strengthen the hands of those engaging in responsible behaviour which will, inevitably, force the less responsible into changing their ways.

The issue really is about how to get existing producers using dirtier processes (burning more coal for a unit of electricity) of manufacture to change their ways because business fundamentals require them to do so.

Of course, India currently faces an acute shortage of power and, hence, even those producing electricity using dirtier processes find takers for their output. But this need not be the case forever. Sooner or later, supply of electricity will catch up and even exceed demand. The economic argument would run something like this.

If Reliance Power, on the strength of additional revenue from carbon credits, quotes a lower price for the electricity in the market it is bound to edge out other producers who employ dirtier, but cheaper processes. There would thus be a beneficial outcome.

The incumbent producers would have to mothball their current facilities and opt for cleaner power-producing technologies sooner or later, in order to stay in business.

In other words, Reliance Power's self-restraint in avoiding bad behaviour has to be rewarded for no other reason than that it has the potential to compel somebody else to switch over to good industrial behaviour.

(This article was published on July 15, 2011)
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